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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________
COMMISSION FILE NUMBER: 0-20937
PHOENIX INTERNATIONAL LTD., INC.
(Exact name of registrant in its charter)
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Florida 59-3171810
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
500 International Parkway, Heathrow, Florida 32746
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (407) 548-5100
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value Per Share
(Title of class)
Indicate by check mark whether the Registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of Common Stock on March
13, 1998, as reported on the Nasdaq Stock Market's National Market, was
approximately $111,852,000. As of March 13, 1998, the Registrant had
outstanding 5,557,879 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders of the Registrant are
incorporated by reference in Part II of this Form 10-K, and portions of the
Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be
held on May 8, 1998 are incorporated by reference in Part III of this Form
10-K.
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INDEX OF FORM 10-K
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Page
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PART I
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Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 21
Item 3. Legal Proceedings............................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 22
Item 6. Selected Financial Data...................................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 22
Item 8. Financial Statements and Supplementary Data.................................................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 22
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 22
Item 11. Executive Compensation....................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 25
Item 13. Certain Relationships and Related Transactions............................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 26
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PART I
ITEM 1. BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Report and include all statements that are
not historical statements of fact regarding the intent, 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,"
"intend," "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 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 as a result of various factors discussed herein
and those factors discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration Number 333-31415),
as declared effective by the Securities and Exchange Commission on August 13,
1997.
GENERAL
The Company is a leading provider of highly adaptable, enterprise-wide
client/server application software to the financial services industry. The
Company's primary market focus in the United States is on middle market
financial institutions and internationally is on those retail-oriented
institutions located within Africa, Asia-Pacific, Europe, Central and South
America and the Middle East that have up to 300 branches and/or one million
accounts ("Tier 2 Banks"). Phoenix has combined (i) its management's extensive
experience with banking and banking software systems, (ii) input from a
consortium of financial institutions ("the U.S. Bank Partners") concerning bank
operational and flexibility needs, and (iii) recent advances in client/server
technology to design and develop an innovative new banking software system, the
Phoenix System. To address the increasingly sophisticated needs of its
customers, the Company intends to continue to introduce enhancements to
existing products, such as the widespread release of Version 2.0 of the Phoenix
System scheduled for the second quarter of 1998, and develop new products in
order to provide improved performance, additional flexibility and increased
functionality.
The Phoenix System, through its client/server technology, addresses
many of the deficiencies of the mainframe and mid-range legacy computer systems
on which most banks currently operate by allowing financial institutions to
integrate data into a comprehensive management information network. Like legacy
systems, the Phoenix System supports core areas of bank data processing,
including system administration, account processing of loans and deposits,
nightly processing, general ledger, budgeting, teller functions and holding
company accounting. Unlike legacy systems, the Phoenix System is a fully
integrated system that provides significant advantages in three critical areas:
(i) customer relationship management; (ii) management decision support; and
(iii) financial product development. In addition, the Phoenix System is
flexible and scalable, it stores dates and performs calculations using codes
written in four-digit years, hence, it is year 2000 compliant, and it allows
financial institutions to take advantage of emerging technologies easily and
less costly through its open architecture technology and advanced software
systems (i.e. Internet banking and Intranets). The Company also offers trade
finance
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and global payments software products as part of its international banking
software applications.
As of December 31, 1997, the Phoenix System supported the core
processing needs of 39 institutions worldwide.
The Company's Chairman of the Board and Chief Executive Officer,
Bahram Yusefzadeh, has over 28 years of experience in the banking software
industry. In addition, the Company's senior management team has over 120 years
of experience in the retail banking and software industries and 45 years of
trade finance and wholesale banking experience. In the 1970s, Mr. Yusefzadeh
co-founded Nu-Comp Systems, Inc. and led the development of one of the first
integrated legacy core banking systems, the Liberty Banking System, which at
one time was used by over 260 banks. Mr. Yusefzadeh founded Phoenix for the
purpose of developing and marketing a new generation of integrated banking
software applications using client/server technology that would replace less
flexible and technologically dated legacy systems. The Phoenix System's
development was the result of a joint effort among the Company's management,
Hewlett-Packard Company ("Hewlett-Packard") and the U.S. Bank Partners. In
addition, the U.S. Bank Partners provided a substantial portion of the
Company's initial capital and continues to contribute to the Company's
strategic planning and product development.
INDUSTRY BACKGROUND
Since the 1970s, financial institutions have used legacy computer
systems which were originally developed for large mainframe and mid-range
computer environments. These legacy computer systems, which the Company
believes currently account for roughly 85-90% of the installed base of core
applications software systems used by the financial services industry, were
designed to process transactions rather than to support management
decision-making and did not interface with other applications across the
enterprise. Today, the competitive landscape has changed dramatically and banks
now compete directly with diversified non-bank financial service providers. In
order to stay competitive, these institutions now face an increased need for
detailed, easily accessible information about their institutions and customers
in order to develop and market profitable products and services more
effectively and to expand customer relationships.
In response to this changing environment, the industry has developed
software that allows data to be extracted from legacy systems and transported
to personal computer application systems. However, such modified legacy systems
generally are written for mainframes and mid-range computers, are difficult and
expensive to maintain and support, require substantial training costs and are
limited in their ability to interact with other information systems. In
addition, many of these modified legacy systems do not yet resolve the year
2000 data rollover problem because these systems generally store dates and
process data using codes which are written only in two-digit years. Information
systems that do not adequately address year 2000 data rollover may produce
inaccurate information and may even become inoperable at the turn of the
century. Although some modified legacy systems offer graphical user interfaces
for ease of use and have introduced database technologies to provide increased
data storage and more flexible access to data, these systems generally are
limited because they are based on decades-old architecture which does not
permit full integration of data. Without full integration of data, the
information provided by these modified legacy systems generally is neither
complete nor readily accessible, and, thus, Phoenix believes that financial
institutions using legacy systems are at a competitive disadvantage.
In the 1990s, the emergence of client/server computing is making
possible the development of powerful applications which are capable of
addressing enterprise-wide business problems in a flexible and cost-effective
manner. The client/server model consists of personal computer workstation
"clients"
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connected on enterprise-wide networks to "servers" that provide data storage
and update capabilities. The client/server architecture allocates processing
tasks between the client and the server to allow the client to handle the user
interface and local data manipulation and to allow the server to perform
computing intensive functions. Because of this allocation, a client/server
system is scalable such that responsiveness and capacity can be increased by
upgrading the server or replacing it with a more powerful model. Furthermore,
the client/server architecture design minimizes network traffic. Client/server
systems also offer the level of data integrity and security that financial
institutions require because access to information can be controlled by
server-based relational database management systems. In addition, the
development of the Microsoft Windows NT operating system in the mid-90s has
increased the cost-competitiveness of client/server systems.
Phoenix believes that very few financial institutions have fully
realized the benefits offered by client/server technology due to the small
number of vendors currently offering true client/server applications to such
institutions. However, management believes that due to the recent and rapid
developments in banking software technology, an increasing number of U.S. and
international financial institutions are recognizing the aged and outdated
functionality of their current software and hardware systems and are evaluating
the data processing alternatives available to improve performance and increase
flexibility and functionality. In addition, the Company believes that an
increasing number of financial institutions are considering replacements for
their existing modified legacy systems because many of these systems do not yet
readily accommodate year 2000 data rollover.
THE PHOENIX SOLUTION
The Phoenix System allows financial institutions to integrate data
into a comprehensive management information network that is readily accessible
throughout the entire institution, flexible with shared information and easily
interfaced. The Company believes that the Phoenix System is easy to use and
simple to learn, which enables a financial institution to provide higher
quality customer service with reduced operating and training costs. Unlike
legacy systems, the Phoenix System is a fully integrated system that provides
significant advantages in three critical areas: (i) customer relationship
management; (ii) management decision support; and (iii) financial product
development. The Phoenix System's open architecture also allows financial
institutions to take advantage of emerging technologies.
Customer Relationship Management. The Phoenix System places a
structural emphasis on managing customer relationships, which allows an
institution to pursue a more personalized and profitable approach to its
products and services. The Relationship Information Management ("RIM") module
integrates a customer's account data, transaction activity, financial data from
third party financial applications, marketing information, relationships with
other customers and other accounts, financial statements and other types of
information required to view a customer's total relationship record. The RIM
module benefits an institution by providing its management with critical
assistance in managing, tracking and analyzing the financial condition,
profitability, creditworthiness and overall relationships with customers and
related groups of customers.
Management Decision Support. The Phoenix System is focused on
providing an institution's executives with the following real-time
capabilities: (i) a fully integrated general ledger; (ii) a broad suite of
standard reports augmented by an ad hoc reporting capability; (iii) an
integrated set of budgeting templates; and (iv) customer and account
profitability analysis. Through its Executive Information System ("EIS"), the
Phoenix System allows senior executives to track performance and business
trends and to model the effect of business strategies and changes in market
conditions on their financial institution. In addition, the EIS provides an
institution with statistical measures of product penetration, profitability and
performance.
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Financial Product Development. The Phoenix System provides the
capability to quickly develop, deliver and process financial products and
services that can be as simple or as sophisticated as an institution's
customers and competition demand. New financial products can be developed
rapidly and do not typically require programming or the support of technical
personnel. In addition, the Phoenix System allows institutions to analyze the
profitability of individual loans and customer relationships, as well as broad
categories of customers, and to perform "what if" calculations to model the
financial impact of new products and services based upon information maintained
on the Phoenix System.
Emerging Technologies. The Phoenix System operates on an integrated
"open systems" environment that uses a graphical user interface, modern
relational database technology and nonproprietary hardware and software
components. The core applications of the Phoenix System include: (i) deposit
and loan processing which can be tailored to an institution's products and
services; (ii) a self-balancing multi-currency general ledger system that
supports both batch and on-line memo post transaction processing functions;
(iii) full on-line transaction processing capabilities which permit users to
post on-line transactions to any account in the Phoenix System; (iv) a
comprehensive set of controls for maintaining account and transaction
safeguards, enhancing system security and tracking employee actions for audit
purposes; and (v) integrated connections to an interactive on-line help system.
Furthermore, the Phoenix System resolves the year 2000 data rollover problem
that many legacy systems face because it stores all dates with four-digit
years, performs all calculations to four digits and incorporates both front-end
and back-end system code which has four-digit year support for dates.
To address the increasingly sophisticated needs of its customers, the
Company intends to continue to enhance its current products and services and to
develop and introduce additional products and services that keep pace with
technological developments and emerging industry standards. For example, the
Company has developed an enhancement to the Phoenix System that will allow the
Company's client institutions to provide customized on-line home and commercial
banking services through the Internet, and offers complementary enterprise-wide
integrated Intranet and custom database driven Internet web site services. The
Company also plans to deliver additional features, products and services such
as cash management and automated loan kiosk systems to enable its customers to
take advantage of alternate channels of electronic commerce. Consistent with
the Company's original plan, Phoenix designed its software to incorporate
numerous international features, such as multi-currency capabilities and a
language-independent engine. Phoenix has acquired additional international
capabilities, such as a trade finance system and global payments system, and
intends to continue to incorporate additional international functionality and
to integrate new technologies. See "-- Product Development and New Products."
STRATEGY
The Company's primary objective is to advance its position as a
leading supplier of enterprise-wide client/server application software for the
financial services industry worldwide by pursuing the following strategies:
Maintain Technology Leadership and Enhance Product Functionality. The
Company believes that the Phoenix System is the most advanced client/server
computing solution for financial institutions. Phoenix intends to maintain its
leadership position by continuing to integrate new technologies, add new
applications, enhance existing applications and expand functionality. From its
initial public offering in July 1996 through December 31, 1997, the Company
developed two major releases of the Phoenix
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System, including Version 2.0, which include numerous system enhancements;
introduced and installed the NT Version; implemented an enterprise-wide
integrated Intranet system; and installed custom database-driven Internet web
sites in client institutions. The Company intends to continue to commit
substantial resources to maintain and extend its technological leadership.
Expand Domestic Distribution. The Company plans to continue to expand
its domestic distribution by increasing its direct sales and implementation
forces in key geographic locations and by seeking additional strategic sales
and marketing relationships. From its initial public offering in July 1996
through December 31, 1997, the Company increased its direct sales and
implementation forces from 30 to 60 persons and entered into agreements with
five strategic marketing organizations to broaden its domestic distribution
efforts. The Company intends to continue focusing its direct sales efforts in
the U.S. on middle market financial institutions with asset sizes ranging from
$100 million to $2 billion, which the Company believes are technologically
sophisticated, seek software applications that support their strategic
objectives and have the resources to finance and use advanced technological
solutions effectively. The Company plans to establish additional arrangements
whereby other organizations will market the Phoenix System primarily to smaller
financial institutions within specified territories. In addition, many
financial institutions that have elected not to maintain in-house core
processing systems use service bureau organizations to handle their core
processing and other functions and, thus, the Company intends to form strategic
relationships with several small to medium size service bureaus that are
looking to replace their current legacy systems with open system alternatives.
Expand International Distribution. The Company plans to continue to
expand its global distribution and market penetration by increasing its
international direct sales and implementation forces, by enlarging its
international offices, by opening additional sales and marketing offices in
strategically located cities worldwide, by leveraging its strategic alliances
with its VARs and agents and by seeking additional strategic sales, marketing
and distribution relationships. From its initial public offering in July 1996
through December 31, 1997, the Company more than doubled its direct
international sales and implementation forces from 6 to 17 persons and opened a
sales and marketing office in London, England to focus on direct sales of the
Company's products in the United Kingdom and Europe. In addition, Phoenix has
maintained or entered into agreements with Unisys Corporation ("Unisys"),
Computer Systems Associates (Nigeria) Limited ("CSA"), International Turnkey
Systems ("ITS") and Siemens Nixdorf Informationssysteme AG ("SNI") to increase
global distribution efforts to cover countries in Africa, Asia-Pacific, Europe,
Latin America/Caribbean and the Middle East and has established local
representation arrangements in Russia, Turkey, Greece and Ireland. Phoenix
intends to continue focusing its direct sales efforts on Tier 2 Banks which the
Company believes are seeking technology as a means to offer a broader array of
financial products and services to meet the sophisticated demands of the
international market. Consistent with the Company's original plan, Phoenix
designed its software to incorporate numerous international features, such as
multi-currency capabilities and a language-independent engine. Phoenix has
acquired additional international capabilities, such as a trade finance system,
and has acquired rights to license from AFA Systems International the
"Musketeer" treasury and risk management client/server system to Phoenix
customers. The combination of Phoenix's retail, trade finance and treasury
offerings allows Phoenix to market an integrated "universal" banking system.
Phoenix intends to continue to incorporate additional international
functionality and to integrate new technologies.
Leverage Existing Customer Base. The Company intends to continue to
leverage its implemented customer base by (i) maximizing recurring revenues
from its customers, (ii) offering complementary products and services to
existing customers and licensing additional subsidiaries of existing bank
holding companies, (iii) obtaining favorable references from existing customers
in the course of developing new customer relationships, and (iv) consulting
with existing customers in the
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development of new products and product enhancements. Phoenix generates
recurring revenues by signing its customers generally to five-year license
agreements and by charging annual service fees for the term of the license. As
the asset size of an institution increases or as branches are added, or as
added-revenue producing products and services are delivered by the Company,
customers pay additional incremental license fees and increased annual service
fees over the life of the license agreement. The Company's disaster recovery,
networking support, bank-wide integrated Intranet, custom database-driven
Internet web site services and its licensed ATM and telephone banking systems
are added-revenue producing services and products that generate additional
license fees and recurring revenues. The Company plans to continue to develop
and provide new added-revenue products and services, as well as enhancements to
existing products and services. The Company also intends to continue involving
its customers in its marketing and product development efforts, obtaining
references from existing customers to new bank customers and receiving valuable
guidance and support in the development of new technologies.
Broaden Primary Markets. The Phoenix System runs on a UNIX operating
system platform and in a Microsoft Windows NT environment. The Company believes
that the NT Version, which was completed in the first quarter of 1997, will be
attractive to a wide group of institutions because of the lower overall costs
related to operating in a Microsoft Windows NT environment. The Company
believes that as Microsoft expands its marketing of the Windows NT product and
enhances the capabilities of this product, more financial institutions,
regardless of asset size, will choose to use the Windows NT operating system
rather than the UNIX operating platform. The Company intends to take advantage
of improvements made to both UNIX and NT operating systems to expand the
processing and functionality capabilities of the Phoenix System to address the
needs of financial institutions with larger asset sizes or more complex branch
networks than the Company's current primary markets. In addition, the Company
intends to capitalize on its strategic relationships with VARs and agents to
more rapidly expand the processing capabilities and functionality of the
Phoenix System to address the specific needs of financial institutions with
larger asset sizes or more complex branch networks.
Pursue Complementary Acquisitions. Phoenix intends to pursue strategic
acquisitions of providers of complementary technologies, products and services
in order to more rapidly (i) optimize the package of software applications and
solutions offered by the Company, (ii) expand the Company's customer base by
converting the customers of the acquired companies to the Phoenix System, (iii)
maximize existing channels of distribution and add new channels of
distribution, and (iv) add experienced personnel with specialized knowledge of
the domestic and international financial services industries. The Company
believes such strategic acquisitions will permit Phoenix to enter new markets,
increase market penetration, expand its expertise, strengthen its strategic
relationships, provide outsourcing alternatives and obtain and develop
additional products and applications to meet the demands of its customers both
in the U.S. and internationally. Phoenix also intends to invest in companies
with complementary technologies and products in order to enhance the
functionality of the Phoenix System.
THE PHOENIX SYSTEM
The Phoenix System allows financial institutions to integrate data
into a comprehensive management information network that is readily accessible
throughout the entire institution, flexible with shared information and easily
interfaced. The Phoenix System gives financial institution personnel immediate
access to a broad range of customer information including balances,
transactions, personal financial statements, contact history, photo
identification, signature verification, related accounts and demographic data.
The Company believes that the Phoenix System is easy to use and simple to
learn, which enables a financial institution to provide higher quality customer
service with reduced operating
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and training costs. In addition, the Company intends to continue to develop and
introduce new products and enhancements to existing products, such as Version
2.0 of the Phoenix System, in order to provide improved performance, additional
flexibility and increased functionality to its customers. The following are
some of the important capabilities included in the Phoenix System:
Customer Relationship Management. The Phoenix System places a
structural emphasis on managing customer relationships which allows an
institution to pursue a more personalized and profitable approach to its
products and services. The Relationship Information Management ("RIM") module
integrates a customer's account data, transactional activity, financial data
from third party financial applications, marketing information, relationships
with other customers and other accounts, financial statements and other types
of information required to view a customer's total relationship record. The RIM
module benefits an institution by providing its management with critical
assistance in managing, tracking and analyzing the financial condition,
profitability, creditworthiness and overall relationships with customers and
related groups of customers. The customer relationship management features
include:
- Marketing and Other Personal Information. The RIM module tracks a
range of personal information, such as employment history,
homeownership status, other credit providers and other bank accounts.
- On-line Financial Statements and Portfolios. The RIM module maintains
information regarding a customer's assets, liabilities, income and
expenses in a unified file.
- Extensive Customer Relationship Tracking. The RIM module can track
relationships between customers, groups of customers and accounts.
- Customer-Based Statements. Combined customer statements can be
customized to contain an unlimited number of accounts and each
statement can be configured to show only summary information or both
summary information and detailed account information.
