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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, 1998 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:
Common Stock, $0.01 Par Value Per Share None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
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None
(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
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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. [__]
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
22, 1999, as reported on the Nasdaq Stock Market's National Market, was
approximately $28,133,460. As of March 22, 1999, the Registrant had outstanding
8,504,989 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE 1998 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 1999 ANNUAL MEETING OF SHAREHOLDERS TO BE
HELD ON MAY 7, 1999 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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PART I
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Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 16
Item 3. Legal Proceedings.............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................................ 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 18
Item 6. Selected Financial Data........................................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 18
Item 7A. Quantitative and Qualitative Disclosure on Market Risk......................................... 18
Item 8. Financial Statements and Supplementary Data.................................................... 18
Item 9. Changes and Disagreements with Accountants in Accounting and Financial Disclosure.............. 18
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 19
Item 11. Executive Compensation......................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 22
Item 13. Certain Relationships and Related Transactions................................................. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 23
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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 Section 21E of 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;
and (iii) the Company's growth and operating strategies. Words such as "may,"
"would," "could," "will," "expect," "estimate," "anticipate," "believe,"
"intend," and "plans" 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 control. Actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. Among the key risks, assumptions and factors that may affect operating
results, performance and financial condition are the Company's reliance on
significant new customers and the timing of customer contracts; dependence on
its strategic alliances and marketing relationships; its ability to expand and
leverage its sales force and other distribution channels worldwide;
fluctuations in its quarterly results; ability to continue and manage its
growth; Year 2000 risks and concerns; competition and the other factors
discussed herein and in the Company's filings with the Securities and Exchange
Commission (the "Commission"), including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration Number 333-31415),
as declared effective on August 13, 1997.
GENERAL
Phoenix International Ltd., Inc. is a leading provider of highly
adaptable, enterprise-wide client/server application software and related
services to the financial services industry. Phoenix's flagship product, the
Phoenix System, is a fully integrated processing solution that manages
financial institutions' retail and wholesale operations in an open-system
environment. The Company offers the Phoenix System, together with its trade
finance and global payments software products and a full suite of professional
and systems integration services, to financial institutions around the world.
Phoenix's primary market focus in the United States is on financial
institutions with assets of $100 million to $2 billion and internationally is
on retail-oriented institutions located in 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"). As of December 31, 1998,
Phoenix's customer base included 127 institutions worldwide.
The Company's Chairman of the Board and Chief Executive Officer,
Bahram Yusefzadeh, has 30 years of experience in the banking software industry.
In addition, the Company's senior management team has over 100 years of
experience in the retail banking and/or software industries and 45 years of
trade finance and wholesale banking experience. 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. Phoenix combined (i)
its management's extensive experience with banking and banking software
systems, (ii) input from a consortium of financial institutions concerning bank
operational and flexibility needs and (iii) advances in client/server
technology to design and develop the Phoenix System. During 1998, Phoenix
formed alliances with international banking organizations and technology and
service providers to further develop, enhance and expand the Phoenix System and
its capabilities for the international market.
INDUSTRY BACKGROUND
Many financial institutions employ legacy computer systems for their
core processing needs. These legacy systems were originally developed for large
mainframe and mid-range computer environments. 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.
Although some modified legacy systems have introduced newer technologies to
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provide for easier use, increased data storage and more flexible access to
data, these systems generally are limited because they are based on decades-old
architecture that 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. Thus, Phoenix believes
that financial institutions using legacy-based systems are at a competitive
disadvantage.
Over the past several years, the competitive landscape of the
financial services industry has changed dramatically and banks now compete
directly with diversified non-bank financial service providers. Financial
institutions, like other businesses, face pressure and challenges to do things
faster, more efficiently and more profitably. Recent developments such as the
rapid acceptance and use of electronic commerce have further elevated customer
expectations for convenient access to a full suite of financial services. In
order to stay competitive, financial 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.
Phoenix believes that client/server computing makes possible the
development of powerful applications that 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"
connected on enterprise-wide networks to "servers" that provide data storage
and processing capabilities. Because of this allocation, a client/server system
is scalable, that is, upgrading the server or replacing it with a more powerful
model can increase its responsiveness and capacity. 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(R) Windows NT(R) operating system in the mid-1990s has increased the
cost-competitiveness of client/server systems.
Phoenix believes that relatively few financial institutions have fully
realized the benefits offered by client/server technology due to the limited
number of vendors that offer true client/server applications. 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 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.
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, capable of being modified to suit the
particular needs of an institution and easily interfaced with other products.
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. In
addition, the Phoenix System is flexible and scalable, it stores dates and
performs calculations using code 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.
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 portfolio. 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:
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- - 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.
- - 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 information 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 and service providers, including information
onbrokerage, insurance and credit card accounts, with existing RIM
information.
Management Decision Support. The Phoenix System is focused on
providing financial institution 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 Executive Information System
("EIS"), the Phoenix System allows senior executives to track performance and
model the effect of business strategies and changes in market conditions on
their financial institution. 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.
Advanced Technology. The Phoenix System operates in an "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
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activity and for logging activities for audit purposes; and (e) integrated
connections to an interactive on-line help system. Furthermore, because the
Phoenix System was conceived and developed to store all dates with four-digit
years and to perform all calculations to four digits, it is year 2000
compliant.
To address the increasingly sophisticated needs of its customers,
Phoenix 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. Phoenix continues to consult with its bank
customers to help identify and prioritize the product enhancements and
additional functionality needed to keep the Phoenix System as a leading
client/server computing solution. The combination of Phoenix's retail, trade
finance and treasury offerings allows Phoenix to market an integrated
"universal" banking system. Phoenix also intends to develop and license
additional international functionality as it enters new countries which require
additional functionality. Phoenix is also participating on the advisory council
for Microsoft's Windows Distributed Internet Applications Architecture for
Financial Services ("Windows DNAfs"). Windows DNAfs is an industry framework -
a way of constructing software applications that will allow different financial
services industry software providers to exchange data and communicate with each
other. Phoenix intends to continue to develop, modify and enhance the Phoenix
System to offer its customer institutions what it believes are some of the best
technologies available in the financial services software industry worldwide.
See "--Product Development and New Products."
STRATEGY
The Company's primary objective is to advance its position as a
leading provider of enterprise-wide client/server application software for the
financial services industry worldwide by pursuing the following strategies:
Maintain and Extend Technology Leadership. The Company believes that
the Phoenix System is the most advanced client/server computing solution for
financial institutions worldwide. Phoenix intends to maintain its leadership
position by continuing to integrate new technologies, add new applications,
enhance existing applications and expand functionality. During 1998, the
Company released U.S. Version D-2.0.1, which contained many upgrades to the
Phoenix System and completed development of international Version I-2.0.2 and
subsequent development and installation of I-2.0.3 for international customers
to add new functionality to meet the international market's need for an
integrated system that supports multi-currency retail banking. During 1998, the
Company also announced the planned release of the Microsoft(R) SQL Server 7(TM)
version of the Phoenix System, currently scheduled to be available in the
second half of 1999. Microsoft SQL Server 7 is a high performance relational
database management system that runs on the Microsoft(R) Windows NT(R)
operating system. The Company believes that the combination of Phoenix's
client/server software and the Microsoft SQL Server 7 will allow financial
institutions to take full advantage of new and emerging technologies including
the myriad of opportunities available using Internet based technologies. The
Company intends to continue to commit substantial resources to maintain and
extend its technological leadership.
Expand International Distribution. During 1998, the Company
successfully expanded 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 and by leveraging its
strategic alliances and distribution channels. The Company's international
sales and implementation forces grew from 17 to 52 persons. During 1998, the
Company expanded its London office to better service Europe, the Middle East
and Africa. Phoenix opened a development center in Sydney, Australia and a
sales office in Singapore to focus on the development, direct sales and
servicing of the Company's products in the Asia-Pacific region. In addition, an
existing strategic alliance between Phoenix and Siemens Business Services, a
division of Siemens A.G., one of the world's leading suppliers of financial
services information technology, led to the signing of a contract with Data
Action, which added 12 credit unions to Phoenix's customer base and which
provides access to over 200 other credit unions in Australia. Data Action
accounted for over 10% of Phoenix's revenues during 1998 and is expected to be
a significant revenue source for Phoenix in 1999. In addition, Phoenix
maintains agreements with Computer Systems Associates (Nigeria) Limited
("CSA"), International Turnkey Systems ("ITS"), Unisys Corporation ("Unisys"),
and Siemens Business Services to increase global distribution efforts to cover
countries in Africa, Asia-Pacific, Europe, Latin America/Caribbean and the
Middle East.
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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. The Company increased its direct sales and
implementation forces from 60 to 73 persons during 1998 and had customers
located in 30 states at year-end. The Company continues to leverage its
relationships with other organizations in the United States to market the
Phoenix System primarily to smaller financial institutions within specified
territories in the U.S. 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. During 1998,
the Company made an equity investment in Servers On-Line, Inc., a northeastern
service bureau, to offer financial institutions an alternative delivery channel
for the Phoenix System and further enhance Phoenix's ability to market to a
wider range of bank customers. The Company believes that this and other service
bureau relationships offer a significant marketing opportunity as a significant
portion of the banking community prefers to outsource their technology needs to
a service bureau provider rather than manage these functions in-house. The
Company intends to form other strategic relationships with several small to
medium size service bureaus that are looking to replace their current legacy
systems with open system alternatives to gain a competitive advantage in this
market segment.
Broaden Primary Markets. During 1998, the Company entered the credit
union market when it signed a long-term agreement with Data Action to license
the Phoenix System. As a result, Phoenix added 12 credit unions to its customer
portfolio and established the Phoenix System as Data Action's exclusive
information processing solution, allowing the Company access to over 200 credit
unions in Australia. This agreement helps to broaden the primary market for the
Phoenix System by expanding and diversifying the Company's customer base. In
addition, a large number of new bank charters in the United States allowed
Phoenix to increase its presence in this segment of the United States banking
market during 1998. These newly chartered banks, unlike established
institutions that require extensive conversions, require shorter implementation
cycles and therefore create opportunities to realize higher operating margins.
Phoenix also joined the IBM Netfinity ServerProven(TM) program during 1998 in
order to provide smaller independent community banks an IBM platform for the
Phoenix System. In addition, the Company intends to capitalize on its strategic
relationships with value added resellers ("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.
Leverage Existing Customer Base. At the end of 1998, Phoenix's
customer base included 127 financial institutions worldwide. Phoenix believes
that many financial institutions that are looking for updated technology
solutions are hesitant to be the first institution to implement new
technologies within their region. In the United States, Phoenix successfully
leveraged its installed customer base to help generate 25 new customers during
1998. Internationally, Phoenix installed the Phoenix System in its first
customer institution in Turkey during 1998 and by the end of the year the
Company had contracts to install the Phoenix System in three major banks in
Turkey. Phoenix intends to build its presence worldwide by continuing to
capitalize on its installed customer base in each region of its target
international market. 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 development of new products and product enhancements.