- Integrated Signature, Photograph and Document Imaging. The RIM module
maintains on-line images of a customer's signature card and personal
photograph and can store and display images including images of loan
collateral and other assets, Social Security cards and drivers'
licenses.
- Flexible Inquiry Capability. The Phoenix System enables users to
progress through increasingly detailed levels of display data which
allows for thorough and quick research of customer inquiries, without
having to enter arcane codes or search through voluminous printed
reports.
- Third Party Information. The Phoenix System is able to integrate data
from third party software services, including information on
brokerage, insurance and credit card accounts, with existing RIM
information.
Management Decision Support. The Phoenix System is focused on
providing an institution's executives with the following real-time
capabilities: (i) a fully integrated general ledger; (ii) a broad suite of
standard reports augmented by an ad hoc reporting capability; (iii) an
integrated set of budgeting templates; and (iv) customer and account
profitability analysis. Through the Phoenix EIS, the Phoenix System allows
senior executives to track performance and model the effect of business
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strategies and changes in market conditions on their financial institution.
Unlike the reporting facilities of legacy systems, the Phoenix EIS draws upon
real-time data to present financial institutions with graphical displays that
highlight important business trends and facilitate rapid interpretation and
analysis. Recent enhancements to the Phoenix System have made the EIS more
user-friendly and efficient, making it a more attractive feature for an
institution's management. The EIS takes into account both the relationship of a
particular indicator to other related categories of information, as well as the
trends for that indicator over time. In addition, the EIS provides an
institution with statistical measures of product penetration, profitability and
performance.
Financial Product Development. The Phoenix System provides the
capability to quickly develop, deliver and process financial products and
services that can be as simple or as sophisticated as an institution's
customers and competition demand. Because all financial product development is
parameter-driven, institutions can design products and services by simply
selecting product features from a variety of options. New financial products
can be developed rapidly and do not require programming or the support of
technical personnel. In addition, the Phoenix System allows institutions to
analyze the profitability of individual loans and customer relationships, as
well as broad categories of customers, and to perform "what if" calculations to
model the financial impact of new products and services based upon information
maintained on the Phoenix System.
Emerging Technologies. The Phoenix System operates in an integrated
"open systems" environment that uses a graphical user interface, modern
relational database technology and nonproprietary hardware and software
components. The Phoenix System divides core processing functions among seven
discrete, but fully integrated, software modules: (i) system administration;
(ii) account processing; (iii) nightly processing; (iv) teller system; (v)
holding company financial statements; (vi) EIS; and (vii) budgeting. The core
applications of the Phoenix System include: (a) deposit and loan processing
which can be customized to implement an analysis-based approach tailored to an
institution's products and services; (b) a self-balancing multi-currency
general ledger system that supports both batch and on-line memo post
transaction processing functions; (c) full on-line transaction processing
capabilities which permit users to post on-line transactions to any account in
the Phoenix System; (d) a comprehensive set of controls for restricting access
to different levels of information, for limiting transactional amounts that
employees are permitted to post to accounts and for tracking employee actions
for audit purposes; and (e) integrated connections to an interactive on-line
help system. Furthermore, the Phoenix System resolves the year 2000 data
rollover problem because it stores all dates with four-digit years, all
calculations are performed to four digits, and all system code has four-digit
year support for dates.
To address the increasingly sophisticated needs of its customers, the
Company intends to continue to enhance its current products and to develop and
introduce additional products that keep pace with technological developments
and emerging industry standards. For example, the Company has developed an
enhancement to the Phoenix System that will allow the Company's client
institutions to provide customized on-line banking services through the
Internet, and offers complementary enterprise-wide integrated Intranet and
custom database driven Internet web site services to its customers. The Company
also plans to deliver additional features, products and services such as
automated loan and mortgage kiosk systems, to enable its customers to take
advantage of emerging channels of distribution. See "-- Product Development and
New Products."
In addition, in order to increase the appeal of the Phoenix System in
the international market, Phoenix has developed and/or is developing the
following core international applications:
- Multi-language enhancements. Phoenix has designed a unique language
independent engine
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that will allow the Company's core product to be rapidly localized
into any single-byte character set language. This engine was used to
implement a Spanish version of the Phoenix System which the Company
released in the third quarter of 1996.
- Trade finance processing. Phoenix currently offers Phoenix
TradeWind(TM), a stand-alone trade finance software system, which
performs back-office processing for all types of trade finance
functions. The Company plans to deliver an integrated version of
Phoenix TradeWind(TM), called Phoenix Trade Finance, as part of the
Phoenix System in 1998.
- Global payments system. Phoenix also currently offers Trade Centre, a
stand-alone global payments software system, which provides for data
capture and automated processing for customer and financial
institution payments to retail-oriented international financial
institutions with more than 300 branches and/or one million accounts
("Tier 1 Banks"). The Company is studying the feasibility of
integrating Trade Centre into the Phoenix System for use by Tier 2
Banks.
- Multi-currency enhancements. Phoenix has designed a multi-currency
enhancement to the Phoenix System which supports the world currencies
formatted in accordance with the standards established by the
International Standards Organization. The Company plans to release
this enhancement during the second quarter of 1998 as part of the
widespread release of Version 2.0 of the Phoenix System.
Phoenix intends to develop additional international functionality as
it enters new countries which require additional functionality. The Company is
forming a separate international development group to focus on these
requirements.
TECHNOLOGY
Phoenix has partnered with leading hardware manufacturers, and tools
and relational database vendors in the client/server community, such as
Hewlett-Packard, Centura Software Corporation and Sybase, Inc. ("Sybase") to
produce software based on leading-edge technological developments. Using these
tools, the Company has created a product that enables the Company's customers
to utilize what the Company believes is the most current technology in the
financial services software industry.
Centralized Relational Database Management System ("RDBMS"). An
advantage of the Phoenix System as compared to legacy or modified legacy
systems is that the Phoenix System stores and maintains data in a relational
database rather than in a proprietary file format. As a result, this data can
be easily accessed and integrated by many different third-party query and
report writing tools which are currently available commercially. In addition,
with a structured query language ("SQL") relational database, it is easy to
expand and change the structures of the tables and manipulate data stored and
maintained in the Phoenix System.
The Phoenix System, TradeWind(TM), and TradeCentre use a relational
database technology provided by Sybase. Sybase System 11.0 has been integrated
into the NT Version and the Company currently anticipates it will move its
current customers from Sybase System 10.0 to Sybase's System 11.0 on the UNIX
version of the Phoenix System in the second quarter of 1998. The Phoenix
System, TradeWind(TM) and TradeCentre can run on platforms from
Hewlett-Packard, International Business Machines Corp. ("IBM"), NCR Corporation
("NCR"), Sun Microsystems, Inc. ("Sun"), Unisys and all others which are UNIX
or Microsoft Windows NT compliant.
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In addition, in conjunction with Microsoft Corporation, the Company is
developing a version of the Phoenix System to run on Microsoft's SQL
Server(TM). Phoenix currently anticipates delivering the Microsoft NT SQL
Server version to a customer in the second quarter of 1998.
Replication and Distributed Data Processing. Phoenix has leveraged the
open architecture of the Phoenix System to implement an advanced distributed
database for support of its off-line teller system. The off-line teller system
uses a local database on each branch server to maintain normal processing in
the event of hardware or network failure at the central server. Off-line
branches are supported using Centura's SQL Base for either Novell NetWare or
Microsoft Windows NT.
Open Protocols for Data Communication. Phoenix uses the industry
standard TCP/IP protocol for communicating with the relational database server
and either IPX/SPX or TCP/IP for communicating with the local area network file
server. This allows the Company's customers implementing either Windows NT or
Novell Netware networks to implement a broad array of local area network and
wide are a network topologies and configurations. In addition, customers that
have an existing network infrastructure in place that supports TCP/IP do not
have to reinvest in new technology simply to run the Company's products.
32-bit Application Support. Version 2.0 of the Phoenix System, which
the Company intends to release on a widespread basis to its customers by the
end of the second quarter of 1998, is a native 32-bit application which will
enable the Company's customers to take further advantage of the latest client
operating systems from Microsoft (Windows 95 and Windows NT Workstation). These
systems offer the Company's customers substantial benefits in the areas of
fault tolerance, ability to support more complex transaction processing,
enhanced performance and advanced security.
TARGET MARKETS
The United States Market. Phoenix currently divides commercial banks
and savings institutions in the United States market into three groups based on
asset-size: (i) institutions with assets less than $150 million (approximately
8,400 institutions); (ii) institutions with assets between $150 million and $2
billion (approximately 2,700 institutions) and (iii) institutions with assets
over $2 billion (approximately 300 institutions). The Company primarily focuses
its direct sales efforts in the U.S. on middle market financial institutions
which the Company defines as commercial banks and savings institutions with
asset sizes ranging between $100 million and $2 billion. The Company estimates
that each year approximately 20% of banks evaluate data processing alternatives
because their current contracts expire. Management believes that recently an
increasing number of institutions have renewed their service contracts for
shorter periods in order to maintain the flexibility to change software
companies due to rapid developments in banking software technology. Moreover,
the Company believes that an increasing number of institutions are evaluating
data processing alternatives due to, among other things, the acquisition of
their software providers and servicers by other software companies, the
inability of many of their current systems to readily accommodate the year 2000
data rollover and the age of their current software and hardware solutions. The
Phoenix System runs on a UNIX operating system platform and in a Microsoft
Windows NT environment. The Company believes that the NT Version is attractive
to a wide group of institutions because of the lower overall costs (including
hardware) related to operating in a Microsoft Windows NT environment.
Furthermore, as Microsoft expands its marketing of the Windows NT product and
enhances the capabilities of this product, the Company believes that more
financial institutions, regardless of asset size, will choose to use the
Windows NT operating system rather than the UNIX operating platform. The
Company intends to take advantage of improvements made to both UNIX and NT
operating systems to expand the
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capabilities of the Phoenix System to address the needs of institutions with
larger numbers of branches, accounts and transactions to process.
The International Market. Phoenix currently divides international
financial institutions into two groups based upon the number of branches and
accounts: (i) Tier 1 Banks; and (ii) Tier 2 Banks. The Company primarily
focuses its sales and marketing efforts on Tier 2 Banks located in countries
within Africa, Asia-Pacific, Europe, Latin America/Caribbean and the Middle
East. Phoenix believes that there are approximately 4,000 Tier 2 Banks in this
international market that are prospects for the Phoenix System. The Company
believes the international market offers significant opportunity because
economic expansion and other market factors have increased the demand for
sophisticated wholesale and retail banking services. Sophisticated
international financial institutions offer a broad array of financial products
and services and demand technology that is open, powerful and economical. The
Company also believes that these technology-minded institutions are looking for
software solutions that will last at least 10 to 15 years and, therefore, these
institutions can appreciate the flexibility and functionality of client/server
technology. Furthermore, management believes that a significant number of
international financial institutions have accepted, to a greater degree than
institutions located in the United States, that technology should be used as a
competitive tool and not just as a service delivery vehicle.
SALES AND MARKETING
The Company markets its software and services directly through its
sales and marketing personnel and through VARs and agents that are involved in
providing products and services to the financial services industry. As of
February 28, 1998, the Company's sales and marketing department, including
administrative staff, consisted of 18 individuals. In addition, the Company has
established non-exclusive local representation relationships with agents
located in Russia, Turkey, Greece and Ireland who introduce potential customers
for the Phoenix System to the Company's sales personnel.
The Company's direct sales and marketing personnel and consultants are
experienced in the sales process for banking software products and generate
leads through a marketing program which includes direct mail, networking,
telemarketing, seminars and trade shows, and provide white papers and other
sales support literature and ongoing customer communications. Phoenix also
actively markets its products and services through its Internet web site from
which prospects can read or download product information, access online product
presentations, and register to receive information by mail. In addition, the
Phoenix A.P. Limited acquisition was initiated by Priority Solutions personnel
contacting the Company after their review of the Company's web site. The
Company believes that an increasing number of future customers will initially
learn about the Company and its products and services through its Internet web
site.
The Company's direct sales and marketing force is complemented,
particularly in the international market, by various indirect distribution
channels, including a growing network of VARs and agents. Some VARs and agents
also provide implementation, training, support and other services to the
end-user. In all cases, the Phoenix System software remains the sole property
of the Company, and if the Company terminates its relationship with any VAR or
agent, customers sold by that VAR or agent will continue to pay support fees to
the Company. The Company intends to expand its network for indirect
distribution primarily on anon-exclusive basis and anticipates that the
percentage of its total revenues derived from indirect sales will increase in
the future.
In the United States market, Phoenix has established marketing agency
agreements with The NetComm Group, Inc. ("NetComm"), ISC Financial Systems,
Inc. ("ISC"), Advanced Financial
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Systems, Inc. ("AFS") and ERAS JV ("ERAS") whereby NetComm, ISC, AFS and ERAS
market the Phoenix System to certain financial institutions within their
respective territories. NetComm, ISC and AFS have nonexclusive rights to market
the Phoenix System within their territories, which include Colorado, Idaho,
Indiana, Kentucky, Michigan, Montana, North Dakota, Ohio, western Pennsylvania,
South Dakota, Utah, West Virginia and Wyoming. ERAS has non-exclusive rights to
market the Phoenix System within its territory, which consists of five counties
in southeastern Florida. Phoenix also has signed an agreement with Servers
On-line, a start-up service bureau in the northeastern U.S., whereby Servers
On-line has licensed to use the Phoenix System to provide bank processing
services.
In the international market, Unisys exclusively markets the Phoenix
System to financial institutions in Central and South America; CSA exclusively
markets the Phoenix System to financial institutions in certain countries of
Africa and non-exclusively markets the Phoenix System to institutions in the
Republic of South Africa; ITS exclusively markets the Phoenix System to
financial institutions in certain countries in the Middle East; and SNI
non-exclusively markets, sublicenses and distributes the Phoenix System to
financial institutions located in those countries in Africa, Asia-Pacific,
Europe and the Middle East that are not a part of ITS' and CSA's exclusive
territories. Unisys has guaranteed a minimum number of sublicenses and each of
ITS and CSA has guaranteed a minimum dollar amount of sales to retain its
exclusive rights in their respective territories.
PRODUCT PRICING
The Company prices the Phoenix System and related services in two
components: (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. When a
customer enters into a license agreement with the Company, which generally is
non-cancelable for an initial period of five years, the license agreement
includes a service agreement for the same term. Implementation, conversion,
training and installation fees and interface fees are paid at the beginning of
the license agreement or when the service is performed. Customer and software
support fees are earned over the life of the license agreement. In the event
that a customer fails to pay its service fees, the license reverts to the
Company. Unless either party cancels or fails to renew a license contract after
the initial term, the license is perpetual, and the service fees are recurring
revenue.
In the United States, license fees are based on the asset size of the
institution. Internationally, each institution is charged a base license fee
and an incremental license fee determined by the number of branches for such
financial institution. Implementation, programming services, conversion,
training and interface fees vary based on the complexity of a particular
project. Customer and software support fees are paid annually or quarterly and
are generally calculated as a percentage of the total license fees. As the
asset size of the institution increases or as branches are added, customers pay
an additional incremental license fee and increased service fees over the life
of the license agreement.
The Company's VARs and agents license the Company's products at a
discount for relicensing or are paid a commission by the Company. Under many of
these agreements, it is anticipated that primary responsibility for
implementation and training services will shift to the VARs and agents after a
certain number of installations are completed successfully with Company
supervision. Under these relicensing arrangements, the VARs and agents will
retain a greater percentage of the implementation, conversion and training
service fees as more of the responsibility for these services is transitioned
to the VAR or agent. The Company believes, however, that the difference in the
margins obtained from direct
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and indirect sales should not have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"-- Implementation and Training Services."
IMPLEMENTATION AND TRAINING SERVICES
The Company provides comprehensive implementation services to
customers converting to the Phoenix System. Phoenix assigns each customer an
implementation team of experts which works with the customer through all phases
of the project, including project management, data conversion, software
installation and network certification, education and training and consulting.
Each implementation team can work on multiple projects at the same time. As of
February 28, 1998, the Company had 59 people assigned to the implementation and
training department. The Company intends to hire additional people and add
resources as necessary.
Project Management and Coordination. Phoenix provides extensive
project planning and coordination as part of the implementation process.
Phoenix assigns a full-time project manager who guides the customer through the
installation process and to coordinate all conversion and implementation
activities.
Data Conversion. Application analysts and conversion programmers map
and convert a bank's current account data to the Phoenix System. Data
conversion activities include data mapping, program development, extensive
testing, detailed data auditing and a complete trial conversion prior to the
final implementation date.
Software Installation and Network Certification. Phoenix provides
network engineers to install software and certify the customer's network prior
to installation of the Phoenix System. This on-site service ensures that all
hardware and software is installed correctly and that the proper network
security is in place.
Education and Training. Phoenix offers a comprehensive education and
training program to customers. The Company offers training classes for product
set-up at the Company's headquarters in Florida. Phoenix also provides hands-on
application training services at the customer site prior to installation.
Additional on-site training for ancillary products is available upon request.
Consulting/Development Services. The Company's consultants are
available to work closely with customers. These consulting services generally
consist of assisting customers who are planning large implementations, who are
engaged in operational reorganizations or who wish to customize the Phoenix
System to their unique needs, including customer specified programming
features, reports or regulatory requirements.
Fees for project management and coordination, data conversion, and
software installation, network certification and basic education and consulting
are included in the cost of implementation. Generally, the Company charges
additional fees for education and consulting requested by customers.
The Company's arrangements with its VARs and agents provide for the
transition of primary responsibility for implementation services to the VAR or
agent. To date, no VAR or agent has had primary responsibility for
installation, training or conversion of new customers. To ensure quality
control, the Company plans to educate its VARs and agents by controlling the
first installation and thereafter diminishing its direct involvement in
implementation, training and conversion services. By the end of the first few
installations, it is anticipated that the VAR or agent will assume direct
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responsibility for substantially all of these services; however, Phoenix
intends to continue to provide the resources and support needed to maintain
customer satisfaction and quality assurances.
CUSTOMER SERVICE AND SUPPORT
The Company believes that maintaining a high level of support and
service is imperative to customer satisfaction because of the critical nature
of the Phoenix System to a bank's day-to-day operations. The Company's customer
service and support personnel assist banks in the use of the Phoenix System and
with the maintenance of their network and technology infrastructures. As of
February 28, 1998, the Company had 25 people in its technology services group
that primarily provide customer service and support. Customer service and
support personnel provide service 24 hours a day, seven days a week, and have
pagers, cellular phones and laptop computers which enable them to answer a
customer's question from any location. The Company has an ongoing training
program which is designed to enable its existing and future VARs and agents to
provide the first line of customer support.
Product Support Services. Phoenix delivers product support services
through all traditional avenues, including telephone, Internet, electronic mail
and facsimile. Due to the unique nature of client/server computing systems,
many critical customer support activities can also be performed through high
speed telecommunication lines connected directly to a customer's location.
Phoenix support personnel have the ability to connect quickly to a server at a
customer site and to perform work as if they were physically at the customer's
site. Using this approach, Phoenix is able to offer effective and direct
support to its customers without the traditional expense associated with
on-site visits.
Networking Support Services. Phoenix offers a full range of networking
support services upon request. Phoenix performs on-site network certification
for all customers during their initial software installation, and network
engineers are available for ongoing support by telephone. Networking support
and on-site consulting are available upon request for an additional fee.
Internet/Intranet Services. Phoenix also offers Internet Consulting
Service ("ICS"), which provides both Internet and Intranet services to client
institutions. ICS allows client institutions to establish a presence on the
World Wide Web through home pages and web sites. ICS can also provide client
institutions with the services to create an internal web environment, known as
an Intranet, which enables the institution to improve productivity without
additional hardware and infrastructure costs.
Disaster Recovery Service. Phoenix also offers a disaster recovery
service that provides customers with assistance in reestablishing the Phoenix
System's processing capacity within 24 hours if a disaster occurs. The disaster
recovery service is a separate five-year contract which has an initial
implementation fee and annual service fees. This added-cost service satisfies
current United States bank regulatory obligations to maintain and annually test
a disaster recovery plan and allows Phoenix to generate additional recurring
revenue from its implemented customer base.
SupportNet. Phoenix also administers SupportNet, part of the Company's
World Wide Web site, which provides an additional vehicle of support for client
banks. SupportNet is a free service which allows users with Internet access to
obtain support through features such as (i) an online discussion forum, (ii)
online support documents for the Phoenix System, (iii) online software bug
recording, (iv) online enhancement requests and (v) online file transfers from
the Company.
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PRODUCT DEVELOPMENT AND NEW PRODUCTS
Phoenix was founded in January 1993 for the purpose of developing and
marketing a new generation of integrated banking software applications that
would replace less flexible and technologically dated legacy systems. From the
Company's inception through December 31, 1997, product development expenditures
(the total of product development expense and capitalized software development
costs) represented approximately 36% of the Company's aggregate revenues.
Hewlett-Packard provided developmental-stage assistance to the Company by
supplying computer hardware to the Company for development and testing of the
Company's products. Early in the Company's history, each of the U.S. Bank
Partners participated in the Company's joint application development program
under which end-users were involved in product development and testing. The
joint application development program helped reduce the development cycle by
increasing the efficiency with which design problems were identified and
corrected. The U.S. Bank Partners continues to contribute to plans for new
products and enhancements as part of the Phoenix User Group ("PUG").
Phoenix believes that its future success will depend in large part on
its ability to maintain and enhance its current product and service offerings
and to develop, acquire or integrate and introduce new products and features
that will keep pace with technological advances and satisfy evolving customer
requirements. As of February 28, 1998, the technology services group consisted
of 77 individuals in addition to 25 customer service and support personnel.
Phoenix develops and adjusts product direction in response to two core trend
areas: (i) developments within the financial services industry and (ii)
developments within the technology arena.
Product Development Cycle. Phoenix develops plans for new products and
enhancements following extensive discussions with the PUG, which consists of
all current domestic and international users of the Phoenix System and from
specific requests from new customers. The PUG meets approximately twice a year
with the Company to offer recommendations and to help prioritize product
development and enhancement projects. In addition, Phoenix adapts and augments
the Phoenix System on a country-by-country basis as it signs bank contracts in
new countries. Moreover, the Company's product development personnel
continually develop new product ideas and enhancements. Once a product idea has
been formalized, the Company uses an internal review process to: (i) determine
whether to develop the product or enhancement; (ii) set a development schedule
and (iii) develop a budget for the product or enhancement.
Development Methodology. Development tools, such as 4GL programming
tools, enable rapid prototyping and have dramatically reduced development
cycles. Enhancements developed in client/server environments take significantly
less time to complete than in a legacy system environment. Phoenix believes
that the efficiencies of its product architecture and development methodology
allow it to move products from planning to delivery more quickly than its
legacy system-based competitors.
Product Plans. The Company's product development efforts are currently
focused on enhancing the functionality of the Phoenix System so that it will be
attractive to a broader range of customers both in the U.S. and abroad. Phoenix
believes that it will be able to improve its competitive position by
successfully completing, licensing, acquiring or delivering to client
institutions (in Version 2.0 or otherwise) the following new products and
enhancements, among others, primarily during 1998:
- Multi-currency enhancements. Phoenix has designed multi-currency
enhancement to the Phoenix System which will support the world
currencies formatted in accordance with the standards established by
the International Standards Organization.
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- Trade finance processing. Phoenix is developing the interfaces to the
customer account and general ledger modules of the Phoenix System
which are required to integrate TradeWind(TM), a trade finance
software system, into the Phoenix System for eventual delivery to the
international market.
- International treasury system. Phoenix has signed an agreement with
AFA Systems International to license the "Musketeeer" international
treasury software and risk management client/server system, which can
be interfaced with and integrated into the Phoenix System for delivery
to the international market. Phoenix believes that such enhancements
will broaden the array of features that can be offered to and increase
the Company's success in marketing to international institutions.
- Secondary marketing and other enhancements. Significant enhancements
for the United States market are focused on the loan processing area,
such as investor reporting for secondary mortgage marketing including
reports required by the Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association. Phoenix is also developing
modules that permit the processing of dealer loans and accounting for
non-accrual loans. Phoenix believes that such enhancements will
broaden the appeal of the Phoenix System for larger institutions.
- ATM system. Phoenix has signed a Software License and Development
Agreement with MultiSoft, a company located in Ecuador, that gives
Phoenix worldwide rights to license and use MultiSoft's NT-based
client/server ATM system. The Company has delivered and intends to
continue to enhance the Phoenix ATM system which will allow its
customers to support their own ATM network and to connect to regional
and national ATM networks.
- Telephone banking system. The Company plans to continue to develop an
NT-based client/server telephone banking system licensed from
MultiSoft. The Phoenix automated voice response banking system allows
the Company's client institutions to offer customized telephone
banking services through which callers can perform fund transfers,
make balance and other inquiries and initiate service requests via
e-mail.
- Cash management system. Phoenix has acquired exclusive rights to a
cash management system that was originally developed by one of its
international customers. Phoenix plans to deliver a highly integrated
version of this cash management system in 1999 which will allow the
Company's customers to provide online cash management services to
their retail and commercial customers.
- Loan pricing and credit scoring system. Phoenix has formed a
relationship (including a minimal equity investment by Phoenix) with
Integrated Financial Services, Inc., an Atlanta-based software and
services company, whereby Phoenix acquired non-exclusive marketing
rights to CreditPak. CreditPak, which the Company plans to interface
with the Phoenix System, is an NT-based commercial credit analysis,
loan pricing software package that enables lenders to consider the
total financial relationship of the borrower and the bank.
- Automated loans and mortgages. Phoenix has acquired an equity
interest in Dyad Corporation ("Dyad"), a company located in Norcross,
Georgia which is in the process of developing automated loan and
mortgage products, including associated software, hardware and
documentation. In addition, Phoenix has obtained the rights to market,
sell and license Dyad's
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products, non-exclusively in the United States and exclusively abroad.
These products are expected to enable financial institutions and their
lenders to provide automated loan and mortgage processing from an
ATM-styled kiosk based upon information supplied by the applicant and
electronic verification of such information and credit investigation
of the applicant's history and ratings, which are obtained
automatically. See Item 13, "Certain Relationships and Related
Transactions."
- Microsoft SQL Server(TM). Phoenix is developing a version of the
Phoenix System to run on the Microsoft SQL Server. Phoenix currently
anticipates delivering this version to a customer in the second
quarter of 1998.
- International Capabilities. Phoenix is developing enhancements for
the international market including, Turkish language support, large
digit support, interbranch accounting and electronic bill payment
functionality.
- Larger Bank Processing. Phoenix is continuing to develop a variety of
enhancements to benchmark and process larger banks.
These potential new enhancements and products are subject to
significant technical risks, including delays in the development, introduction,
production or implementation of the new enhancements or products, failure to
achieve market acceptance and undetected errors or failures.
COMPETITION
The financial services software market is intensely competitive,
rapidly evolving and subject to rapid technological change. Competitors vary in
size and in the scope and breadth of the products and services offered. Phoenix
encounters competition in the U.S. from a number of sources, including Fiserv,
Inc., Bisys, Inc., Marshall & Ilsley Corp., East Point Technology, Inc., a
division of Marshall & Ilsley Corp. ("East Point"), Electronic Data Systems
Corp., Jack Henry & Associates, Inc., ALLTEL Information Services, Inc.,
Prologic Corporation, The Kirchman Corporation and Open Solutions, Inc.
("OSI"), all of which offer core retail software systems or outsourcing
alternatives to the financial institutions industry. Of these competitors, the
Company believes that only East Point and OSI offer true client/server
solutions. In the international arena, the Company competes with several global
players, including Fiserv, Inc., Midas-Kapiti International, Inc., ACT/Kindle
Banking Systems ("ACT/Kindle"), Sanchez Computer Associates, Inc., Prologic
Corporation and Financial Network Services ("FNS"). In addition, there are
smaller, regional competitors in the countries which the Company targets
internationally. The Company expects additional competition from other
established and emerging companies as the client/server application software
market continues to develop and expand.
In general, Phoenix competes on the basis of: (i) product
architecture, including distributed computing capability, access to commercial
SQL databases and ease of customization and integrations with other
applications; (ii) functionality, including the breadth and depth of features
and functions and ease of use; (iii) service and support, including the range
and quality of technical support, training, implementation and consulting
services and the capability to provide these on a global basis; (iv) management
expertise, including management's banking software experience and financial
services industry knowledge; and (v) product pricing in relation to performance
and support. Management believes that the Phoenix System is a market leader in
the areas of product architecture and management expertise and that the Company
competes favorably in the areas of functionality, service and support and
product pricing.
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Financial institutions have two fundamental alternatives for obtaining
data processing capabilities: (i) inhouse applications, either those that are
developed internally or those that are purchased from third party vendors; and
(ii) outsourcing, either as a part of a total outsourcing solution or where a
third party acts as a service bureau. Until the introduction of client/server
technology, the only in-house processing systems offered were proprietary
legacy systems running on mainframe or mid-range computer hardware. In the
United States market, client/server application software has only recently been
made available to financial institutions, but it is gaining market acceptance
and market share. In the international market, there are a number of
client/server alternatives available, as well as traditional legacy systems.
The Company believes that none of its current competitors offers
application software that provides the level of flexibility and functionality
featured in the Company's customer relationship management, customer
profitability analysis or executive information modules. The Company expects
additional competition from other established and emerging companies as the
client/server market continues to develop and expand. In addition, competition
could increase as a result of software industry consolidations, including
particularly the acquisition of any of the client/server based retail banking
system providers by one of the larger service providers to the financial
services industry. For example, East Point, a provider of client/server
technology, was acquired by Marshall & Ilsley Corp., one of Phoenix's largest
competitors in the U.S. in August 1996.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Phoenix relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. Phoenix seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company's license agreements
contain provisions which limit the number of users, state that title remains
with the Company, protect confidentiality, permit the termination of license
for misuse or abuse and require licensees to notify the Company of
infringements on the Company's property and rights. Phoenix presently has no
patents or patent application spending and has no trademark or copyright
registrations. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, particularly overseas,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great of an extent as do the laws of the
United States. Nevertheless, the Company believes that due to the rapid pace of
technological change in the information technology and software industries,
factors such as the technological and creative skills of its employees, new
product developments, frequent product enhancements and the timeliness and
quality of support services are more important to establishing and maintaining
a competitive advantage in the industry.
Phoenix does not believe that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that software product
developers will be increasingly subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require Phoenix to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable
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to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial conditions.
EMPLOYEES
As of February 28, 1998, Phoenix had a total of 216 employees and
contract workers, of which 102 were engaged in product development and support,
59 were in implementation and training, 18 were in sales and marketing, 14 were
in finance and administration, 8 were in executive management, and 15 were
engaged in product development and support, sales and marketing and general
business operations at Phoenix A.P. Limited. All of the Company's senior and
executive officers who were employed by the Company as of the date of this
report have entered into employment agreements with the Company. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be satisfactory.
FACILITIES
In March 1997 the Company moved its principal administrative, sales,
marketing, support and product development facility to a commercial building in
Heathrow, Florida. The Company currently leases approximately 48,000 square
feet of space in this building. The lease for this property is for a term of
ten years and expires on April 1, 2007. The Company has entered into
negotiations for additional space of approximately 22,500 square feet in a
nearby building to meet its anticipated needs for additional space.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business --
Facilities" for information with respect to the Company's facilities.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1997.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required in Item 5 is incorporated herein by reference
from the Company's 1997 Annual Report to Shareholders, included in this Form
10-K as Exhibit 13.1 (the "Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required in Item 6 is incorporated herein by reference
from the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required in Item 7 is incorporated herein by reference
from the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in Item 8 is incorporated herein by reference
from the Annual Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURES
N/A.
PART III
Certain information required by Part III is omitted from this Report
in that the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the financial year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as
of March 13, 1998 are as follows:
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AGE CLASS(1) POSITION
- ---- --- -------- --------
<S> <C> <C> <C> <C>
Bahram Yusefzadeh(2)(3)...... 51 III Chairman of the Board and Chief Executive Officer
Raju M. Shivdasani........... 47 III President, Chief Operating Officer and Director
Clay E. Scarborough.......... 43 -- Senior Vice President and Chief Financial Officer
Michael R. Newes............. 51 -- Senior Vice President, International Marketing
Harold C. Boughton........... 46 -- Senior Vice President, USA Business Development
Daniel P. Baker.............. 35 -- Senior Vice President, Research and Development
Ruann F. Ernst(2)............ 51 I Director
Ronald E. Fenton(3)(4)....... 69 III Director
William C. Hess(4)........... 61 I Director
James C. Holly(2)(3)......... 56 III Director
Paul A. Jones(2)............. 43 II Director
J. Michael Murphy(3)......... 57 II Director
Glenn W. Sturm(4)............ 44 II Director
O. Jay Tomson................ 61 I Director
</TABLE>
- -------------
(1) Class I term expires in 2000; Class II term expires in 1998; and Class
III term expires in 1999.
(2) Member of Compensation and Stock Option Committee. Mr. Holly is the
Chairman of the Compensation and Stock Option Committee, and Mr.
Yusefzadeh is
a non-voting member of the Compensation and Stock Option Committee.
(3) Member of the Executive Committee. Mr. Yusefzadeh is the Chairman of
the Executive Committee.
(4) Member of Audit Committee. Mr. Fenton is the Chairman of the Audit
Committee.
Bahram Yusefzadeh. Mr. Yusefzadeh, the Company's founder, Chairman of
the Board and Chief Executive Officer of Phoenix, has over 28 years of
experience in the banking software industry. In 1969, he co-founded Nu-Comp
Systems, Inc. ("Nu-Comp"), where he developed the Liberty Banking System and
served as Nu-Comp's president and chief executive officer. Mr. Yusefzadeh
became chairman of the board of Broadway & Seymour, Inc. ("Broadway & Seymour")
upon its acquisition of Nu-Comp in June 1986 and remained in that position
until November 1986. From 1986 to 1992, he worked for The Kirchman Corporation
("Kirchman"), first as president of the product and marketing strategies
division, and later as president of both the independent banking group and the
outsourcing division. Mr. Yusefzadeh currently serves as a member of the
Executive Committee and as a non-voting member of the Compensation and Stock
Option Committee.
Raju M. Shivdasani. Mr. Shivdasani joined the Company in July 1996 as
a Senior Vice President and as Division President of International Sales. In
January 1998, Mr. Shivdasani assumed the position of President and Chief
Operating Officer and was appointed a Director of the Company. From 1990 to
1996, he worked for Fiserv, Inc. where he served as group executive vice
president of the bank services sector and president of CBS Worldwide, a banking
software division. Mr. Shivdasani has over 26 years of experience working for
companies in the banking software, service bureau and data center services
industries.
23
<PAGE> 24
Clay E. Scarborough. Mr. Scarborough joined the Company in March 1996
as a Senior Vice President and Chief Financial Officer. From 1995 to 1996, he
served as chief financial officer and senior vice president of Medifax, Inc., a
health industry services company. From 1992 to 1995, he was chief financial
officer and vice president of administration for A.D.A.M. Software, Inc., a
multimedia software publishing company. In 1991, Mr. Scarborough served as vice
president of finance at Gerber Alley Healthcare, a hospital information systems
software company. From 1986 to 1991, Mr. Scarborough was employed by Digital
Communication Associates, a publicly traded data communications technology
company where he last served as Director of Finance. Mr. Scarborough holds an
M.B.A. from the Harvard Graduate School of Business Administration and is a
certified public accountant.
Michael R. Newes. Mr. Newes joined the Company in 1993 and serves as
Senior Vice President, International Marketing. From 1990 to 1993, he was a
senior vice president for OKRA Marketing Corporation ("OKRA"), a financial
institutions database software marketing company. He worked with Mr. Yusefzadeh
at both Nu-Comp and Kirchman and has nearly 25 years of experience in
marketing, sales and customer support for technology companies.
Harold C. Boughton. Mr. Boughton joined the Company in May 1996 as
Senior Vice President, USA Business Development and is responsible for all
domestic sales and marketing activities. From 1992 to 1996, Mr. Boughton worked
for Fiserv, Inc., first as national sales manager for the CBS Service Bureau
and later as national sales manager for InformEnt. From 1990 to 1992 he served
as regional sales manager and national sales manager for DCR Technologies, an
optical storage technology company.
Daniel P. Baker. Mr. Baker joined the Company in February 1998 as
Senior Vice President, Research and Development and is responsible for domestic
and international product development and quality assurance of the Phoenix
System and Phoenix ancillary products. From 1995 to 1998, Mr. Baker served as
Senior Vice President, Information Technology Division and Director of Market
Systems Strategy at the John H. Harland Company. From 1993 to 1995, he worked
for Fiserv Inc., where he served as Vice President of Technology Services.
Prior to Fiserv, Mr. Baker served over 13 years in the banking industry.
Ruann F. Ernst. Ms. Ernst has been a director of the Company since
1996 and currently serves as a member of the Compensation and Stock Option
Committee. Ms. Ernst has worked for Hewlett-Packard for more than 13 years.
From 1995 to 1997, she served as General Manager of the financial services
business unit of Hewlett-Packard's Computer Systems Organization. From 1991 to
1993, she served as Director of Strategic Business for Hewlett-Packard's
multi-user UNIX product line. In 1993, Ms. Ernst assumed the position of
Marketing Manager for Hewlett-Packard for the financial industry worldwide as
well as U.S. responsibility for process, retail and oil and gas industries.
Ronald E. Fenton. Mr. Fenton has been a director of Phoenix since
1993, currently serves as a member of the Executive Committee and is the
Chairman of the Audit Committee. He has served as the president, the chief
executive officer and a director of BancSecurity Corporation since 1982 and the
president, chief executive officer and director of Security Bank since 1976.
Mr. Fenton is the chairman of the board of Story County Bank & Trust, Story
City, Iowa and is the chairman of the board of Security Bank Jasper-Poweshiek,
Kellogg, Iowa. He is also a director, executive committee member and former
chairman of the board of Shazam, Inc. ("Shazam"), a regional electronic funds
transfer network.
24
<PAGE> 25
William C. Hess. Mr. Hess has been a director of the Company since
1993 and currently serves as a member of the Audit Committee. Since 1984, he
has been the president of Iowa Savings Bank, and since 1981, he has been
chairman of the board of Sac City State Bank. He is also a director of Audubon
State Bank, Iowa Savings Bank, Perry State Bank, Raccoon Valley State Bank and
Home State Bank. Mr. Hess is a past director of Shazam, a past director of the
Iowa Bankers Mortgage Association and Iowa Bankers Association and a past
member of the member of the board of directors of the Iowa Department of
Banking.