Pursue Complementary Acquisitions. Phoenix intends to carefully and
selectively pursue strategic acquisitions of providers of complementary
technologies, products and services. Management believes there are acquisition
opportunities that may: (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)
add new channels of distribution; and (iv) add experienced personnel with
specialized knowledge of either the domestic or 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.
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TECHNOLOGY
Phoenix has worked with leading hardware manufacturers and tools and
relational database vendors in the client/server community, such as Microsoft,
Hewlett-Packard Company, Centura Software Corporation and Sybase, Inc.
("Sybase"), to produce software based on leading-edge technological
developments. The Phoenix System operates on Microsoft Windows(R), Windows
NT(R) and UNIX environments. The Company has installed the IBM Netfinity
platform for the Phoenix System in two banks and the Company now offers the
Phoenix System on an IBM platform in order to provide smaller banks the choice
of an IBM computing environment for their core processing needs. During 1998,
the Company released U.S. Version D-2.0.1, which contained many upgrades to the
Phoenix System and completed development of international Version I-2.0.2 and
subsequent development and installation of I-2.0.3 for international customers
to add new functionality to meet the international market's need for an
integrated system that supports multi-currency retail banking. In addition, the
Company is developing a version of the Phoenix System to run on Microsoft's SQL
Server 7(TM). Phoenix currently anticipates delivering the Microsoft SQL Server
7 version of the Phoenix System in the second half of 1999. Some of the key
technological features of the Phoenix System are described below.
Centralized Relational Database Management System. An advantage of the
Phoenix System as compared to legacy or modified legacy systems is that the
Phoenix System stores and maintains data in an open relational database rather
than in a proprietary file format. As a result, this data can be easily
accessed and integrated by many third-party products, such as query and report
writing tools that 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 Sybase System
11.0, a relational database technology provided by Sybase, which has been
integrated into the NT Version and the UNIX version of the Phoenix System. The
Phoenix System, TradeWind(TM) and TradeCentre can run on platforms from
Hewlett-Packard, IBM, NCR Corporation, Sun Microsystems, Inc., Unisys and all
others which are UNIX or Microsoft Windows NT compliant.
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 area 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 D-2.0.1 and Version I-2.0.3 of the
Phoenix System, which the Company released on a widespread basis to its
customers in 1998, are native 32-bit applications which enable the Company's
customers to take further advantage of 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 (multi-tasking), enhanced
performance and advanced security.
TARGET MARKETS
The United States Market. The FDIC, as of the end of the third quarter
of 1998, divided its insured depository institutions in the United States
market into groups based on asset-size: (i) institutions with assets less than
$100 million (approximately 6,305 institutions); (ii) institutions with assets
between $100 million and $1
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billion (approximately 3,791 institutions); (iii) institutions with assets
between $1 billion and $3 billion (approximately 299 institutions); and (iv)
institutions with assets over $3 billion (approximately 228 institutions). The
Company primarily focuses its direct sales efforts in the U.S. on those
commercial banks and savings institutions with asset sizes ranging between $100
million and $2 billion. Management believes that many of these financial
institutions seek cost-effective, flexible and sophisticated technology
solutions that can provide a competitive advantage in the changing financial
services marketplace. The Phoenix System runs on the UNIX operating system
platform as well as the Microsoft Windows and Windows NT environments. 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. The Company intends to take
advantage of improvements made to UNIX and NT operating systems to expand the
capabilities of the Phoenix System to address the needs of institutions with
larger numbers of branches, accounts and transactions to process, while
maintaining its focus on supporting the needs of middle market banks in the
United States.
The International Market. Phoenix currently divides international
financial institutions into two groups based upon the number of branches and
accounts: (i) those with more than 300 branches and/or one million accounts;
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. The Company believes the
international market offers significant opportunity because economic diversity
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 the client/server technology it offers.
During 1998, over half of Phoenix's revenues were derived from its
international customers. There are many risks associated with such significant
international operations which could have a material impact on Phoenix's
operations and financial performance, including governmental and regulatory
changes, the relative political and economic instability of foreign markets,
the diminished ability to monitor and maintain customer relationships across
larger geographical areas, the increased costs incurred to maintain
international operations and the other risks discussed in the Company's filings
with the Commission, including in the "Risk Factors" Section of its
registration statement on Form S-1 (No. 333-31415) declared effective on August
13, 1997.
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
December 31, 1998, the Company's sales and marketing department, including
administrative staff, consisted of 22 individuals. The Company established
sales offices in Singapore and Sydney, and expanded its London office to cover
Europe, the Middle East, South Africa and Asia during 1998. In addition, the
Company has established non-exclusive local representation relationships with
agents located in several countries who add value in the sales and
implementation process. Through these relationships, the Company has added
customers in Turkey and South Africa and believes that these relationships will
assist Phoenix in building its international following in the future.