James C. Holly. Mr. Holly has been a director of Phoenix since 1993,
currently serves as a member of the Executive Committee and is Chairman of the
Compensation and Stock Option Committee. Since 1977, he has served as
president, chief executive officer and director of Bank of the Sierra. He is
also the current president of the California Independent Bankers Association.
Mr. Holly holds an M.B.A. from the University of Wisconsin and was a
commissioned officer in the United States Army (Armor).
Paul A. Jones. Mr. Jones has been director of the Company since 1995
and currently serves as a member of the Compensation and Stock Option
Committee. He is the president, chief executive officer and a director of
Glenview State Bank and was the president of such bank from 1986 to 1996. Mr.
Jones is a director of Cummins-American Corp. and Cummins-Allison Corp.
J. Michael Murphy. Mr. Murphy has been a director of Phoenix since
1993 and currently serves as a member of the Executive Committee. Since 1977,
he has served as president of Drum Service Co. of Florida, which in February
1998 merged into Palex, Inc. Since 1988 he has been a director of Lochaven
Federal Savings and Loan Association, Orlando Florida and served as chairman of
the board from 1995-1996. He is a past chairman of the National Trade
Association of Container Reconditioners and was chairman of the board of the
International Confederation of Drum Reconditioners from 1990 to 1993. Mr.
Murphy holds an M.B.A. from the Harvard Graduate School of Business
Administration.
Glenn W. Sturm. Mr. Sturm has been a director of the Company since
1996 and currently serves as a member of the Audit Committee. Since 1992, Mr.
Sturm has been a partner in the law firm of Nelson Mullins Riley & Scarborough,
L.L.P., where he serves on such firm's executive committee.
O. Jay Tomson. Mr. Tomson has been a director of the Company since
1993 and was Chairman of the Board of the Company from August 1993 to February
1994. Since 1974, he has served as chairman and chief executive officer of
First Citizens National Bank, and since 1977, he has been chairman of the board
of First Citizens Financial Corporation. Mr. Tomson was a member of the Board
of Directors of the Federal Reserve Bank of Chicago from 1980 to 1986. He is a
former director and president of Shazam.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the Proxy Statement.
25
<PAGE> 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements of the Company as of December
31, 1997 and 1996 and for each of the years in the three-year period ending
December 31, 1997, together with the report of Ernst & Young LLP, dated January
28, 1998, appearing in the Company's 1997 Annual Report to Shareholders,
included as Exhibit 13.1 to this Form 10-K, are incorporated herein by
reference.
(a)(2) Financial Statement Schedules
Financial statement schedules are omitted because they are either: (i)
not applicable or not required; or (ii) the information required is contained
in the consolidated financial statements or the notes thereto.
(b) Exhibits
2.1 Agreement of Merger and Amalgamation Proposal by and among the
Company, Hampton Resources Limited, PSL Acquisition Limited, Brian Lee
Thomas and Elizabeth Carolyn Swanston, dated May 15, 1997
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K, filed with the Securities and Exchange Commission
on May 29, 1997, File No. 0-20937).
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 State of Florida on May
28, 1997 (incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Registration No. 333-31415), as
declared effective by the Securities and Exchange Commission on August
13, 1997 (the "1997 Registration Statement")).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
of the Company's Form 10-Q dated August 14, 1996, File No. 0-20937
(the "Second Quarter 1996 10-Q")).
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.
10.1 Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
effective as of March 18, 1995 (incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on
26
<PAGE> 27
Form S-1 (Registration No. 33-03355), as declared effective by the
Securities and Exchange Commission on July 1, 1996 (the "1996
Registration Statement").*
10.2 Amendment, dated May 24, 1996, to the Phoenix International Ltd., Inc.
1995 Employee Stock Option Plan, effective March 18, 1995
(incorporated by reference to Exhibit 10.43 of the 1996 Registration
Statement).*
10.3 Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
effective as of October 21, 1995 (the "October Plan") (incorporated by
reference to Exhibit 10.13 of the 1996 Registration Statement).*
10.4 Amendment, dated May 24, 1996, to the October Plan (incorporated by
reference to Exhibit 10.44 of the 1996 Registration Statement).*
10.5 Second Amendment, dated as of January 24, 1997, to the October Plan
(incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on December 31, 1996 and as amended by the
Company's Registration Statement on Form S-8, as filed July 3, 1997
(the "Form S-8").*
10.6 Revised Form of Stock Option Agreement for the October Plan
(incorporated by reference to Exhibit 10.45 of the 1996 Registration
Statement).*
10.7 Phoenix International Ltd., Inc. 1996 Director Stock Option Plan
(incorporated by reference to Exhibit 10.46 of the 1996 Registration
Statement).*
10.8 Form of Stock Option Agreement under the Phoenix International Ltd.,
Inc. 1996 Director Stock Option Plan (incorporated by reference to
Exhibit 4.7 of the Form S-8).*
10.9 Form of the Company's Director Indemnity Agreement (incorporated by
reference to Exhibit 10.47 of the 1996 Registration Statement).
10.10 Employment Agreement by and between the Company and Bahram Yusefzadeh,
dated December 28, 1995 (incorporated by reference to Exhibit 10.14 of
the 1996 Registration Statement).*
10.11 First Amendment to Employment Agreement by and between the Company and
Bahram Yusefzadeh, dated May 22, 1996 (incorporated by reference to
Exhibit 10.15 of the 1996 Registration Statement).*
10.12 Employment Agreement by and between the Company and Ralph Reichard,
dated December 18, 1995 (incorporated by reference to Exhibit 10.16 of
the 1996 Registration Statement).*
10.13 First Amendment to Employment Agreement by and between the Company and
Ralph Reichard, dated May 22, 1996 (incorporated by reference to
Exhibit 10.17 of the 1996 Registration Statement).*
10.14 Employment Agreement by and between the Company and Clay E.
Scarborough, dated May 23, 1996 (incorporated by reference to Exhibit
10.18 of the 1996 Registration Statement).*
27
<PAGE> 28
10.15 Employment Agreement by and between the Company and Michael R. Newes,
dated April 12, 1996 (incorporated by reference to Exhibit 10.19 of
the 1996 Registration Statement).*
10.16 Employment Agreement by and between the Company and Harold C.
Boughton, dated June 3, 1996 (incorporated by reference to Exhibit
10.1 of the Second Quarter 1996 10-Q).*
10.17 Employment Agreement by and between the Company and Raju M.
Shivdasani, dated July 15, 1996 (incorporated by reference to Exhibit
10.2 of the Second Quarter 1996 10-Q).*
10.18 Form of Employee Confidentiality Agreement (incorporated by reference
to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, File No. O-20937) (the "1996 10-K")).
10.19 Form of Promissory Note for employee loans from the Company
(incorporated by reference to Exhibit 10.54 of the 1996 Registration
Statement).
10.20 Form of Stock Pledge and Security Agreement for employee loans from
the Company (incorporated by reference to Exhibit 10.55 of the 1996
Registration Statement).
10.21 OEM Software License Agreement, dated June 30, 1995, between the
Company and Gupta Corporation (incorporated by reference to Exhibit
10.26 of the 1996 Registration Statement).+
10.22 Value Added Remarketer Agreement, dated October 13, 1993, between the
Company and Sybase, Inc. (incorporated by reference to Exhibit 10.27
of the 1996 Registration Statement).+
10.23 Software License Agreement between the Company and Unisys Corporation,
dated March 16, 1996 (incorporated by reference to Exhibit 10.28 of
the 1996 Registration Statement).+
10.24 First Amendment to Software License Agreement between the Company and
Unisys Corporation, dated December 27, 1996 (incorporated by reference
to Exhibit 10.25 of the 1996 10-K).+
10.25 Second Amendment to Software License Agreement between the Company and
Unisys Corporation, dated June 30, 1997 (incorporated by reference to
Exhibit 10.27 of the 1997 Registration Statement). +
10.26 General Agreement for Strategic Relationship between the Company and
Hewlett-Packard Company, dated April 30, 1993 (incorporated by
reference to Exhibit 10.29 of the 1996 Registration Statement).+
10.27 Form of Software License Agreement (incorporated by reference to
Exhibit 10.30 of the 1996 Registration Statement).+
10.28 Form of International Software License Agreement (incorporated by
reference to Exhibit 10.31 of the 1996 Registration Statement).+
10.29 Form of Disaster Recovery Service Agreement (incorporated by reference
to Exhibit 10.32 of the 1996 Registration Statement).+
28
<PAGE> 29
10.30 Form of Software Deposit Agreement (incorporated by reference to
Exhibit 10.33 of the 1996 Registration Statement).+
10.31 Form of Confidentiality and Non-Disclosure Agreement (incorporated by
reference to Exhibit 10.34 of the 1996 Registration Statement).
10.32 Form of Confidentiality Agreement (incorporated by reference to
Exhibit 10.35 of the 1996 Registration Statement).
10.33 Form of Mutual Non-Disclosure Agreement (incorporated by reference to
Exhibit 10.36 of the 1996 Registration Statement).
10.34 Form of Confidentiality/Non-Disclosure Agreement Remitting Access to
System Documentation and Data Files for Data Conversion (incorporated
by reference to Exhibit 10.37 of the 1996 Registration Statement).
10.35 Form of Phoenix International Ltd., Inc. Confidentiality Agreement
(incorporated by reference to Exhibit 10.38 of the 1996 Registration
Statement).
10.36 The Principal Financial Group Prototype for Savings Plans (401k), as
amended, and the Group Annuity Contract for the Company (incorporated
by reference to Exhibit 10.41 of the 1996 Registration Statement).*
10.37 Remarketing Agreement and Support Authorization, dated as of April 22,
1996, between the Company and Computer Systems Associates (Nigeria)
Limited (incorporated by reference to Exhibit 10.42 of the 1996
Registration Statement) (the "CSA Agreement").+
10.38 Lease Agreement, dated September 11, 1996, between the Company and 500
International Parkway Development Company (incorporated by reference
to Exhibit 10.1 of the Company's Form 10-Q, dated November 5, 1996,
File No. 0-20937).
10.39 Cooperative Marketing Agreement, dated September 5, 1996, between the
Company and The Netcomm Group, Inc. (incorporated by reference to
Exhibit 10.42 of the 1996 10-K).+
10.40 Cooperative Marketing Agreement, dated October 2, 1996, between the
Company and ISC Financial Systems, Inc. (incorporated by reference to
Exhibit 10.43 of the 1996 10-K).+
10.41 Stock Purchase Agreement, dated March 5, 1997, between the Company and
Dyad Corporation (incorporated by reference to Exhibit 10.44 of the
1996 10-K).+
10.42 License and Distribution Agreement, dated March 5, 1997, between the
Company and Dyad Corporation (incorporated by reference to Exhibit
10.45 of the 1996 10-K).+
10.43 License and Marketing Agreement, dated November 26, 1997, between the
Company and Integrated Financial Services, Inc. (incorporated by
reference to Exhibit 10.46 of the 1996 10-K).+
10.44 Form of Software License Agreement used in connection with the CSA
Agreement (incorporated by reference to Exhibit 10.47 of the 1996
10-K).
29
<PAGE> 30
10.45 Addendum to Lease Agreement, dated March 17, 1997, between the Company
and 500 International Parkway Development Company (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q, dated May 8,
1997, File No. 0-20937 (the "First Quarter 1997 10-Q")).
10.46 Cooperative Marketing Agreement, dated March 26, 1997, between the
Company and International Turnkey Systems (incorporated by reference
to Exhibit 10.2 of the First Quarter 1997 10-Q). +
10.47 Cooperative Marketing Agreement, dated June 28, 1997, between the
Company and Siemens Nixdorf Informationssyteme AG (incorporated by
reference to Exhibit 10.49 of the 1997 Registration Statement). +
10.48 Cooperative Marketing Agreement, dated March 31, 1997, between the
Company and ERAS JV (incorporated by reference to Exhibit 10.50 of the
1997 Registration Statement).+
10.49 Cooperative Marketing Agreement, dated April 16, 1997, between the
Company and Advanced Financial Systems, Inc. (incorporated by
reference to Exhibit 10.51 of the 1997 Registration Statement).+
10.50 Software License and Development Agreement, dated December 31, 1997,
between the Company and Intercept Systems, Inc.
13.1 Registrant's 1997 Annual Report to Shareholders. Except for portions
of said Annual Report incorporated herein by reference, the Annual
Report is furnished for the information of the Commission and is not
deemed filed herewith.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
of the 1997 Registration Statement.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (contained on the signature page of this filing).
27.1 Financial Data Schedule (for Commission purposes only).
- ---------------
+ Confidential treatment previously granted for portions of such
exhibit.
* This agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereto duly authorized.
<TABLE>
<CAPTION>
Phoenix International Ltd., Inc.
<S> <C>
March 17, 1998 By: /s/ Bahram Yusefzadeh
- --------------------------------- -------------------------------------------
Date Bahram Yusefzadeh
Chairman and Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints jointly and severally, Bahram
Yusefzadeh and Raju M. Shivdasani, and each one of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any and all amendments to this Annual Report (Form 10-K) and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchanges Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Bahram Yusefzadeh Chairman of the Board and March 17, 1998
- ------------------------- Chief Executive Officer
Bahram Yusefzadeh (principal executive officer)
/s/ Clay E. Scarborough Chief Financial Officer March 17, 1998
- ------------------------- (principal financial and
Clay E. Scarborough and accounting officer)
/s/ Raju M. Shivdasani President, Chief Operating March 17, 1998
- ------------------------- Officer and Director
Raju M. Shivdasani
/s/ Ruann F. Ernst Director March 17, 1998
- -------------------------
Ruann F. Ernst
/s/ Ronald E. Fenton Director March 17, 1998
- -------------------------
Ronald E. Fenton
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ William C. Hess Director March 17, 1998
- -------------------------
William C. Hess
/s/ James C. Holly Director March 17, 1998
- -------------------------
James C. Holly
/s/ Paul A. Jones Director March 17, 1998
- -------------------------
Paul A. Jones
/s/ J. Michael Murphy Director March 17, 1998
- -------------------------
J. Michael Murphy
/s/ Glenn W. Sturm Director March 17, 1998
- -------------------------
Glenn W. Sturm
/s/ O. Jay Tomson Director March 17, 1998
- -------------------------
O. Jay Tomson
</TABLE>
32
<PAGE> 33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement of Merger and Amalgamation Proposal by and among
the Company, Hampton Resources Limited, PSL Acquisition
Limited, Brian Lee Thomas and Elizabeth Carolyn Swanston,
dated May 15, 1997 (incorporated by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on May 29, 1997, File No.
0-20937).
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 State of Florida
on May 28, 1997 (incorporated by reference to Exhibit 3.1 of
the Company's Registration Statement on Form S-1
(Registration No. 333-31415), as declared effective by the
Securities and Exchange Commission on August 13, 1997 (the
"1997 Registration Statement")).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of the Company's Form 10-Q dated August 14, 1996,
File No. 0-20937 (the "Second Quarter 1996 10-Q")).
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.
10.1 Phoenix International Ltd., Inc. 1995 Employee Stock Option
Plan, effective as of March 18, 1995 (incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 (Registration No. 33-03355), as
declared effective by the Securities and Exchange Commission
on July 1, 1996 (the "1996 Registration Statement").*
10.2 Amendment, dated May 24, 1996, to the Phoenix International
Ltd., Inc. 1995 Employee Stock Option Plan, effective March
18, 1995 (incorporated by reference to Exhibit 10.43 of the
1996 Registration Statement).*
10.3 Phoenix International Ltd., Inc. 1995 Employee Stock Option
Plan, effective as of October 21, 1995 (the "October Plan")
(incorporated by reference to Exhibit 10.13 of the 1996
Registration Statement).*
10.4 Amendment, dated May 24, 1996, to the October Plan
(incorporated by reference to Exhibit 10.44 of the 1996
Registration Statement).*
10.5 Second Amendment, dated as of January 24, 1997, to the
October Plan (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8, as filed with
the Securities and Exchange Commission on December 31, 1996
and as amended by the Company's Registration Statement on
Form S-8, as filed July 3, 1997 (the "Form S-8").*
<PAGE> 34
10.6 Revised Form of Stock Option Agreement for the October Plan
(incorporated by reference to Exhibit 10.45 of the 1996
Registration Statement).*
10.7 Phoenix International Ltd., Inc. 1996 Director Stock Option
Plan (incorporated by reference to Exhibit 10.46 of the 1996
Registration Statement).*
10.8 Form of Stock Option Agreement under the Phoenix
International Ltd., Inc. 1996 Director Stock Option Plan
(incorporated by reference to Exhibit 4.7 of the Form S-8).*
10.9 Form of the Company's Director Indemnity Agreement
(incorporated by reference to Exhibit 10.47 of the 1996
Registration Statement).
10.10 Employment Agreement by and between the Company and Bahram
Yusefzadeh, dated December 28, 1995 (incorporated by
reference to Exhibit 10.14 of the 1996 Registration
Statement).*
10.11 First Amendment to Employment Agreement by and between the
Company and Bahram Yusefzadeh, dated May 22, 1996
(incorporated by reference to Exhibit 10.15 of the 1996
Registration Statement).*
10.12 Employment Agreement by and between the Company and Ralph
Reichard, dated December 18, 1995 (incorporated by reference
to Exhibit 10.16 of the 1996 Registration Statement).*
10.13 First Amendment to Employment Agreement by and between the
Company and Ralph Reichard, dated May 22, 1996 (incorporated
by reference to Exhibit 10.17 of the 1996 Registration
Statement).*
10.14 Employment Agreement by and between the Company and Clay E.
Scarborough, dated May 23, 1996 (incorporated by reference to
Exhibit 10.18 of the 1996 Registration Statement).*
10.15 Employment Agreement by and between the Company and Michael
R. Newes, dated April 12, 1996 (incorporated by reference to
Exhibit 10.19 of the 1996 Registration Statement).*
10.16 Employment Agreement by and between the Company and Harold C.
Boughton, dated June 3, 1996 (incorporated by reference to
Exhibit 10.1 of the Second Quarter 1996 10-Q).*
10.17 Employment Agreement by and between the Company and Raju M.
Shivdasani, dated July 15, 1996 (incorporated by reference to
Exhibit 10.2 of the Second Quarter 1996 10-Q).*
10.18 Form of Employee Confidentiality Agreement (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, File No.
0-20937) (the "1996 10-K")).
<PAGE> 35
10.19 Form of Promissory Note for employee loans from the Company
(incorporated by reference to Exhibit 10.54 of the 1996
Registration Statement).
10.20 Form of Stock Pledge and Security Agreement for employee
loans from the Company (incorporated by reference to Exhibit
10.55 of the 1996 Registration Statement).
10.21 OEM Software License Agreement, dated June 30, 1995, between
the Company and Gupta Corporation (incorporated by reference
to Exhibit 10.26 of the 1996 Registration Statement).+
10.22 Value Added Remarketer Agreement, dated October 13, 1993,
between the Company and Sybase, Inc. (incorporated by
reference to Exhibit 10.27 of the 1996 Registration
Statement).+
10.23 Software License Agreement between the Company and Unisys
Corporation, dated March 16, 1996 (incorporated by reference
to Exhibit 10.28 of the 1996 Registration Statement).+
10.24 First Amendment to Software License Agreement between the
Company and Unisys Corporation, dated December 27, 1996
(incorporated by reference to Exhibit 10.25 of the 1996
10-K).+
10.25 Second Amendment to Software License Agreement between the
Company and Unisys Corporation, dated June 30, 1997
(incorporated by reference to Exhibit 10.27 of the 1997
Registration Statement). +
10.26 General Agreement for Strategic Relationship between the
Company and Hewlett-Packard Company, dated April 30, 1993
(incorporated by reference to Exhibit 10.29 of the 1996
Registration Statement).+
10.27 Form of Software License Agreement (incorporated by reference
to Exhibit 10.30 of the 1996 Registration Statement).+
10.28 Form of International Software License Agreement
(incorporated by reference to Exhibit 10.31 of the 1996
Registration Statement).+
10.29 Form of Disaster Recovery Service Agreement (incorporated by
reference to Exhibit 10.32 of the 1996 Registration
Statement).+
10.30 Form of Software Deposit Agreement (incorporated by reference
to Exhibit 10.33 of the 1996 Registration Statement).+
10.31 Form of Confidentiality and Non-Disclosure Agreement
(incorporated by reference to Exhibit 10.34 of the 1996
Registration Statement).
10.32 Form of Confidentiality Agreement (incorporated by reference
to Exhibit 10.35 of the 1996 Registration Statement).
<PAGE> 36
10.33 Form of Mutual Non-Disclosure Agreement (incorporated by
reference to Exhibit 10.36 of the 1996 Registration
Statement).
10.34 Form of Confidentiality/Non-Disclosure Agreement Remitting
Access to System Documentation and Data Files for Data
Conversion (incorporated by reference to Exhibit 10.37 of the
1996 Registration Statement).
10.35 Form of Phoenix International Ltd., Inc. Confidentiality
Agreement (incorporated by reference to Exhibit 10.38 of the
1996 Registration Statement).
10.36 The Principal Financial Group Prototype for Savings Plans
(401k), as amended, and the Group Annuity Contract for the
Company (incorporated by reference to Exhibit 10.41 of the
1996 Registration Statement).*
10.37 Remarketing Agreement and Support Authorization, dated as of
April 22, 1996, between the Company and Computer Systems
Associates (Nigeria) Limited (incorporated by reference to
Exhibit 10.42 of the 1996 Registration Statement) (the "CSA
Agreement").+
10.38 Lease Agreement, dated September 11, 1996, between the
Company and 500 International Parkway Development Company
(incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q, dated November 5, 1996, File No. 0-20937).
10.39 Cooperative Marketing Agreement, dated September 5, 1996,
between the Company and The Netcomm Group, Inc. (incorporated
by reference to Exhibit 10.42 of the 1996 10-K).+
10.40 Cooperative Marketing Agreement, dated October 2, 1996,
between the Company and ISC Financial Systems, Inc.
(incorporated by reference to Exhibit 10.43 of the 1996
10-K).+
10.41 Stock Purchase Agreement, dated March 5, 1997, between the
Company and Dyad Corporation (incorporated by reference to
Exhibit 10.44 of the 1996 10-K).+
10.42 License and Distribution Agreement, dated March 5, 1997,
between the Company and Dyad Corporation (incorporated by
reference to Exhibit 10.45 of the 1996 10-K).+
10.43 License and Marketing Agreement, dated November 26, 1997,
between the Company and Integrated Financial Services, Inc.
(incorporated by reference to Exhibit 10.46 of the 1996
10-K).+
10.44 Form of Software License Agreement used in connection with
the CSA Agreement (incorporated by reference to Exhibit 10.47
of the 1996 10-K).
10.45 Addendum to Lease Agreement, dated March 17, 1997, between
the Company and 500 International Parkway Development Company
(incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q, dated May 8, 1997, File No. 0-20937 (the "First
Quarter 1997 10-Q")).
<PAGE> 37
10.46 Cooperative Marketing Agreement, dated March 26, 1997,
between the Company and International Turnkey Systems
(incorporated by reference to Exhibit 10.2 of the First
Quarter 1997 10-Q). +
10.47 Cooperative Marketing Agreement, dated June 28, 1997, between
the Company and Siemens Nixdorf Informationssyteme AG
(incorporated by reference to Exhibit 10.49 of the 1997
Registration Statement). +
10.48 Cooperative Marketing Agreement, dated March 31, 1997,
between the Company and ERAS JV (incorporated by reference to
Exhibit 10.50 of the 1997 Registration Statement).+
10.49 Cooperative Marketing Agreement, dated April 16, 1997,
between the Company and Advanced Financial Systems, Inc.
(incorporated by reference to Exhibit 10.51 of the 1997
Registration Statement).+
10.50 Software License and Development Agreement, dated December
31, 1997, between the Company and Intercept Systems, Inc.
13.1 Registrant's 1997 Annual Report to Shareholders. Except for
portions of said Annual Report incorporated herein by
reference, the Annual Report is furnished for the information
of the Commission and is not deemed filed herewith.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 of the 1997 Registration Statement.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (contained on the signature page of this
filing).
27.1 Financial Data Schedule (for Commission purposes only).
- ---------------
+ Confidential treatment previously granted for portions of such exhibit.
* This agreement is a compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE> 1
EXHIBIT 10.50
SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT
BETWEEN
INTERCEPT SYSTEMS, INC.
AND
PHOENIX INTERNATIONAL LTD., INC.
DATED: DECEMBER 31, 1997
Parties:
Intercept Systems, Inc., a Georgia corporation ("Intercept")
3150 Holcomb Bridge Road
Suite 200
Norcross, Georgia 30071
Phoenix International Ltd., Inc., a Florida corporation ("Phoenix")
500 International Parkway
Heathrow, Florida 32746
THIS LICENSE AND DEVELOPMENT AGREEMENT (this "Agreement") is
effective as of the date first set forth above by and between Phoenix and
Intercept. Phoenix has acquired certain rights from Multisoft, an Ecuador
company, in certain software and related documentation for financial
institutions for the operation and administration of automatic teller machines,
which software Phoenix has further developed and modified. Intercept desires to
further develop such software and integrate it with Intercept's existing
software programs, and to market such modified programs with Intercept's other
products. In consideration of the premises set forth above, and of the
obligations herein made and undertaken and other good and valuable
consideration, the parties hereby agree as follows:
1 DEFINITIONS
Capitalized terms used in this Agreement shall have the following definitions:
1.1 Confidential Information. Any competitively sensitive or secret business,
marketing, or technical information, disclosed by one party to the other,
including all source and object code versions of all software, and all
documentation, technical manuals, design and development documentation, and all
other non-public information relating to either party's software or business.
Notwithstanding the foregoing, Confidential Information does not include
information which (i) becomes generally available to the public other than as a
result of a disclosure by the receiving party or its representatives, (ii) was
available to a party prior to its disclosure to such party by the other party
or its representatives, provided the receiving party has no knowledge that such
information
<PAGE> 2
was obtained, directly or indirectly, from a source that was bound by a
confidentiality agreement with the disclosing party or other obligation of
secrecy to the disclosing party or its representatives, (iii) becomes available
to a party, directly or indirectly, from a source other than the other party or
its representatives, provided that such source is not bound by a
confidentiality agreement with the disclosing party, or (iv) that is
independently developed by the receiving party without reference to any
Confidential Information of the disclosing party.
1.2 Derivative Work. A work that is based upon one or more preexisting works,
such as a revision, modification, translation, abridgment, condensation,
expansion, or any other form in which such a preexisting work may be recast,
transformed, or adapted, and that, if prepared without authorization by the
owner of the preexisting work, would constitute a copyright infringement.
1.3 Documentation. The printed material relating to the Program, including all
instructional, technical and development documentation.
1.4 Enhancement. A change or addition to the Program or Documentation, that
improves its function, adds new function, or enhances its performance,
including changes, additions, modifications, new releases, new versions, error
corrections and bug fixes.
1.5 Intellectual Property Rights. All copyrights, patent, patent rights, trade
secrets, trademarks, service marks, Confidential Information, know-how and
other intellectual property rights in software or documentation owned or
claimed by any person under the laws of the United States, or any other
country.
1.6 Intercept Product. Derivative Works of the Program created by Intercept.
1.7 Program. Computer programming code, including source code (human-readable),
and object code (machine-readable), and associated procedural code, including
all current and subsequent Enhancements, as more fully described in Exhibit A.
2 LICENSE GRANT
2.1 Program License. Subject to termination pursuant to Section 5 below,
Phoenix hereby grants Intercept a non-exclusive worldwide, perpetual,
irrevocable right and license to install, use, copy, modify, adapt, translate,
and create Derivative Works of (under sublicense or otherwise) all versions of
the Program, including all source code and object code, and to authorize others
to do some or all of the foregoing subject to the limitations set forth herein.
2.2 Documentation. Subject to termination pursuant to Section 5 below, Phoenix
hereby grants Intercept a non-exclusive worldwide, perpetual, irrevocable right
and license to translate, change, modify and distribute the Documentation.
2.3 Derivative Works. As part of the above license, Intercept shall have the
right to create Derivative Works and Enhancements to the Program and
Documentation, including without limitation, converting the Program to run in
conjunction with Intercept's software, translating the Program and
Documentation into other languages as required by Intercept's business
practices, and
2
<PAGE> 3
modifying the Program to integrate it into Intercept's software product line.
The Program and Documentation as so modified shall be referred to herein as the
"Intercept Products". Intercept shall have an exclusive, worldwide, perpetual,
irrevocable right and license to use, install, market, license, sublicense, and
distribute the Intercept Products, and to authorize others to do some or all of
the foregoing, provided however, that Intercept may not license or provide the
source code of the Program to any third party without the written consent of
Phoenix. Intercept is authorized to use the Intercept Products and the Program
as necessary to implement, install, train, support and maintain the Intercept
Products for end-users and otherwise as necessary to exercise its rights
hereunder.
2.4 Fee. In exchange for the foregoing rights, Intercept shall pay Phoenix a
total of $350,000, due and payable within 45 days following the execution of
this Agreement.
3 PHOENIX OBLIGATIONS
3.1 Initial Deliveries. Phoenix shall deliver to Intercept one copy of the
Program (in object code and source code form) and Documentation within ten days
following the date of this Agreement.
3.2 Assistance.
(a) Phoenix will provide assistance and support to Intercept at no charge
as required by Intercept to create the Intercept Products, provided that
Intercept will pay all of Phoenix's reasonable travel and lodging expenses.
(b) Phoenix will provide additional assistance to Intercept as reasonably
requested on a time and materials basis at Phoenix's then current rates for
such assistance, plus reasonable travel and lodging expenses.
4 LIMITED WARRANTY AND LIMITATION OF LIABILITY
4.1 Warranty. Phoenix warrants that it has received the right from Multisoft to
grant all of the rights granted to Intercept in the Program, Documentation, and
all Enhancements delivered to Intercept hereunder, and that it has all rights
necessary for the grant of rights and licenses under this Agreement.
4.2 Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH HEREIN, PHOENIX DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, ARISING OUT OF OR RELATING TO THE PROGRAM OR
DOCUMENTATION OR ANY USE THEREOF, INCLUDING (WITHOUT LIMITATION) ANY WARRANTY
WHATSOEVER AS TO THE FITNESS FOR A PARTICULAR USE OR THE MERCHANTABILITY OF THE
PROGRAM OR DOCUMENTATION.
4.3 Limitation of Liability. In no event shall either party be liable to the
other for any indirect, special, incidental, or consequential damages
(including lost profits).
3
<PAGE> 4
5 TERMINATION; EFFECT OF TERMINATION
5.1 Agreement Termination. Phoenix may terminate the licenses granted under
this Agreement upon the material breach by Intercept of its obligations
hereunder if such breach is not cured within 30 days following notice thereof
from Phoenix.
5.2 Consequences. Upon the termination of the licenses as set forth above,
Intercept shall immediately return to Phoenix all of the software and
documentation provided by Phoenix. In such case, Intercept may retain the
Intercept Products and a license to use, modify, enhance, and distribute the
Intercept Products as necessary to continue to provide maintenance and support
for its customers who have already licensed the Intercept Products until all
such licenses have expired.
6 INDEMNIFICATION
6.1 Phoenix Indemnification. Phoenix agrees to, and does hereby, indemnify and
hold harmless Intercept from any and all claims, demands, or actions alleging
that the Program or Documentation (including any Enhancements), in the form
delivered by Phoenix, infringes or abridges any third-party Intellectual
Property Rights in violation of the warranty in Section 4.1 above.
6.2 Intercept Indemnification. Intercept agrees to, and does hereby, indemnify
and hold harmless Phoenix from any and all claims, demands, or actions from or
relating to Intercept Products, or use by customers of Intercept Products, and
based on or related to Intercept's performance, nonperformance, infringement of
third-party Intellectual Property Rights, representations or statements made,
or other actions with respect to the Intercept Products, but only to the extent
such claims, demands or actions do not arise from any act or omission of
Phoenix or from infringement of Intellectual Property Rights by the portion of
the Intercept Products provided to Intercept by Phoenix.
6.3 Conditions. The foregoing indemnities shall be contingent upon the
following: The party seeking to enforce the indemnity against the other party
shall give written notice to the other party of any claim, demand, or action
for which indemnity is sought; shall fully cooperate in the defense or
settlement of any such claim, demand, or action; and shall obtain the prior
written agreement of the indemnifying party to any settlement or proposal of
settlement.
7 CONFIDENTIALITY
7.1 Confidentiality. Both parties hereto desire to maintain the confidentiality
of the Confidential Information and are making it available only upon the terms
and conditions set forth below and they hereby agree:
(a) Not to use any portion of the Confidential Information for any purpose,
except pursuant to the rights and obligations set forth in this Agreement;
and
(b) Not to disclose any portion of the Confidential Information to any
person except the parties' respective officers, directors, employees, and
representatives who need to know such information in connection with this
letter or for the purpose of entering into a definitive agreement and who
4
<PAGE> 5
agree to be bound by confidentiality obligations consistent with the
provisions of this Agreement.
7.2 Exceptions. If either of the parties are requested or required (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process) to disclose any Confidential
Information of the other, the party which is subject to such request will
provide the other party with prompt notice of such request(s) so that such
other party may seek an appropriate protective order and/or waive compliance
with the provisions of this letter agreement. If, in the absence of a
protective order or the receipt of a waiver hereunder a party is nonetheless,
in the opinion of its counsel, compelled to disclose the Confidential
Information of the other party to any tribunal or else stand liable for
contempt or suffer other censure or penalty, that party may disclose such
information to such tribunal without liability hereunder.
7.3 Remedies. As money damages would not be a sufficient remedy for any breach
of this paragraph of this letter agreement the parties hereto shall be entitled
to specific performance as a remedy for any such breach. Such remedy shall not
be deemed to be the exclusive remedy for any such breach of this letter
agreement but shall be in addition to all other remedies available at law or
equity.
8 MISCELLANEOUS
8.1 Title. It is expressly understood and agreed that, as between Phoenix and
Intercept, all right, title, and interest in and to the Program and
Documentation (including any Enhancements) and any other material furnished to
Intercept under this Agreement vests solely and exclusively in the Phoenix, and
Intercept shall neither derive nor assert any title or interest in or to such
materials except for the rights of use or licenses granted under this
Agreement. Intercept shall own all changes in the Program and Documentation
made by or at the direction of Intercept, and the Derivative Works to the
extent they are different from the Program.
8.2 Status. Nothing herein shall be construed to create a partnership, joint
venture, or agency relationship between the parties hereto.
8.3 No Conflict of Interest. Intercept and Phoenix represent and warrant that
they have full power and authority to undertake the obligations set forth in
this Agreement and that they have not entered into any other agreement that
would render them incapable of satisfactorily performing their obligations
hereunder, or that would place them in a position of conflict of interest or be
inconsistent or in conflict with their obligations hereunder.
8.4 Compliance with Law. Intercept agrees that it shall comply with all
applicable laws and regulations of governmental bodies or agencies in its
performance under this Agreement.
8.5 No Assignment. Intercept represents that it is acting on its own behalf and
is not acting as an agent for or on behalf of any third party and further
agrees that it may not assign its rights or obligations under this Agreement
without the prior written consent of Phoenix, except that Intercept may assign
its rights to a successor to substantially all of its business or assets or to
any owner of 30% or more of its equity or any of its subsidiaries.
5
<PAGE> 6
8.6 Notices. All notices and other communications required or permitted to be
given under this Agreement shall be in writing and shall be considered
effective upon delivery when deposited with United Parcel Service, FedEx, or in
the U.S. Mail, return receipt requested, addressed to the appropriate party at
the address noted above, unless a different address shall have been designated
in writing.
8.7 No Waiver. Neither party shall by mere lapse of time, without giving
notice or taking other action hereunder, be deemed to have waived any breach by
the other party of any of the provisions of this Agreement. Further, the waiver
by either party of a particular breach of this Agreement by the other shall not
be construed or constitute a continuing waiver of such breach or of other
breaches of the same or other provisions of this Agreement.
8.8 Intercept Stock. Phoenix shall not buy or sell any of the shares of the
publicly traded stock of Intercept as long as Phoenix has access to non-public
information regarding Intercept's business or technology.
8.9 Force Majeure. Neither party shall be in default if failure to perform any
obligation hereunder is caused solely by supervening conditions beyond that
party's control, including acts of God, civil commotion, strikes, labor
disputes, and governmental demands or requirements.
8.10 Scope of Agreement; Amendment. The parties hereto acknowledge that each
has read this Agreement, understands it, and agrees to be bound by its terms.
The parties further agree that this Agreement is the complete and exclusive
statement of agreement and supersedes all proposals (oral or written),
understandings, representations, conditions, warranties, covenants, and other
communications between the parties relating hereto. This Agreement may be
amended only by a subsequent writing that specifically refers to this Agreement
and is signed by both parties, and no other act, document, usage, or custom
shall be deemed to amend this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by respective duly authorized representatives as set forth below.
INTERCEPT SYSTEMS, INC. PHOENIX INTERNATIONAL LTD., INC.