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. 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
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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 a non-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 ISC Financial Systems, Inc. ("ISC"), Advanced Financial
Systems, Inc. ("AFS"), ERAS JV ("ERAS"), and Servers On-Line, Inc. ("Servers"),
whereby ISC, AFS, ERAS and Servers market the Phoenix System to certain
financial institutions within their respective territories. ISC and AFS have
non-exclusive rights to market the Phoenix System within their territories,
which include Colorado, Idaho, Kentucky, 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. In 1998, these relationships
resulted in five new customers for Phoenix in the U.S. Also in 1998, Phoenix
signed a Referred Authorized Reseller Agreement with Western Micro Technology,
a division of Savoir Technology Group, Inc., and Unisys to sell the Phoenix
System on the Unisys line of Aquanta NT servers. Phoenix was also approved by
IBM as part of the IBM ServerProven(TM) program and is now IBM-endorsed on the
line of IBM Netfinity servers, which will permit Phoenix to offer the Phoenix
System to independent community banks with less than $500 million in assets
that want to operate on an IBM platform
In the international market, 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; SNI markets, sublicenses
and distributes the Phoenix System to financial institutions located in
Australia and in those countries in Africa, Asia-Pacific, Europe and the Middle
East that are not a part of ITS' and CSA's exclusive territories and Unisys
markets the Phoenix System on a nonexclusive basis to financial institutions in
Central and South America. 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. License
agreements generally have a term of five years, renewable for one year periods
thereafter. Each agreement also contains a five year commitment to pay for
customer and software support. Such fees are recognized quarterly. Most
agreements provide that the Company can cancel a license if the customer does
not continue to pay for customer and software support. Implementation,
conversion, training and installation fees and interface fees are paid at the
beginning of the license agreement or when the service is performed.
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
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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. 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
December 31, 1998, the Company had 75 people assigned to the implementation and
training department. To better support its growing client base, and because
international implementations are customized for each client (requiring more
on-site service) Phoenix hired 21 new employees with extensive implementation
services backgrounds during 1998. The Company believes its implementation teams
are better structured to support both international and domestic customers. 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 U.S. implementation. Generally, the Company charges
additional fees for education and consulting requested by its U.S. customers.
International implementations are priced based on time and materials for the
services performed.
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 ensure quality control, each VAR and agent sends a team of people to
Phoenix to work side by side with one of its implementation teams for three or
four months. By the end of this training period, the VAR or agent assumes
primary and direct responsibility for substantially all of these services in
their region. This process allows Phoenix to deliver and install its software
faster and across more areas. Regardless of the number of installations
accomplished through its VARs and agents, however, Phoenix intends to continue
to provide the resources and support needed to maintain customer satisfaction
and quality assurances through its many offices worldwide.
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CLIENT 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 Client
Services Group supports banks in the use of the Phoenix System and with the
maintenance of their network and technology infrastructures. As of December 31,
1998, the Company had 50 people in its Client Services Group that primarily
provide this service and support. These personnel provide service 24 hours a
day, seven days a week, and have pagers, cellular telephones and laptop
computers which enable them to answer a customer's question from any location.
In 1998, Phoenix created a new Client Management Program within its Client
Services Group to further enhance its client relationships and offer superior
levels of support. Every Phoenix client has a dedicated Client Care Manager
assigned to their financial institution to serve as a single point of contact
from the initial contract signing through the implementation phase and beyond.
In 1998, the Company held its first professionally managed users conference in
Orlando, produced its first client newsletter, and did a client satisfaction
survey in order to better communicate with its growing customer base.
Product Support Services. Phoenix delivers product support services
through all traditional avenues, including telephone, Internet, electronic mail
and facsimile. 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.
Internet/Intranet Product and Customization 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. Phoenix's
disaster recovery service is a separate five-year contract that has an initial
implementation fee and annual service fees. In December 1998, Phoenix entered
an agreement with SunGard Recovery Services, Inc. ("SunGard") under which
SunGard will offer disaster recovery services to Phoenix customers and will pay
Phoenix a commission based on monthly fees SunGard charges to Phoenix
customers. 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 provides SupportNet, part of the Company's
World Wide Web site, which provides an additional vehicle of support for client
financial institutions. 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 defect reporting, (iv) online enhancement requests and (v)
online file transfers from the Company.
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, 1998, product development expenditures
(the total of product development expense and capitalized software development
costs) represented approximately 40% of the Company's aggregate revenues.
Hewlett-Packard provided developmental-stage assistance to the Company by
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<PAGE> 13
supplying computer hardware to the Company for development and testing of the
Company's products. Early in the Company's history, a group of U.S. financial
institutions participated in the Company's joint application development (JAD)
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. U.S. financial institutions continue to contribute to plans for new
products and enhancements as part of the Phoenix Customer ("PHOCUS") group.
Consistent with the Company's original plan, Phoenix designed its
software to incorporate numerous international features, such as multi-currency
capabilities and multi-language support. Phoenix has designed a multi-currency
enhancement to the Phoenix System which support the world currencies formatted
in accordance with the standards established by the International Standards
Organization. Phoenix has acquired additional international capabilities, such
as a trade finance system, and has 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 also intends to develop and license additional international
functionality as it enters new countries which require additional
functionality. For instance, to support its new relationship with Data Action,
a major credit union service bureau provider in Australia, the Company has
established a development center in Sydney, Australia to work on enhancing the
Phoenix System for the credit union market in Australia. Phoenix intends to
continue to incorporate additional international functionality and to integrate
new technologies for the benefit of existing and future customers around the
world.
Phoenix is also participating on the advisory council for Microsoft's
Windows DNAfs. Windows DNAfs is an industry framework - a way of constructing
software applications that will allow different financial services industry
software providers to exchange data and communicate with each other. Phoenix is
working with Microsoft to finalize DNAfs specifications for the Company's
Project Aurora. Aurora is a set of technologies, tools and frameworks that
Phoenix is developing to serve as the foundation for a new set of products to
be delivered in the coming years. Fundamentally, Aurora is a distributed
internet-based application that is being built from the ground up to run under
Windows 2000's COM+ environment and is deployed using an Internet browser.