By:/s/ JW Collins By: /s/ Bahram Yusefzadeh
---------------------------- -------------------------------
Signature Signature
JW Collins Bahram Yusefzadeh
- ------------------------------- ----------------------------------
Print Name Print Name
CEO Chm. & CEO
- ------------------------------- ----------------------------------
Print Title Print Title
6
<PAGE> 7
EXHIBIT A
SOFTWARE DESCRIPTION
English version of:
Multisoft ATM Software for NT
Multisoft Voice Response System
Multisoft TranPro
each as modified by Phoenix, and including all associated drivers and ancillary
software
7
<PAGE> 1
EXHIBIT 13.1
ANNUAL REPORT - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SELECTED FINANCIAL & OPERATING DATA
Eleven months Fiscal year Fiscal year
Year ended Year ended ended ended ended
December 31, December 31, December 31, January 31, January 31,
1997 1996 1995(1) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
License fees and other $12,664,491 $6,827,699 $ 3,467,547 $ 57,776 $ 30,000
Implementation, customer and software support
and other service fees 5,178,543 3,577,848 1,556,164 369,711 --
----------------------------------------------------------------------
Total revenues 17,843,034 10,405,547 5,023,711 427,487 30,000
Expenses:
Cost of license fees and other 1,594,711 674,037 375,783 -- --
Cost of implementation, customer
and software support and other service fees 3,886,878 2,272,710 1,246,886 637,427 104,818
Sales and marketing 3,264,055 1,377,353 983,290 358,948 96,911
General and administrative 2,743,100 1,822,871 1,058,190 981,930 225,458
Product development 3,274,238 1,760,691 654,797 1,362,780 621,373
----------------------------------------------------------------------
Total expenses 14,762,982 7,907,662 4,318,946 3,341,085 1,048,560
Other income (expense):
Interest income 799,676 223,548 121,815 26,610 3,603
Interest expense (52,376) (19,231) (12,060) (19,366) --
Other income (expense) 133,656 (2,242) (4,252) 75,989 1,815
----------------------------------------------------------------------
Income (loss) before income taxes 3,961,008 2,699,960 810,268 (2,830,365) (1,013,142)
Income tax expense 920,492 481,666 255,999 -- --
----------------------------------------------------------------------
Net income (loss) $ 3,040,516 $2,218,294 $ 554,269 $(2,830,365) $(1,013,142)
======================================================================
Net income (loss) per share(2) - basic $ 0.68 $ 0.65 $ 0.19 $ (1.21) $ (0.58)
======================================================================
Net income (loss) per share(2) - diluted $ 0.62 $ 0.60 $ 0.18 $ (1.21) $ (0.58)
======================================================================
Weighted average shares outstanding(2) - basic 4,465,545 3,406,782 2,929,517 2,330,391 1,741,813
======================================================================
Weighted average shares outstanding(2) - diluted 4,886,255 3,715,120 3,029,251 2,330,391 1,741,813
======================================================================
OTHER DATA
Total product development expenditures(3) $ 5,132,271 $2,966,515 $ 1,788,172 $ 1,455,781 $ 621,373
Total personnel(4) 193 124 87 48 23
Implemented customers(5) 39 27 12 2 --
Backlog(6) $21,200,000 $6,800,000 $ 7,300,000 $ 3,100,000 $ 212,000
At
-----------------------------------------------------------------------
December 31, December 31, December 31, January 31, January 31,
1997 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital (deficit) $27,488,029 $6,864,961 $(2,263,338) $(2,156,814) $ (393,335)
Total assets 52,157,495 12,083,167 3,228,289 1,726,511 311,322
Long-term obligations 595,821 190,000 -- -- --
Retained earnings (deficit) 1,866,711 (1,070,944) (3,289,238) (3,843,507) (1,013,142)
Total shareholders' equity (deficit) 45,835,131 9,584,017 (568,102) (1,619,412) (226,456)
</TABLE>
(1) During 1995, the Company changed its fiscal year end from January 31 to
December 31. Accordingly, the consolidated financial statements for the
period ended December 31, 1995 include only eleven months of operations.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) The total of capitalized software development costs and product development
expenses.
(4) All personnel, including contract workers and part-time employees.
(5) Customers using the Phoenix System to support daily operations.
(6) Contract value of executed license and service agreements minus revenues
recognized from those contracts.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Annual Report. The financial statements for 1997 and 1996 include the
twelve months of operations ended December 31, 1997 and 1996 respectively.
During 1995, Phoenix changed its fiscal year end from January 31 to December
31. For purposes hereof, the Company defines the eleven months ended December
31, 1995 as "Fiscal 1995." Dollar amounts are rounded.
OVERVIEW
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 are recorded in accordance with AICPA Statement of Position 91-1
"Software Revenue Recognition." 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 American Institute of Certified Public Accountants ("AICPA")
issued a new Statement of Position 97-2 ("SOP 97-2") "Software Revenue
Recognition." SOP 97-2 supersedes SOP 91-1, the AICPA's current guidance on
software revenue recognition. See "Impact of New Accounting Standards."
Costs incurred internally to develop a computer software product are charged to
product development expense when incurred until technological feasibility has
been established for the product. Thereafter, all software production costs are
capitalized and recorded at the lower of unamortized cost or net realizable
value. Capitalization ceases upon general release of the software to customers.
After general release, capitalized costs are amortized using the straight-line
method over the estimated useful life of the related product (currently five
years).
The Company intends to maintain its marketing focus in the United States on
middle market financial institutions, which the Company defines as commercial
banks and savings institutions with asset sizes ranging from $100 million to $2
billion. In addition, Phoenix will continue to expand its presence in the
international market by focusing its marketing efforts on retail-oriented Tier
2 Banks (banks with up to 300 branches and/or one million accounts). The
Company intends to pursue both markets by increasing its direct and indirect
distribution channels. Since its inception, Phoenix primarily has used a direct
sales force to market the Phoenix System. Phoenix believes that, in the future,
revenues from products sold through strategic alliances and other indirect
channels may become an increasingly significant source of the Company's total
revenues, particularly in the international market. Gross margins and
composition of revenue and expenses will vary depending on whether a sale was
made directly by the Company or by a value added reseller ("VAR") or agent.
However, the Company believes that the difference in the margins obtained from
direct and indirect sales should not have a material adverse effect on the
Company's business, operating results and financial condition.
2
<PAGE> 3
The Company expects increased competition and intends to invest significantly
in product development and other aspects of its business. Management believes
that the banking software market for middle market financial institutions is
diffuse with medium-to-high barriers to entry, including costs of entry and
time to market. Management believes that client/server technology in the
financial services industry is early in its life cycle and will continue to
gain market share for the next five to ten years as it displaces legacy
hardware and software. Although client/server technology is characterized by
rapidly evolving developments, the open architecture design and attributes of
the Phoenix System facilitate rapid adaptation to evolving technological
changes. Phoenix intends to maintain its leadership position by integrating new
technologies, adding new applications, enhancing existing applications and
increasing functionality.
The Company's quarterly operating results have varied significantly in the past
and may vary significantly in the future. 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; the timing
of the development, implementation and release of the Company's products and
enhancements; changes in the Company's strategy and operating expenses and
general economic factors. Product revenues are difficult to forecast because
the market for client/server application software products is rapidly evolving.
The Company's sales cycle generally covers an extended period but varies
substantially from customer to customer. Phoenix believes that quarter to
quarter comparisons of its results of operations should not be relied upon as
indications of future performance.
3
<PAGE> 4
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>
Percent of Total Revenues
Fiscal
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees and other 71.0% 65.6% 69.0%
Implementation, customer and software support
and other service fees 29.0% 34.4% 31.0%
------------------------------------------
Total revenues 100.0% 100.0% 100.0%
Expenses:
Cost of license fees and other 8.9% 6.5% 7.5%
Cost of implementation, customer and software
support and other service fees 21.8% 21.8% 24.8%
Sales and marketing 18.3% 13.2% 19.6%
General and administrative 15.4% 17.5% 21.1%
Product development 18.3% 17.0% 13.0%
------------------------------------------
Total expenses 82.7% 76.0% 86.0%
Other income (expense):
Interest income 4.5% 2.1% 2.4%
Interest expense (0.3%) (0.2%) (0.2%)
Other income (expense) 0.7% -- (0.1%)
------------------------------------------
Income before income taxes 22.2% 25.9% 16.1%
Income tax expense 5.2% 4.6% 5.1%
------------------------------------------
Net income 17.0% 21.3% 11.0%
==========================================
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues increased 71.5% to $17.8 million in the year ended
December 31, 1997 from $10.4 million in the year ended December 31, 1996.
International sales accounted for approximately 53% of total revenues in the
years ended December 31, 1997 and 1996. License fees and other revenues
increased 85.5% to $12.7 million from $6.8 million due to an increased number
of customers and an increased product line. Implementation, customer and
software support and other service fees increased 44.7% to $5.2 million in the
year ended December 31, 1997 from $3.6 million in the year ended December 31,
1996 due to increased support fees, programming support and consulting
revenues. In October 1997, the AICPA issued SOP 97-2 which supersedes SOP 91-1,
the AICPA's current guidance on software revenue recognition. See "Impact of
New Accounting Standards."
Expenses. The Company's operating expenses increased 86.7% to $14.8 million in
the year ended December 31, 1997 from $7.9 million in the year ended December
31, 1996, and excluding nonrecurring acquisition
4
<PAGE> 5
expenses of $274,000 related to the Phoenix A.P. Limited acquisition, operating
expenses in the year ended December 31, 1997 would have been $14.5 million.
Cost of license fees and other increased 136.6% to $1.6 million in the year
ended December 31, 1997 from $674,000 in the year ended December 31, 1996, as a
result of increased amortization of capitalized software development costs and
third party software royalties.
Cost of implementation, customer and software support and other service fees
increased 71.0% to $3.9 million in the year ended December 31, 1997 from $2.3
million in the year ended December 31, 1996 as a result of additional personnel
costs related to increased staffing, Phoenix System implementation activity and
training of third party agents and resellers. 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.
Sales and marketing expenses increased 137.0% to $3.3 million in the year ended
December 31, 1997 from $1.4 million in the year ended December 31, 1996,
primarily as a result of additional expenses incurred in connection with
increased staffing, travel, marketing, commissions and personnel related costs
and from the opening of a new sales office in London, England in December 1996.
General and administrative expenses increased 50.5% to $2.7 million in the year
ended December 31, 1997 from $1.8 million in the year ended December 31, 1996.
The increase was primarily the result of acquisition expenses of $274,000
related to the acquisition of Phoenix A.P. Limited, personnel related costs and
other overhead costs.
Product development expenses increased 86.0% to $3.3 million in the year ended
December 31, 1997 from $1.8 million in the year ended December 31, 1996.
Product development expenses increased as a result of increased salaries and
contract labor costs. Capitalized software development costs increased to $1.9
million in the year ended December 31, 1997 from $1.2 million in the year ended
December 31, 1996. The total of product development expenses and capitalized
software development costs ("Total Product Development Expenditures") increased
to $5.1 million during the year ended December 31, 1997 from $3.0 million
during the year ended December 31, 1996. The increase in Total Product
Development Expenditures was primarily attributable to increased staffing
required to expand and enhance the Company's product line.
Other Income (Expense). Interest income was $800,000 and $224,000 in the years
ended December 31, 1997 and 1996, 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. Interest expense was $52,000 and $19,000 in the year
ended December 31, 1997 and 1996, respectively. Other income was $134,000 in
the year ended December 31, 1997, primarily as a result of fulfilling
obligations under an economic development grant and realized foreign exchange
gains from the operations of the Company's foreign subsidiaries, Phoenix A.P.
Limited and Phoenix E.M.E.A., Ltd.
Income Tax Expense. Income tax expense was $920,000 and $482,000 resulting in
effective rates of 23.2% and 17.8% in the years ended December 31, 1997 and
1996, respectively. As a result of the Company's start-up losses, the Company
has a net operating loss carryforward. At December 31, 1997, Phoenix had
available net operating loss carryforwards of approximately $4.95 million that
expire in years 2009 through 2011 to offset future taxable income for federal
income tax purposes. In addition, Phoenix has available
5
<PAGE> 6
research and development tax credit carryforwards of $500,000 that expire in
years 2008 through 2011. Utilization of these carryforwards to reduce future
income taxes will depend on the Company's ability to generate sufficient
taxable income prior to the expiration of the carryforwards. As a result of an
ownership change, as defined by the Internal Revenue Code of 1986, as amended
(the "Code"), the annual amount of net operating loss carryforwards and tax
credit available to offset taxable income may be limited under the provisions
of the Code. As of December 31, 1997, the Company has determined that the
deferred tax assets resulting from the net operating loss and tax credit
carryforwards and other tax benefits is more likely than not to be realized. As
a result, the Company expects that its effective tax rate in 1998 will no
longer be significantly reduced by the benefit of the above tax loss
carryforwards and credits. See Note 9 to the Notes to Consolidated Financial
Statements.
Net Income. Net income increased 37.1% to $3.0 million in the year ended
December 31, 1997 from $2.2 million in the year ended December 31, 1996,
primarily as a result of increased revenue. Excluding nonrecurring acquisition
expenses of $274,000 related to the acquisition of Phoenix A.P. Limited, net
income for the year ended December 31, 1997 would have been $3.3 million.
Comparison of the Year Ended December 31, 1996 to Fiscal 1995
Revenues. Total revenues increased 107.1% to $10.4 million in the year ended
December 31, 1996 from $5.0 million in Fiscal 1995. License fees and other
revenues increased 96.9% to $6.8 million in the year ended December 31, 1996
from $3.5 million in Fiscal 1995. Revenues during the year ended December 31,
1996 and Fiscal 1995 include $482,000 and $256,000, respectively, in foreign
tax withholdings which are contractually paid by foreign customers, and such
amount is also recorded as an income tax expense. The completion of a
commercially viable version of the Phoenix System and the delivery of software
to an increased number of customers in both the United States and international
markets were major factors in the increase in license fees during the year
ended December 31, 1996 compared to Fiscal 1995.
For the year ended December 31, 1996, two international customers accounted for
approximately 32% of Phoenix's total revenues (each accounting for
approximately 16% of total revenues). One of these customers contributed 19% of
total revenues in Fiscal 1995 and in Fiscal 1995 another customer contributed
approximately 43% of Phoenix's total revenues. Revenue from one of these
customers during the year ended December 31, 1996 represents license fees to a
reseller which the reseller may apply to future sales of the Phoenix System.
During the year ended December 31, 1996, approximately 53% of the Company's
revenues were derived from its foreign sales activities as compared to
approximately 70% of the Company's revenues in Fiscal 1995.
Implementation, customer and software support and other service fees increased
129.9% to $3.6 million in the year ended December 31, 1996 from $1.6 million in
Fiscal 1995. This growth was primarily due to increased implementation and
development fees and services, which resulted from increased licensing
activity.
Expenses. The Company's operating expenses increased 83.1% to $7.9 million in
the year ended December 31, 1996 from $4.3 million in Fiscal 1995. The growth
in expenses was primarily due to increased personnel related costs resulting
from higher staffing levels.
6
<PAGE> 7
Cost of license fees and other increased 79.4% to $674,000 in the year ended
December 31, 1996 from $376,000 in Fiscal 1995. These costs consisted primarily
of amortization of capitalized software development costs and third party
software royalties which related to software which is sold and installed with
the Company's products. Amortization of software development costs increased in
the year ended December 31, 1996 compared to Fiscal 1995 because; (i)
amortization costs were only first recorded in June 1995 after general release
of the Phoenix System; and (ii) the amount of monthly amortization increased as
the Company capitalized additional software development costs. Third party
royalties increased in the year ended December 31, 1996 from Fiscal 1995 due to
higher sales of third party software licenses.
Cost of implementation, customer and software support and other services
increased 82.3% to $2.3 million in the year ended December 31, 1996 from $1.2
million in Fiscal 1995 because of increased personnel related costs.
Sales and marketing expenses increased 40.1% to $1.4 million in the year ended
December 31, 1996 from $983,000 in Fiscal 1995. This increase was primarily due
to the expansion of sales and marketing staffing and increased marketing
activities.
General and administrative expenses increased 72.3% to $1.8 million in the year
ended December 31, 1996 from $1.1 million in Fiscal 1995. The increase was
primarily the result of increased personnel costs, professional services and
public company related expenses.
Product development expenses increased 168.9% to $1.8 million in the year ended
December 31, 1996 from $655,000 in Fiscal 1995. This increase was primarily due
to the continued development of the Phoenix System. Capitalized software
development costs increased to $1.2 million in the year ended December 31, 1996
from $1.1 million in Fiscal 1995. Total Product Development Expenditures
increased to $3.0 million during the year ended December 31, 1996 from $1.8
million during Fiscal 1995. The increase in Total Product Development
Expenditures was primarily attributable to increased staffing required to
expand and enhance the Company's product line.
Other Income (Expense). Interest income was $224,000 and $122,000 in the year
ended December 31, 1996 and Fiscal 1995, respectively. Interest income
increased in the year ended December 31, 1996 as a result of interest from the
investment of funds received by the Company in the third quarter of 1996 from
the initial public offering of the Company's Common Stock. Interest expense
increased to $19,000 in the year ended December 31, 1996 from $12,000 in Fiscal
1995 as a result of increased interest from bank equipment and line of credit
loans in the year ended December 31, 1996.
Income Tax Expense. Income tax expense was $482,000 and $256,000 in the year
ended December 31, 1996 and Fiscal 1995, respectively. These income tax
expenses represent withholding taxes which relate to the licensing of the
Company's products to foreign customers and which are contractually payable by
those customers.
Net Income. Net income increased $1.7 million to $2.2 million for the year
ended December 31, 1996 from $554,000 for Fiscal 1995 primarily as a result of
increased revenues.
7
<PAGE> 8
BACKLOG
Backlog, defined as the contract value of executed agreements minus revenue
recognized from these contracts, totaled $21.2 million, $6.8 million and $7.3
million at December 31, 1997, 1996, and 1995, respectively. At December 31,
1997 backlog consisted of $0.1 million for software licenses, $3.8 million for
implementation services, $2.8 million for other professional services, and
$14.4 million for five-year customer support and disaster recovery service
agreements. Backlog of software license and implementation revenue is expected
to be realized within a period of approximately one year, and customer support
service backlog is expected to be realized within a period of approximately
five years.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its cash needs through existing cash and investment balances,
interest on investments and, to a lesser extent, through cash flow from
operations, without relying on lines of credit or other borrowings. At December
31, 1997, cash and cash equivalents were $13.0 million. Short term investments
of $7.7 million and long term investments of $13.1 million consist primarily of
liquid U.S. Treasury Securities. For the year ended December 31, 1997, cash
used by operations was $1.1 million. An increase in accounts receivable of $4.1
million, and an increase in unbilled accounts receivable of $2.6 million were
significant uses of cash in operating activities. Investing activities used
cash of $22.6 million, including $1.9 million from capitalized software costs.
Purchases of property and equipment used $1.4 million of cash. Increases in
other assets which include minority investments in other companies and
non-current prepaid royalties used $1.3 million of cash. Purchases of long term
investments used $13.1 million of cash and increases in the purchases of short
term investments used $5.0 million of cash. Financing activities provided $31.8
million of cash primarily from the issuance of 1,474,000 shares pursuant to the
Company's public offering of its common stock in August 1997. In addition, the
Company entered into a capital lease obligation of $727,000 for furniture when
it moved into its new corporate offices in March 1997. Working capital was
$27.5 million as of December 31, 1997.
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 1998. 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, including acquisitions, may require the
Company to obtain additional equity or debt financing.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which changes the current method of computing earnings per share.
SFAS 128 requires presentation of basic earnings per share and diluted earnings
per share amounts, as defined. See Note 1 to the Consolidated Financial
Statements. SFAS 128 is effective for the Company's year ending December 31,
1997, and all prior-period earnings per share data presented have been restated
to conform with the provisions of the new pronouncement.
In February 1998 the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 98 ("SAB 98"). This SAB significantly changes the SEC
staff's guidance on "cheap stock" in initial public offerings and the
subsequent reporting of cheap stock. The SAB also eliminated inconsistencies
between the
8
<PAGE> 9
SEC's previous guidance and SFAS 128. Under the guidance of SAB 98, the
Company's "cheap stock" does not meet the criteria stated as "nominal
issuances," and the cheap stock impact has been eliminated. SAB 98 is applied
retroactively and is reflected within the earnings per share amounts reported.
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 requires reporting segment profit or loss, certain specific revenue
and expense items, and segment assets. It requires reconciliations of total
segment revenues, total segment profit or loss, total segment assets, and other
amounts disclosed for segments to corresponding amounts in the enterprise's
general-purpose financial statements. It requires that all public business
enterprises report information about the revenues derived from the enterprise's
products or services (or groups of similar products and services), about the
countries in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in making
operating decisions. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated.
The Company intends to adopt the provisions of SFAS 130 and 131 in 1998 and
does not expect their application to have a material impact on the financial
statements of the Company.
In October 1997 the AICPA issued SOP 97-2 which supersedes SOP 91-1 and is
effective for transactions entered into for fiscal years beginning after
December 15, 1997. While some principles remain the same, there are several key
differences between the two pronouncements, including accounting for multiple
element arrangements. SOP 97-2 addresses revenue recognition from a conceptual
level and does not specifically provide implementation guidance. However the
Company currently believes, based on its reading and interpretation of SOP
97-2, that future license and services agreements that require modifications to
the software will likely 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.
The Company currently believes that international license and service
agreements, which historically represent approximately half of the Company's
revenues, are most likely to be affected. 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 the
9
<PAGE> 10
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.
YEAR 2000 ISSUES
The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the Year 2000 and beyond. The Company has
initiated discussions with its significant suppliers to ensure that they have
appropriate plans to remediate potential Year 2000 issues.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the financial statements. Generally, throughout
the periods discussed above, the increases in revenue have resulted primarily
from higher volumes, rather than price increases.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Annual Report and include all statements
that are not historical statements of fact regarding the intent, 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 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 as a result of various factors discussed herein
and those factors discussed in detail in the Company's filings with the SEC,
including the "Risk Factors" section of the Company's Registration Statement on
Form S-1 (Registration Number 333-31415), as declared effective by the SEC on
August 13, 1997.
10
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,034,491 $ 3,770,889
Investments, available for sale 7,705,000 2,730,825
Accounts receivable, net of allowance for doubtful accounts
of $155,000 and $15,000 at December 31, 1997 and 1996, respectively 4,578,485 935,736
Unbilled accounts receivable 3,766,322 1,188,282
Deferred tax asset 2,229,000 -
Prepaid expenses and other current assets 592,274 548,379
----------------------------------
Total current assets 31,905,572 9,174,111
Long term investments, available for sale 13,088,014 -
Property and equipment:
Computer equipment and purchased software 2,217,366 1,088,509
Furniture, office equipment and leasehold improvements 1,100,275 252,047
----------------------------------
3,317,641 1,340,556
Accumulated depreciation and amortization (972,616) (447,128)
----------------------------------
2,345,025 893,428
Capitalized software development costs, net of accumulated amortization of
$1,078,749 and $446,572 at December 31, 1997 and 1996, respectively 3,522,484 1,985,628
Other assets 1,296,400 30,000
----------------------------------
Total assets $52,157,495 $12,083,167
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 624,924 $ 384,693
Accrued expenses 813,817 870,481
Accrued commissions 580,167 51,559
Accrued royalties 416,678 -
Capital lease, current portion 129,997 -
Deferred revenue 1,851,960 1,002,417
----------------------------------
Total current liabilities 4,417,543 2,309,150
Deferred revenue under economic development grant 95,000 190,000
Deferred tax liability 1,309,000 -
Capital lease, long term portion 500,821 -
Shareholders' equity:
Preferred stock, $0.01 par value:
10,000,000 shares authorized, none issued and outstanding - -
Common stock, $0.01 par value:
50,000,000 and 20,000,000 shares authorized; 5,435,418 and 3,838,910 issued and
outstanding at December 31, 1997 and 1996, respectively 54,354 38,389
Additional paid-in capital 43,927,426 10,727,255
Stock subscription receivables (13,360) (110,683)
Retained earnings (deficit) 1,866,711 (1,070,944)
----------------------------------
Total shareholders' equity 45,835,131 9,584,017
----------------------------------
Total liabilities and shareholders' equity $52,157,495 $12,083,167
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Eleven
Year ended Year ended months ended
December 31, December 31, December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
License fees and other $12,664,491 $6,827,699 $3,467,547
Implementation, customer and software
support and other service fees 5,178,543 3,577,848 1,556,164
----------------------------------------------------
Total revenues 17,843,034 10,405,547 5,023,711
Expenses:
Costs of license fees and other 1,594,711 674,037 375,783
Costs of implementation, customer and
software support and other service fees 3,886,878 2,272,710 1,246,886
Sales and marketing 3,264,055 1,377,353 983,290
General and administrative 2,743,100 1,822,871 1,058,190
Product development 3,274,238 1,760,691 654,797
----------------------------------------------------
Total expenses 14,762,982 7,907,662 4,318,946
Other income (expense):
Interest income 799,676 223,548 121,815
Interest expense (52,376) (19,231) (12,060)
Other income (expense) 133,656 (2,242) (4,252)
----------------------------------------------------
Income before income taxes 3,961,008 2,699,960 810,268
Income tax expense 920,492 481,666 255,999
----------------------------------------------------
Net income $ 3,040,516 $2,218,294 $ 554,269
====================================================
Net income per share - basic $ 0.68 $ 0.65 $ 0.19
====================================================
Net income per share - diluted $ 0.62 $ 0.60 $ 0.18
====================================================
Weighted average shares outstanding - basic 4,465,545 3,406,782 2,929,517
====================================================
Weighted average shares outstanding - diluted 4,886,255 3,715,120 3,029,251
====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Stock Retained Total
All Classes Paid-In Subscription Earnings/ Shareholders'
-------------
Shares Amount Capital Receivables (Deficit) Equity/(Deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995 2,881,683 $1,477,117 $2,097,502 $(1,350,524) $(3,843,507) $(1,619,412)
Issuance of 23,231 shares of Class D
common stock 23,231 100,000 - - - 100,000
Issuance of 87,416 shares of Class E
common stock 87,416 94,073 270,968 - - 365,041
Payment on stock subscription receivable - - - 32,000 - 32,000
Net income - - - - 554,269 554,269
------------------------------------------------------------------------------
Balance, December 31, 1995 2,992,330 1,671,190 2,368,470 (1,318,524) (3,289,238) (568,102)
Issuance of shares of Class E common
stock from exercise of stock options 170,269 183,230 137,940 (118,280) - 202,890
Conversion of Class A, B, C, D and E
common stock into common stock,
$0.01 par value - (1,822,794) 1,822,794 - - -
Payment of stock subscription receivable - - - 1,318,524 - 1,318,524
Payment on employee stock receivable - - - 7,597 - 7,597
Common stock issued in connection
with initial public offering,
net of expenses 670,000 6,700 6,367,195 - - 6,373,895
Issuance of common stock from
exercise of stock options 7,473 75 32,094 - - 32,169
Repurchase of employee stock (1,162) (12) (1,238) - - (1,250)
Net income - - - - 2,218,294 2,218,294
------------------------------------------------------------------------------
Balance, December 31, 1996 3,838,910 38,389 10,727,255 (110,683) (1,070,944) 9,584,017
Common stock issued in connection
with a public offering, net of expenses 1,474,000 14,740 31,515,732 - - 31,530,472
Issuance of common stock from exercise
of stock options 45,748 457 235,144 - - 235,601
Payment on employee stock receivable - - - 97,323 - 97,323
Issuance of common stock in connection
with acquisition 76,760 768 (705) - - 63
Retained deficit recorded in connection
with acquisition - - - - (102,861) (102,861)
Reduction of deferred tax valuation allowance
related to restricted stock and stock options - - 1,450,000 - - 1,450,000
Net income - - - - 3,040,516 3,040,516
------------------------------------------------------------------------------
Balance, December 31, 1997 5,435,418 $54,354 $43,927,426 $(13,360) $1,866,711 $45,835,131
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Eleven
Year ended Year ended months ended
December 31, December 31, December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,040,516 $2,218,294 $ 554,269
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,157,665 594,227 228,544
Satisfaction of payable to vendor -- (100,000) --
Provision for doubtful accounts 140,000 5,000 10,000
Deferred taxes 530,298 390,769 (190,325)
Revenue under economic development grant (95,000) -- --
Changes in operating assets and liabilities:
Accounts receivable (4,068,749) (612,043) (78,163)
Unbilled accounts receivable (2,578,040) (1,079,962) (99,908)
Interest receivable, related party -- 105,001 (95,557)
Prepaid expenses and other current assets (43,895) (374,040) (79,350)
Accounts payable 240,231 120,419 127,613
Accrued expenses, commission and royalties 888,622 642,519 56,732
Deferred revenue 849,543 (2,074,976) 576,123
------------------------------------------------------
Net cash provided by (used in) operating activities 61,191 (164,792) 1,009,978
INVESTING ACTIVITIES
Purchases of short term investments, available for sale (4,974,175) (2,730,825) --
Purchases of long term investments, available for sale (13,088,014) -- --
Purchases of property and equipment (1,352,946) (572,223) (253,003)
Capitalized software development costs (1,883,033) (1,205,824) (1,133,375)
Increase in other assets (1,266,400) (30,000) --
------------------------------------------------------
Net cash used in investing activities (22,564,568) (4,538,872) (1,386,378)
FINANCING ACTIVITIES
Capital lease payments (96,182) -- --
Proceeds from short-term debt -- 247,031 --
Payment on short-term debt -- (322,234) (310,000)
Economic development grant -- 190,000 -
Net proceeds from issuance of common stock 31,765,838 6,607,704 465,041
Cash payments for stock subscription receivables 97,323 1,326,121 32,000
------------------------------------------------------
Net cash provided by financing activities 31,766,979 8,048,622 187,041
Net increase (decrease) in cash and cash equivalents 9,263,602 3,344,958 (189,359)
Cash and cash equivalents at beginning of period 3,770,889 425,931 615,290
------------------------------------------------------
Cash and cash equivalents at end of period $ 13,034,491 $3,770,889 $ 425,931
=====================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 50,597 $ 56,406 $ 12,060
======================================================
Income taxes $ 24,500 $ 481,666 $ 313,984
======================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment financed by capital lease $ 727,000 $ -- $ --
======================================================
Purchase of developed software through forgiveness of receivable $ 286,000 $ -- $ --
======================================================
Stock subscription receivable from sale of common stock $ -- $ 118,280 $ --
======================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Phoenix International Ltd., Inc. (the "Company"), formed on January 11, 1993,
designs, develops, markets and supports highly adaptable, enterprise-wide
client/server application software for the financial services industry, with a
primary focus on middle market financial institutions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal Year
The financial statements for 1997 and 1996 include the twelve months of
operations ended December 31, 1997 and 1996, respectively. During 1995 the
Company changed its fiscal year end from January 31 to December 31 ("fiscal
1995"). Fiscal 1995 includes the eleven months ended December 31, 1995.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Net Income Per Share
In February 1997 the Financial Accounting Standards Board ("FASB") issued a new
accounting pronouncement statement of financial accounting standards, Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128")
which changes the method of computing earnings per share. The new standard
requires presentation of basic earnings per share and diluted earnings per
share amounts, as defined therein. Basic earnings per share is computed by
dividing net income by weighted average shares outstanding and does not include
potentially dilutive securities. Diluted earnings per share is computed by
dividing net income by weighted average shares outstanding, including
potentially dilutive securities using the treasury stock method based on the
average stock price for the period. SFAS 128 is effective for the year ending
December 31, 1997, and all prior-period earnings per share data presented have
been restated to conform with the new pronouncement.
In February 1998 the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 98 ("SAB 98"). This SAB significantly changes the SEC
staff's guidance on "cheap stock" in initial public offerings and the
subsequent reporting of cheap stock. The SAB also eliminated inconsistencies
between the SEC's previous guidance and SFAS 128. Under the guidance of SAB 98
the Company's "cheap stock" does not meet the criteria stated as "nominal
15
<PAGE> 16
issuances," and the cheap stock impact has been eliminated. SAB 98 is applied
retroactively and is reflected within the net income per share amounts
reported.
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Fiscal
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Numerator - net income available
to common shareholders $3,040,516 $2,218,294 $ 554,269
========================================
Denominator for basic net income per
share - weighted average shares outstanding 4,465,545 3,406,782 2,929,517
Effect of dilutive securities -
employee stock options 420,710 308,338 99,734
----------------------------------------
Denominator for diluted net income per
Share - adjusted weighted average shares
outstanding and assumed conversion
of dilutive securities 4,886,255 3,715,120 3,029,251
========================================
Net income per share - basic $ 0.68 $ 0.65 $ 0.19
========================================
Net income per share - diluted $ 0.62 $ 0.60 $ 0.18
========================================
</TABLE>
Revenue Recognition
Revenues are recorded in accordance with AICPA Statement of Position 91-1,
"Software Revenue Recognition." Revenue is derived principally from the
licensing of internally produced software and implementation and support
services. When the Company receives payment in advance of delivering the
products or providing services, these payments are deferred until earned.
Software license revenue is recognized upon delivery and when no significant
obligations remain as to the software system requirements. Implementation
service revenue is recognized as earned over the service period. Support
services are billed in advance, and revenue is recognized over the related
service period.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
as of December 31, 1997 and 1996 include $95,000 and $190,000, respectively
received from a government municipality under a job growth incentive economic
development agreement. The amount received under this agreement secures a
letter of credit. Revenue has been deferred until the Company completes its
obligations under this agreement. Short-term investments consist primarily of
U.S. Treasury securities with original maturities beyond three months and less
than twelve months. The short term investments are carried at cost, which
approximates fair value.
16
<PAGE> 17
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets (generally three to five years for
computer equipment and purchased software and four to seven years for furniture
and office equipment). Depreciation expense was $525,488, $255,302 and $120,897
for 1997, 1996 and fiscal 1995, respectively. Leasehold improvements are
amortized over the related lease term. Property and equipment includes
furniture purchased under a capital lease of $787,281.
Capitalized Software Development 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 $311,000 at December 31, 1997. Costs incurred internally to
develop a computer software product are charged to product development expense
when incurred until technological feasibility has been established for the
product. Thereafter, all software production costs are capitalized and recorded
at the lower of unamortized cost or net realizable value. Capitalization ceases
upon general release to customers. After general release, capitalized costs are
amortized using the greater of the amount computed using a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated revenues for that product or b) the straight-line method over the
estimated useful life of the related product (currently five years).
Amortization for 1997, 1996 and fiscal 1995 was $632,177, $338,925 and
$107,647, respectively, and is included in costs of license fees and other.
Advertising Expense
Advertising costs are expensed as incurred. The Company incurred $130,242,
$90,432, and $116,196, in advertising costs during 1997, 1996, and fiscal 1995,
respectively.
Stock Based Compensation
The Company grants stock options generally for a fixed number of shares to
certain employees with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and, accordingly, recognizes no compensation expense for
stock option grants for which the terms are fixed. Compensation expense is
recognized for increases in the estimated fair value of common stock for stock
options with variable terms. In October 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which provides an alternative to APB 25 in
accounting for stock-based compensation issued to employees. However, the
Company continues to account for stock-based compensation in accordance with
APB 25.
Impact of Recently Issued Accounting Standards
See " - Net Income Per Share" above.
17
<PAGE> 18
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 requires reporting segment profit or loss, certain specific revenue
and expense items, and segment assets. It requires reconciliations of total
segment revenues, total segment profit or loss, total segment assets, and other
amounts disclosed for segments to corresponding amounts in the enterprise's
general-purpose financial statements. It requires that all public business
enterprises report information about the revenues derived from the enterprise's
products or services (or groups of similar products and services), about the
countries in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in making
operating decisions. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated.
The Company intends to adopt the provisions of SFAS 130 and 131 in 1998 and
does not expect their application to have a material impact on the financial
position or results of operations of the Company.
In October 1997 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which supersedes SOP 91-1 and is effective for transactions
entered into for fiscal years beginning after December 15, 1997. While some
principles remain the same, there are several key differences between the two
pronouncements, including accounting for multiple element arrangements. SOP
97-2 addresses revenue recognition from a conceptual level and does not
specifically provide implementation guidance. However, the Company currently
believes, based on its reading and interpretation of SOP 97-2, that future
license and services agreements that require modifications to the software will
likely 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.
18
<PAGE> 19
The Company currently believes that international license and service
agreements, which historically represent approximately half of the Company's
revenues, are most likely to be affected. 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 the
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.
2. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
investments, and trade accounts receivable.
The Company's cash and cash equivalents at December 31, 1997 are deposited
principally in a single financial institution.
Accounts receivable are unsecured and due under stated terms from a small
number of customers which are primarily in the banking business and are
generally subject to regulatory oversight. Credit risk with respect to trade
accounts receivable is limited due to the nature of the customers and the
license agreements generally requiring substantial prepayments.
Fair Value
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the balance sheet approximates the
fair value of cash and cash equivalents.
Investments
The Company's short and long term investments are deposited
principally in a single financial institution and consist of United
States Treasury Bills and United States Treasury Notes with maturities
of less than three years. Investments are classified as
available-for-sale and are carried at amounts approximating their fair
value.
3. LEASE COMMITMENTS
The Company leases furniture under a capital lease. The Company also leases
office space and equipment under noncancellable operating leases. Total rent
expense for all operating leases was $701,617, $320,526 and $181,868 in 1997,
1996 and fiscal 1995, respectively. Future minimum lease payments under capital
leases and noncancellable operating leases with terms of one year or more
consisted of the following at December 31, 1997:
19
<PAGE> 20
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Years ending December 31,
1998 $180,552 $ 1,117,229
1999 180,552 1,093,725
2000 180,552 1,107,723
2001 180,552 1,057,033
2002 30,092 1,058,272
Thereafter - 4,654,501
-------- -----------
752,300 $10,088,483
Amounts representing interest 121,482 ===========
--------
Net minimum lease payments $630,818
========
</TABLE>
1. ACQUISITION
In May 1997, the Company completed the merger of Hampton Resources Limited, a
New Zealand corporation and its subsidiaries, Priority Solutions Ltd. and
Priority Solutions International, Ltd. (collectively "Priority Solutions") in
exchange for 76,760 shares of Phoenix common stock into Phoenix's wholly-owned
subsidiary, Phoenix International A.P. Limited, a New Zealand corporation
("Phoenix A.P. Limited"). Phoenix A.P. Limited is a provider of international
banking software products and services.
The Phoenix A.P. Limited acquisition has been accounted for as a pooling of
interests. The company believes that the historical results of operations and
other financial information of Priority Solutions are not material in relation
to the Company's results of operations and other financial information. The
Company has not, therefore, restated its historical financial statements but
has included the results of Phoenix A.P. Limited's ongoing operations in the
Company's financial statements, effective April 1, 1997.
5. STOCK OFFERINGS
In August 1997 the Company completed a public offering of its common stock. The
Company issued 1,474,000 shares, including the underwriter's over-allotment
option, at a price of $23.50 per share. The proceeds to the Company from the
offering, net of underwriting discounts and offering expenses, were
approximately $31.5 million.
In July 1996 the Company completed an initial public offering of 670,000 shares
of its common stock. The proceeds to the Company from the offering, net of
underwriting discounts and offering expenses, were approximately $6.4 million.
In July 1996 the Company received approximately $1,319,000 plus accrued
interest of approximately $159,000 from its CEO for payment of stock
subscriptions receivable due from the CEO out of proceeds of shares sold by the
CEO in the public offering.