Aurora is designed to enhance, rather than replace, the existing product and is
expected to dramatically extend the functionality of the existing software.
Project Aurora spent much of 1998 in design work and in early conceptual
studies as to the feasibility of the project. Initial key members of the Aurora
team have been identified and hired and have begun working on some detailed
designs for the application. The Company expects to continue working on Aurora
during 1999 while awaiting Microsoft's delivery of Windows 2000 but plans to be
able to demonstrate the technology to select customers and partners. Phoenix
intends to continue to develop, modify and enhance the Phoenix System to offer
its customer institutions what it believes are some of the best technologies
available in the financial services software industry.
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 December 31, 1998, the Company's Research & Development
Division consisted of 147 individuals. 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 discussions with PHOCUS, which consists of all current
domestic and international users of the Phoenix System and from specific
requests from new customers. PHOCUS 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 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.
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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 the following new products and enhancements, among others,
primarily during 1999:
- - Microsoft SQL Server 7(TM). Phoenix is developing a version of the
Phoenix System to run on the Microsoft SQL Server 7 to further enhance
the functionality and flexibility of its products. Phoenix currently
anticipates delivering this version in the second half of 1999.
- - Project Aurora. Phoenix is working with Microsoft to finalize DNAfs
specifications for the Company's Project Aurora, which is expected to
serve as the foundation for a new set of products to be delivered in
the coming years. Fundamentally, Aurora is a distributed internet-based
application that is being built from the ground up to run under Windows
2000's COM+ environment and will be deployed using an Internet browser.
Aurora is designed to enhance, rather than replace, the existing
product and is expected to dramatically extend the functionality of the
existing software.
- - Cash Management System. Phoenix has acquired exclusive rights to a
cash management system that was originally developed by one of its
international customers. As part of its Project Aurora, 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.
- - 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.
- - ATM System. The Company has delivered and intends to enhance the
Phoenix ATM system which allows its customers to support their own ATM
network and to connect to regional and national ATM networks.
- - International Capabilities. Phoenix is developing enhancements for the
international market including large digit support, interbranch
accounting and electronic bill payment functionality. The Company has
established a development center in Sydney, Australia to customize the
Phoenix System for use in credit unions and other financial
institutions in the international market.
- - Larger Bank Processing. Significant enhancements for the United States
market during 1998 focused on the loan processing area, such as
investor reporting for secondary mortgage marketing. Phoenix also
developed modules that permit the processing of dealer loans and
accounting for non-accrual loans and plans to enhance the performance
of these modules. Phoenix believes that such enhancements broaden the
appeal of the Phoenix System for larger institutions. Phoenix is
continuing to develop a variety of enhancements to process larger
financial institutions, capitalizing on the latest database and server
technological advances.
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 and uncorrected errors or failures. These
product plans are "forward-looking
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statements" which are subject to the risks and uncertainties discussed earlier
in this Annual Report and in the Company's filing with the Securities and
Exchange Commission.
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 services 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.
Financial institutions have two fundamental alternatives for obtaining
data processing capabilities: (i) in-house 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 its current competitors do not offer
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.
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
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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 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 December 31, 1998, Phoenix had a total of 368 employees and
contract workers, of which 225 were engaged in research & development and
support, 75 were in implementation and training, 22 were in sales and
marketing, 23 were in finance and administration, 7 were in executive
management, and 16 were engaged in product development and support, sales and
marketing and general business operations at Phoenix A.P. Limited. All of the
Company's 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 and approximately 22,500 square feet in a nearby
building. The lease for both properties is for a term of ten years and expires
on April 1, 2007.
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.
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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, 1998.
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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 1998 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ON MARKET RISK.
Phoenix does not use derivative financial instruments in its
operations or investments. While the Company has significant international
operations, its contracts are all written for payments to be made in U.S.
Dollars and, therefore, it does not believe it is materially subject to
fluctuations in foreign currency exchange rates. Phoenix's short term and long
term investments are deposited principally in a single financial institution
with significant assets and consist of U.S. Treasury bills and notes with
maturities of less than three years. Phoenix does not consider the interest
rate risk for these investments to be material. The Company does not have
any material credit facilities and, therefore, the Company does not have a
significant risk due to potential fluctuations in interest rates for loans at
this time. Changes in interest rates could decrease the Company's interest
income and could make it more costly to borrow money in the future and may
impede Phoenix's future acquisition and growth strategies if management
determines that the costs associated with borrowing funds are too high to
implement these strategies.
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
Not applicable.
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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 15, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE CLASS(1) POSITION
<S> <C> <C> <C>
Bahram Yusefzadeh(2)(3) 52 III Chairman of the Board and Chief Executive
Officer
Raju M. Shivdasani 48 III President, Chief Operating Officer and Director
Theodore C. Burns 42 -- Senior Vice President and Chief Financial
Officer
Daniel P. Baker 36 -- Senior Vice President, Research and
Development
Harold C. Boughton 47 -- Senior Vice President, USA Business
Development
Barbara A. Brescia 53 -- Senior Vice President, Human Resources
Brian J. Morgan 52 -- Senior Vice President, International Business
Development
Jocelyn C. Ruggiero 37 -- Senior Vice President, Implementation Services
John F. Winstanley 39 -- Senior Vice President, Strategic Operations
Ruann F. Ernst(2)(3) 52 I Director
Ronald E. Fenton(3)(4) 70 III Director
William C. Hess(4) 62 I Director
James C. Holly(2) 57 III Director
Paul A. Jones(2) 44 II Director
J. Michael Murphy(3) 58 II Director
Glenn W. Sturm(4) 45 II Director
O. Jay Tomson (4) 62 I Director
</TABLE>
- ---------------------
(1) Class I term expires in 2000; Class II term expires in 2001; 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.
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Bahram Yusefzadeh. Mr. Yusefzadeh, the Company's founder, Chairman of
the Board and Chief Executive Officer, has 30 years of experience in the
banking software industry. In 1969, he co-founded Nu-Comp Systems, Inc., 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. 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, 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. Mr. Yusefzadeh has been a director of Towne Services,
Inc., a publicly traded company, since 1997 and has been a member of its
compensation committee since 1998.
Raju M. Shivdasani. Mr. Shivdasani joined the Company in July 1996 as
a Senior Vice President and 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 27 years of experience working for
companies in the banking software, service bureau and data center services
industries.
Theodore C. Burns. Mr. Burns joined the Company in October 1998 as
Senior Vice President and Chief Financial Officer. From 1993 to 1998, Mr. Burns
worked with PricewaterhouseCoopers LLP (and its predecessor, Price Waterhouse
LLP) in Indonesia, India, South Korea and the U.S., most recently as a Director
in their Financial Advisory Services Group. He previously advised banking
institutions in the areas of mergers & acquisitions, capital raising and
strategy for over eight years, first with Golembe Associates, Inc. and later
with Fox-Pitt, Kelton Inc. Mr. Burns holds an MBA from Columbia University and
is a Certified Public Accountant.
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 14 years in the banking industry.
Harold C. Boughton. Mr. Boughton joined the Company in June 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.
Barbara A. Brescia. Ms. Brescia joined the Company as Senior Vice
President, Human Resources in January 1998 and is responsible for all employment
administrative matters for the Company. Ms. Brescia was the Director of Human
Resources for Amnex Corporation, a telecommunications services provider, from
1997-1998. From 1994 to 1997, she was studying for a Ph.D. and was a human
resources consultant. Ms. Brescia has over 14 years of human resource management
experience with major companies such as Amnex and Harcourt Brace Jovanovich,
Inc.
Brian J. Morgan. Mr. Morgan joined the company in April 1998 as Senior
Vice President of International Business Development. Mr. Morgan leads the
Company's efforts to develop new worldwide business opportunities for its
customers. Prior to joining the Phoenix team, from 1996 to 1998, Mr. Morgan was
managing director of a consulting partnership that assisted software companies
in expanding their market reach and increasing revenues. From 1994 to 1996, Mr.
Morgan was the assistant general manager and head of sales and marketing for
Arab National Bank. Mr. Morgan has over 7 years experience with banking,
software and electronic product delivery companies.
Jocelyn C. Ruggiero. Ms. Ruggiero joined Phoenix in April 1998 as
Senior Vice President, Implementation Services and is responsible for customer
implementation and training services. From 1989 to
20
<PAGE> 21
1998, Ms. Ruggiero worked for PaySys International, Inc. where she served as
Director of Compliance Services and was responsible for the development and
installation of credit card systems for domestic and international banks. She
has 15 years of experience in the banking software industry.
John F. Winstanley. Mr. Winstanley joined the company in May 1998 as
Senior Vice President, Strategic Operations. Before joining Phoenix, he was
with TCA Consulting, where he was responsible for managing account
relationships. From 1991 to 1996, Mr. Winstanley worked with International
Banking Systems (IBIS) in various capacities providing system delivery services
and system strategy direction. Mr. Winstanley has over twenty years banking and
systems experience and has worked in thirty different countries during his
career.
Ruann F. Ernst. Ms. Ernst has been a director of the Company since
1996 and currently serves as a member of the Executive Committee and
Compensation and Stock Option Committee. Ms. Ernst is the president and chief
executive officer of Digital Island, Inc. and serves as a director of Advanced
Fiber Communications, Inc. Prior to her joining Digital Island in 1998, Ms.
Ernst worked for Hewlett-Packard for more than 13 years. 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. From 1995 to
1998, she served as General Manager of the financial services business unit of
Hewlett-Packard's Computer Systems Organization.
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. Mr. Fenton is the chairman of the board of
directors of F&M Bank - Iowa Central and a board member of F&M Bank - Iowa
Story County and F&M Bank - Iowa South Central. He also serves as chairman of
the board of directors of BancSecurity Corporation (where he has been since
1982), and recently retired as president, chief executive officer and director
of Security Bank (where he had been since 1976). He is also a director and
former chairman of the board of Shazam, Inc. ("Shazam"), a regional electronic
funds transfer network.
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 1988, he has been
chairman of the board of Sac City State Bank. Mr. Hess serves as an officer and
director of several bank holding companies and 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,
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). Mr. Holly has elected
not to stand for re-election to the Board when his current term as a director
expires in 1999.
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. and
serves as a board member for the Glenview Park District and Chamber of Commerce
and the United Way--Glenview.
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
21
<PAGE> 22
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 the law firm's executive committee. Mr. Sturm has
been a director of Towne Services, Inc. since 1996 and a director of The
InterCept Group, Inc. since 1997.
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. Mr. Tomson is also a member of the Audit Committee. 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this Item is incorporated by reference
from the Proxy Statement.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the Proxy Statement.
22
<PAGE> 23
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, 1998 and 1997 and for each of the years in the three-year period ending
December 31, 1998, together with the report of Ernst & Young LLP, dated
February 3, 1999, appearing in the Company's 1998 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.