CAPITALIZATION
In May 1997 the shareholders approved an amendment to the Company's articles of
incorporation increasing the number of shares of common stock authorized for
issuance to 50,000,000.
20
<PAGE> 21
In July 1996, the Company filed amended and restated articles of incorporation
authorizing 20,000,000 shares of common stock, par value $0.01 per share, and
all outstanding shares of the Company's capital stock (classes A through E
common stock) converted into common stock, on a share for share basis as
approved on June 12, 1996 by the shareholders of the Company. This
recapitalization did not change total shareholders' equity (deficit).
In May 1996 the Board of Directors approved a 2.3231-for-one share split of the
Company's capital stock (classes A through E), and the Company amended its
articles of incorporation to reduce the par value of each of the Company's
capital stock (Classes A through E) in accordance with the stock split. All
share and per share amounts related to common stock have been retroactively
restated to reflect the stock split.
The Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock, par value $0.01 per share. The terms of preferred stock have
not been designated and no shares have been issued.
7. STOCK OPTIONS
The Company has various stock option plans which authorize the Company's Board
of Directors to grant employees, officers, and directors qualified and
unqualified options to purchase shares of the Company's Common Stock. Stock
options are granted at exercise prices at or above the fair market value at the
date of the grant.
Stock option plans effective as of December 31, 1997 are the March 1995 Plan,
the October 1995 Plan and the 1996 Director Plan. Up to 520,000 shares of the
Company's Common Stock may be issued pursuant to Options granted under the
March 1995 Plan; however, the Board does not intend to issue any additional
shares under the March 1995 Plan. The October 1995 Plan authorizes the grant of
options to purchase up to 500,000 shares of the Company's Common Stock and the
1996 Director Plan authorizes the grant of options to purchase up to 99,000
shares of Common Stock. Stock options granted under the October 1995 plan have
varying vesting schedules but typically vest over a three to five year period
from the date of grant and incentive stock options expire within ten years from
the date of grant. Stock options granted under the 1996 Director Plan are
non-qualified, have a term of five years and may be exercised after the six
month anniversary from the date of grant.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS 123. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and net income per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1997, 1996
and fiscal 1995, respectively; risk-free interest rates of 6.24%, 6.33% and
6.06%; no dividend
21
<PAGE> 22
yield, weighted average volatility factors of the expected market price of the
Company's common stock of 0.49, 0.13 and 0.00 and a weighted average expected
life of the option of 3.97, 3.50 and 2.77 years. The volatility factors used
are 0.00 for options issued prior to the initial public offering of the
Company's stock, 0.56 for options granted in 1996 after the Company's initial
public offering, and 0.49 for options granted in 1997. The weighted average
fair value of options granted during the years ended December 31, 1997, 1996
and fiscal 1995 were $8.86, $2.94 and $0.58, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Fiscal
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $1,929,129 $1,815,606 $430,367
Pro forma net income per share - diluted $0.40 $0.49 $0.14
Pro forma net income per share - basic $0.44 $0.54 $0.15
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
A summary of the Company's option activity and related information follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
-----------------------------
<S> <C> <C>
Outstanding at January 31, 1995 205,929 $ 2.17
Granted 497,027 $ 4.37
Exercised (86,835) $ 4.18
Canceled (8,597) $ 2.91
--------
Outstanding at December 31, 1995 607,524 $ 3.68
Granted 258,931 $ 11.24
Exercised (177,739) $ 1.99
Cancelled (30,696) $ 4.47
--------
Outstanding at December 31, 1996 658,020 $ 7.07
Granted 272,300 $ 20.95
Exercised (45,748) $ 5.21
Cancelled (7,562) $ 6.15
--------
Outstanding at December 31, 1997 877,010 $ 11.49
========
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 range from
$4.30 to $21.13 per share.
There were 292,684 options exercisable at a weighted average exercise price of
$6.02 at December 31, 1996, and 356,362 options were exercisable at December
31, 1995. The following table as of December 31, 1997 sets forth by group of
exercise price ranges, the number of shares, weighted average exercise price,
and weighted average remaining contractual life of options
22
<PAGE> 23
outstanding, and the number and weighted average exercise price of options
currently exercisable.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$ 4.30 - $ 6.46 403,960 6.77 $ 4.64 294,491 $ 4.54
$12.00 - $17.50 200,750 7.79 $12.42 93,189 $12.43
$20.63 - $21.13 272,300 8.83 $20.95 128,575 $21.05
--------------- --------- ----------- ------ --------- ------
$ 4.30 - $21.13 877,010 7.64 $11.49 516,255 $10.08
</TABLE>
The Company issued warrants to purchase up to 19,000 shares of common stock at
an exercise price of $14.40 per share to the underwriters of its initial public
offering pursuant to the underwriting agreement. The warrants are exercisable
from July 1997 to July 2001.
At December 31, 1997, the Company had 163,466 and 40,000 shares available for
future grant under the October 1995 Plan and 1996 Director Plan, respectively.
The Company has reserved 1,099,476 shares of common stock for issuance upon
exercise of options and warrants to purchase common stock.
8. RELATED PARTY TRANSACTIONS
In March 1997, the Company entered into a Stock Purchase Agreement with Dyad
Corporation ("Dyad") whereby the Company purchased a minimal equity interest in
Dyad. Dyad is developing automated loan and mortgage and financial services
delivery products. Pursuant to the Company's agreement with Dyad, the Company,
in September 1997, exercised an option to increase its equity interest in Dyad,
to no more than 10% of the outstanding shares of Dyad. The total amount of this
investment was $850,000 at December 31, 1997. This transaction has been
recorded under the "cost" method of investments and is included within other
assets. In addition, the Company and Dyad entered into a License and
Distribution Agreement whereby the Company obtained certain rights to market,
sell and license Dyad's products. The Company has paid Dyad license fees which
are classified as prepaid royalties against future sales of Dyad products. A
shareholder and director of the Company is a shareholder and director of Dyad.
The Company's CEO is also a director of Dyad.
At December 31, 1995, the CEO of the Company had outstanding promissory notes
of $35,203 and accrued interest, and a stock subscription receivable of
$1,318,524 due from the CEO related to the issuance of 137,481 shares of Class
E non-voting common stock. In July 1996 following the Company's initial public
offering, the Company repaid the promissory note and accrued interest to the
CEO and the Company received payment of stock subscription receivables and
accrued interest out of proceeds of shares sold by the CEO in the initial
public offering.
23
<PAGE> 24
To encourage certain bank shareholders' initial investment in the Company, the
Company offered a discount, equal to the shareholders' initial investment, to
be applied toward the license fee if and when the shareholders licensed the
Phoenix System for use in their normal course of operations. Discounts offered
since inception total $855,000. Discounts of $0, $450,000 and $300,000 were
used in 1997, 1996 and fiscal 1995, respectively leaving a balance of $105,000
of available discounts at December 31, 1997. License fee revenue of $480,185,
$744,900, and $326,700, net of discounts used, was recorded in 1997, 1996 and
fiscal 1995, respectively under license agreements with shareholder banks.
Implementation support revenues, and other services of $635,879, $1,060,000 and
$254,200 recorded in 1997, 1996, and fiscal 1995, respectively, were from
shareholder banks.
9. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current foreign expense $390,194 $ 90,897 $446,324
Deferred foreign expense (benefit) -- 390,769 (190,325)
Deferred domestic expense 530,298 -- --
--------------------------------------------------
Total taxes $920,492 $481,666 $255,999
==================================================
</TABLE>
24
<PAGE> 25
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation $ (60,018) $ (52,958)
Capitalized software (1,668,901) (946,126)
Deferred revenue (299,573) -
------------------------------
Total tax liabilities (2,028,492) (999,084)
Deferred income tax assets:
Amortization of capitalized software 419,919 215,591
Alternative minimum tax credit 20,439 -
Foreign tax credit carryforwards - 737,664
Research and development credit carryforwards 503,522 198,236
Net operating loss carryforwards 1,921,793 2,224,720
Other 82,819 32,540
------------------------------
Total tax assets 2,948,492 3,408,751
Valuation allowance for deferred income tax assets - (2,409,667)
------------------------------
Net deferred income tax assets $ 920,000 $ -
==============================
</TABLE>
The reconciliation of income tax computed at the U.S. Federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
Fiscal
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rates $ 1,346,743 $ 944,986 $ 275,491
Foreign taxes 241,377 90,897 255,999
State taxes 154,479 105,298 31,600
Tax credits 411,939 (310,127) (346,571)
Non-deductible compensation expense (352,248) - -
Restricted stock compensation 1,449,997 (1,078,362) -
Other 77,872 (17,561) 13,833
Change in valuation allowance (2,409,667) 746,535 25,647
------------------------------------------------------
Total tax expense $ 920,492 $ 481,666 $ 255,999
======================================================
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $4,950,000 for federal income tax purposes that expire
approximately $490,000 in 2009, $1,060,000 in 2010, and $3,400,000 in 2011. The
tax benefit related to approximately $3,728,000 of the net operating loss carry
forwards results in a credit to shareholders' equity when realized. The Company
also has research and development tax credit carryforwards of approximately
$500,000 that expire in years 2008 through 2012. The valuation allowance has
decreased from 1996 by approximately $2,400,000 as management has determined
that it is more likely than not that the majority of the deferred tax assets
will be realized. Of the $2,400,000
25
<PAGE> 26
change in the valuation allowance, $1,450,000 was credited directly to
shareholders' equity as it related to tax deductions for restricted stock and
stock options for which there was no income statement effect.
10. EMPLOYEE BENEFITS
The Company maintains a 401(k) plan that covers substantially all employees.
The Company may, at its discretion, contribute by matching employee deferrals.
Defined contributions are limited to the maximum amount deductible under the
Internal Revenue Code. The Company did not make contributions to the plan in
1997, 1996, or fiscal 1995. The Company has a profit sharing plan with
discretionary contributions by the Company covering substantially all
employees. Charges to income for the profit sharing plan, as determined by the
Board of Directors, were $80,000 in 1996. The Company did not make
contributions to the profit sharing plan in 1997 or fiscal 1995.
11. MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers, as a percentage of total revenues, are as follows:
<TABLE>
<CAPTION>
Fiscal
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A 11% 16% -
Customer B - 16% 19%
Customer C - - 43%
</TABLE>
Export sales from the United States, as a percentage of total revenues, were
49% in 1997 of which 17% represents sales to Latin and South America, 7% was to
the Pacific Rim and 25% was to Europe, Africa and the Middle East. Export sales
from the United States, as a percentage of total revenues, were 53% in 1996, of
which 42% represents sales to Latin and South America, 7% was to the Pacific
Rim and 4% was to Africa. Export sales from the United States, as a percentage
of total revenues, were 70% in fiscal 1995, of which 63% represents sales to
Latin and South America and 7% was to the Pacific Rim.
26
<PAGE> 27
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------------------
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues $ 3,713,724 $ 4,706,108 $ 3,354,710 $ 6,068,492
Gross profit 2,662,354 3,247,352 1,906,184 4,545,555
Operating income (loss) 1,111,610 856,953 (312,324) 1,423,813
Net income $ 1,013,296 $ 763,674 $ 9,971 $ 1,253,575
Net income per share - basic $ 0.26 $ 0.19 $ 0.00 $ 0.23
Net income per share - diluted (1) $ 0.24 $ 0.17 $ 0.00 $ 0.22
Weighted average shares
outstanding - basic 3,848,697 3,944,740 4,633,725 5,435,016
Weighted average shares
outstanding - diluted 4,286,640 4,378,722 5,098,173 5,781,486
Three months ended
---------------------------------------------------------------------------
March 31, 1996 June 30, 1996 September 30, 1996 December 31, 1996(2)
- -----------------------------------------------------------------------------------------------------------------------
1996
Revenues $ 1,781,330 $ 2,101,707 $ 2,885,180 $ 3,637,300
Gross profit 1,193,105 1,454,133 2,093,132 2,718,430
Operating income 266,960 397,298 746,527 1,087,100
Net income $ 141,526 $ 351,450 $ 558,567 $ 1,166,751
Net income per share - basic (1) $ 0.05 $ 0.12 $ 0.15 $ 0.30
Net income per share - diluted (1) $ 0.05 $ 0.10 $ 0.14 $ 0.28
Weighted average shares
outstanding - basic 3,000,074 3,020,121 3,774,103 3,832,787
Weighted average shares
outstanding - diluted 3,116,205 3,385,939 4,116,868 4,231,869
Three months ended
---------------------------------------------------------------------------
March 31, 1995 June 30, 1995 (4) September 30, 1995 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
1995 (3)
Revenues $ 90,745 $ 3,199,852 $ 788,767 $ 950,982
Gross profit (132,077) 2,747,471 311,759 405,365
Operating income (loss) (704,260) 2,055,039 (409,230) (476,385)
Net income (loss) $ (605,973) $ 1,826,465 $ (377,437) $ (445,322)
Net income (loss) per share - basic $ (0.21) $ 0.63 $ (0.13) $ (0.15)
Net income (loss) per share - diluted(1) $ (0.21) $ 0.61 $ (0.13) $ (0.15)
Weighted average shares
outstanding - basic 2,847,053 2,900,589 2,948,344 2,959,548
Weighted average shares
outstanding - diluted 2,847,053 3,002,183 2,948,344 3,056,081
</TABLE>
(1) Due to the calculation of weighted average shares outstanding for the
year as the average of quarterly weighted average shares outstanding,
the sum of net income per share for the four quarters does not equal
diluted net income per share diluted for the year.
27
<PAGE> 28
(2) License fees and other revenue was $2.6 million for the quarter ended
December 31, 1996 which included $1.55 million to a single reseller
under a distribution license agreement.
(3) In 1995, Phoenix changed its fiscal year end from January 31 to
December 31. However, the information above for the quarter ended
March 31, 1995 consists of three months, including the month of
January 1995.
(4) License fee and other revenue was $2.8 million for the quarter ended
June 30, 1995 in large part due to license fees of $2.1 million from a
single foreign customer (which includes approximately $205,000 in
foreign withholding taxes that are payable by that customer) and from
the recognition of revenue from the backlog of customers with whom
Phoenix had signed contracts while the Phoenix System was under
development.
13. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its senior executives.
Each agreement commits the Company to various obligations if the employee is
terminated without cause or if there is a change in the control of the Company.
The major obligations are for salaries and bonus, healthcare premiums, and the
vesting of previously granted stock options.
28
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Phoenix International Ltd., Inc.
We have audited the accompanying consolidated balance sheets of Phoenix
International Ltd., Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity (deficit) and cash
flows for the years ended December 31, 1997 and 1996, and the eleven months
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Phoenix International Ltd., Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, and the eleven months ended December 31, 1995 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
January 28, 1998
29
<PAGE> 30
Board of Directors
Bahram Yusefzadeh (1)(3)
Chairman of the Board
and Chief Executive Officer
Raju M. Shivdasani
President and Chief Operating
Officer
Ruann F. Ernst(1)
Computer Organization
Hewlett-Packard Company
Ronald E. Fenton(2)(3)
President and Chief Executive
Officer,
BancSecurity Corporation
William C. Hess(2)
President, Iowa Savings Bank
James C. Holly(1)(3)
President and Chief Executive
Officer,
Bank of the Sierra
Paul A. Jones(1)
President and Chief Executive
Officer,
Glenview State Bank
J. Michael Murphy (3)
Division President
Palex, Inc.
Glenn W. Sturm(2)
Partner, Nelson Mullins Riley &
Scarborough, L.L.P.
O. Jay Tomson
Chairman and Chief Executive
Officer,
First Citizens National Bank
(1) Member of Compensation and
Stock Option Committee
(2) Member of Audit Committee
(3) Member of Executive
Committee
Officers
Bahram Yusefzadeh
Chairman of the Board and Chief
Executive Officer
Raju M. Shivdasani
President and Chief Operating
Officer
Clay E. Scarborough
Senior Vice President and
Chief Financial Officer
Daniel P. Baker
Senior Vice President,
Research and Development
Michael R. Newes
Senior Vice President,
International Marketing
Harold C. Boughton
Senior Vice President,
USA Business Development
30
<PAGE> 31
FORM 10-K INVESTOR CONTACT
A copy of the Company's Annual Report on Form 10-K for 1997 (without exhibits)
is available from the Company at no charge. Requests for the Annual Report on
Form 10-K and other investor contacts should be directed to Investor Relations,
at the Company's corporate office.
ANNUAL SHAREHOLDERS' MEETING
The annual meeting of shareholders will be held on Friday, May 8, 1998, at
10:00 a.m. local time at the Company's corporate office.
COMMON STOCK AND DIVIDEND INFORMATION
Since its initial public offering on July 2, 1996, the Company's common stock
has traded on the Nasdaq Stock Market under the symbol PHXX. As of March 6,
1998, the Company had approximately 2,355 beneficial holders of its common
stock. Of that total, approximately 230 were shareholders of record. To date,
the Company has not paid cash dividends on its common stock. The Company
currently intends to retain earnings to support operations and finance
expansion and therefore does not anticipate paying cash dividends in the
foreseeable future.
The following table sets forth the high and low sales price information as
reported by Nasdaq during the period indicated since the Company's common stock
began trading publicly on July 2, 1996.
<TABLE>
<CAPTION>
STOCK PRICE
HIGH LOW
<S> <C> <C>
1996
Third Quarter $17.50 $12.25
Fourth Quarter 21.50 16.50
1997
First Quarter $26.75 $17.00
Second Quarter 25.00 19.00
Third Quarter 25.88 20.25
Fourth Quarter 25.00 13.00
</TABLE>
CORPORATE OFFICE
Phoenix International Ltd., Inc.
500 International Parkway
Heathrow, FL 32746
407-548-5100
www.phoenixint.com
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust
Company
40 Wall Street
New York, New York 10005
INDEPENDENT AUDITORS
Ernst & Young LLP
Atlanta, GA
GENERAL COUNSEL
Nelson Mullins Riley &
Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, GA 30309
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Phoenix International Ltd., Inc. and to the incorporation by reference in
the Registration Statement (Form S-8 No. 333-19121) pertaining to the Phoenix
International Ltd., Inc. 1995 Employee Stock Option Plan (March,), the Phoenix
International Ltd., Inc. 1995 Employee Stock Option Plan (October), and the
Phoenix International Ltd., Inc. 1996 Director Stock Option Plan of our report
dated January 28, 1998 included in the 1997 Annual Report to Shareholders of
Phoenix International Ltd., Inc.
Ernst & Young LLP
Atlanta, Georgia
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FILING
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 13,034,491
<SECURITIES> 20,793,014
<RECEIVABLES> 8,499,807
<ALLOWANCES> (155,000)
<INVENTORY> 0
<CURRENT-ASSETS> 31,905,572
<PP&E> 3,317,641
<DEPRECIATION> (972,616)
<TOTAL-ASSETS> 52,157,495
<CURRENT-LIABILITIES> 4,471,543
<BONDS> 0
0
0
<COMMON> 54,354
<OTHER-SE> 45,780,777
<TOTAL-LIABILITY-AND-EQUITY> 52,157,495
<SALES> 0
<TOTAL-REVENUES> 17,843,034
<CGS> 0
<TOTAL-COSTS> 5,481,589
<OTHER-EXPENSES> 9,281,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (52,376)
<INCOME-PRETAX> 3,981,008
<INCOME-TAX> 920,492
<INCOME-CONTINUING> 3,040,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,040,516
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.62
</TABLE>