<TABLE>
<CAPTION>
(b) Exhibits
<S> <C>
3.1 Amended and Restated Articles of Incorporation as amended by
the Articles of Amendment to Amended and Restated Articles of
Incorporation as filed with the Secretary of 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").*
10.6 Third Amendment, dated as of January 30, 1998, to the October
Plan (incorporated by reference to Exhibit A of the Company's
definitive proxy statement on Schedule 14A for its 1998 annual
meeting of shareholders, File No. 0-20937 (the "1998 Proxy").
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.7 Revised Form of Stock Option Agreement for the October Plan
(incorporated by reference to Exhibit 10.45 of the 1996
Registration Statement).*
10.8 Phoenix International Ltd., Inc. 1996 Director Stock Option Plan
(the "Director Plan") (incorporated by reference to Exhibit
10.46 of the 1996 Registration Statement).*
10.9 First Amendment to the Director Plan (incorporated by reference
to Exhibit B to the 1998 Proxy).*
10.10 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).*
10.11 Phoenix International Ltd., Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit C of the 1998 Proxy).*
10.12 Form of the Company's Director Indemnity Agreement (incorporated
by reference to Exhibit 10.47 of the 1996 Registration
Statement).
10.13 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).*
10.14 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).*
10.15 Amended and Restated Employment Agreement by and between the
Company and Raju M. Shivdasani, dated as of March 20, 1998
(incorporated by reference to Exhibit 10.3 of the Company's
Form 10-Q, dated May 6, 1998, File No.
0-20937 (the "First Quarter 1998 10-Q")).*
10.16 Letter agreement dated August 1, 1998 between the Company and
Brian Morgan.*
10.17 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).*
10.18 Employment Agreement dated as of March 6, 1998 by and between
the Company and Daniel P. Baker (incorporated by reference to
Exhibit 10.4 of the First Quarter 1998 10-Q).*
10.19 Employment Agreement dated as of March 25, 1998 by and between
the Company and Jocelyn F. Ruggiero (incorporated by reference
to Exhibit 10.5 of the First Quarter 1998 10-Q).*
10.20 Form of Employment Agreement by and between the Company and its
Senior Vice Presidents.*
10.21 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 ")).
10.22 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).+
10.23 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).+
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.24 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).+
10.25 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).+
10.26 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). +
10.27 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).+
10.28 Form of Domestic Software License Agreement (incorporated by
reference to Exhibit 10.1 of Company's Form 10-Q, dated July
31, 1998, File No. 0-20937 (the "Second Quarter 1998 10-Q")).
10.29 Form of International Software License Agreement (incorporated
by reference to Exhibit 10.2 of the Second Quarter 1998
10-Q).
10.30 Form of Disaster Recovery Service Agreement (incorporated by
reference to Exhibit 10.32 of the 1996 Registration
Statement).+
10.31 Form of Software Deposit Agreement (incorporated by reference to
Exhibit 10.33 of the 1996 Registration Statement).+
10.32 Form of Confidentiality and Non-Disclosure Agreement (incorporated
by reference to Exhibit 10.34 of the 1996 Registration
Statement).
10.33 Form of Confidentiality Agreement (incorporated by reference to
Exhibit 10.35 of the 1996 Registration Statement).
10.34 Form of Mutual Non-Disclosure Agreement (incorporated by reference
to Exhibit 10.36 of the 1996 Registration Statement).
10.35 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).
10.36 Form of Phoenix International Ltd., Inc. Confidentiality Agreement
(incorporated by reference to Exhibit 10.38 of the 1996
Registration Statement).
10.37 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).*
10.38 Remarketing Agreement and Support Authorization, dated as of
April 22, 1996, between the Company and Computer Systems
Associates (Nigeria) Limited ("CSA") (incorporated by
reference to Exhibit 10.42 of the 1996 Registration Statement)
(the "CSA Agreement").+
10.39 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).
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
10.40 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")).
10.41 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).+
10.42 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 Form of Software License Agreement used in connection with the
CSA Agreement (incorporated by reference to Exhibit 10.47 of
the 1996 10-K).
10.44 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).+
10.45 Cooperative Marketing Agreement, dated June 28, 1997, between
the Company and Siemens Nixdorf Informationssysteme AG
(incorporated by reference to Exhibit 10.49 of the 1997
Registration Statement).+
10.46 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).+
10.47 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).+
10.48 Software License and Development Agreement, dated as of
January 15, 1998, between the Company and Intercept Systems,
Inc. (incorporated by reference to Exhibit 10.2 of the First
Quarter 1998 10-Q).+
10.49 Source Code License and Marketing Agreement, dated as of March
31, 1998, between the Company and CSA (incorporated by
reference to Exhibit 10.2 to the First Quarter 1998 10-Q).+
10.50 Agreement for Software Services in Relation to Phoenix Banking
system dated September 30, 1998 between the Company and
Siemens Nixdorf Information Systems Pty. Limited (incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q, dated
November 4, 1998, File No. 0-20937).
10.51 Disaster Recovery Services Marketing Agreement dated as of
December 15, 1998 between the Company and SunGard Recovery
Services Inc.++
13.1 Registrant's 1998 Annual Report to Shareholders. Except for the
portions of said Annual Report specifically 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.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (contained on the signature page of this
filing).
</TABLE>
26
<PAGE> 27
27.1 Financial Data Schedule (for Commission purposes only).
- -----------------
+ Confidential treatment previously granted for portions of such
exhibit.
++ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. In accordance with this rule, these
confidential portions have been omitted from this exhibit and filed
separately with the Securities and Exchange Commission.
* 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).
27
<PAGE> 28
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.
Phoenix International Ltd., Inc.
By: /s/ Bahram Yusefzadeh
------------------------------------
Date March 23, 1999 Bahram Yusefzadeh
Chairman and Chief Executive Officer
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 Chief Executive March 23, 1999
- ------------------------------- Officer (principal executive officer)
Bahram Yusefzadeh
/s/ Theodore C. Burns Chief Financial Officer (principal financial and March 23, 1999
- ------------------------------- accounting officer)
Theodore C. Burns
/s/ Raju M. Shivdasani President, Chief Operating March 23, 1999
- -------------------------------- Officer and Director
Raju M. Shivdasani
/s/ Ruann F. Ernst Director March 23, 1999
- -------------------------------
Ruann F. Ernst
/s/ Ronald E. Fenton Director March 23, 1999
- -------------------------------
Ronald E. Fenton
/s/ William C. Hess Director March 23, 1999
- -------------------------------
William C. Hess
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
/s/ James C. Holly Director March 23, 1999
- -------------------------------
James C. Holly
/s/ Paul A. Jones Director March 23, 1999
- -------------------------------
Paul A. Jones
/s/ J. Michael Murphy Director March 23, 1999
- --------------------------------
J. Michael Murphy
/s/ Glenn W. Sturm Director March 23, 1999
- -------------------------------
Glenn W. Sturm
/s/ O. Jay Tomson Director March 23, 1999
- -------------------------------
O. Jay Tomson
</TABLE>
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Amended and Restated Articles of Incorporation as amended by
the Articles of Amendment to Amended and Restated Articles of
Incorporation as filed with the Secretary of 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").*
10.6 Third Amendment, dated as of January 30, 1998, to the October
Plan (incorporated by reference to Exhibit A of the Company's
definitive proxy statement on Schedule 14A for its 1998 annual
meeting of shareholders, File No. 0-20937 (the "1998 Proxy").
10.7 Revised Form of Stock Option Agreement for the October Plan
(incorporated by reference to Exhibit 10.45 of the 1996
Registration Statement).*
10.8 Phoenix International Ltd., Inc. 1996 Director Stock Option Plan
(the "Director Plan") (incorporated by reference to Exhibit
10.46 of the 1996 Registration Statement).*
10.9 First Amendment to the Director Plan (incorporated by reference
to Exhibit B to the 1998 Proxy).*
10.10 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).*
</TABLE>
<PAGE> 31
<TABLE>
<S> <C>
10.11 Phoenix International Ltd., Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit C of the 1998 Proxy).*
10.12 Form of the Company's Director Indemnity Agreement (incorporated
by reference to Exhibit 10.47 of the 1996 Registration
Statement).
10.13 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).*
10.14 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).*
10.15 Amended and Restated Employment Agreement by and between the
Company and Raju M. Shivdasani, dated as of March 20, 1998
(incorporated by reference to Exhibit 10.3 of the Company's
Form 10-Q, dated May 6, 1998, File No.
0-20937 (the "First Quarter 1998 10-Q")).*
10.16 Letter agreement dated August 1, 1998 between the Company and
Brian Morgan.*
10.17 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).*
10.18 Employment Agreement dated as of March 6, 1998 by and between
the Company and Daniel P. Baker (incorporated by reference to
Exhibit 10.4 of the First Quarter 1998 10-Q).*
10.19 Employment Agreement dated as of March 25, 1998 by and between
the Company and Jocelyn F. Ruggiero (incorporated by reference
to Exhibit 10.5 of the First Quarter 1998 10-Q).*
10.20 Form of Employment Agreement by and between the Company and its
Senior Vice Presidents.*
10.21 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 ")).
10.22 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).+
10.23 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).+
10.24 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).+
10.25 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).+
10.26 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). +
10.27 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).+
</TABLE>
<PAGE> 32
<TABLE>
<S> <C>
10.28 Form of Domestic Software License Agreement (incorporated by
reference to Exhibit 10.1 of Company's Form 10-Q, dated July
31, 1998, File No. 0-20937 (the "Second Quarter 1998 10-Q")).
10.29 Form of International Software License Agreement (incorporated
by reference to Exhibit 10.2 of the Second Quarter 1998
10-Q).
10.30 Form of Disaster Recovery Service Agreement (incorporated by
reference to Exhibit 10.32 of the 1996 Registration
Statement).+
10.31 Form of Software Deposit Agreement (incorporated by reference
to Exhibit 10.33 of the 1996 Registration Statement).+
10.32 Form of Confidentiality and Non-Disclosure Agreement (incorporated
by reference to Exhibit 10.34 of the 1996 Registration
Statement).
10.33 Form of Confidentiality Agreement (incorporated by reference to
Exhibit 10.35 of the 1996 Registration Statement).
10.34 Form of Mutual Non-Disclosure Agreement (incorporated by reference
to Exhibit 10.36 of the 1996 Registration Statement).
10.35 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).
10.36 Form of Phoenix International Ltd., Inc. Confidentiality Agreement
(incorporated by reference to Exhibit 10.38 of the 1996
Registration Statement).
10.37 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).*
10.38 Remarketing Agreement and Support Authorization, dated as of
April 22, 1996, between the Company and Computer Systems
Associates (Nigeria) Limited ("CSA") (incorporated by
reference to Exhibit 10.42 of the 1996 Registration Statement)
(the "CSA Agreement").+
10.39 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).
10.40 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")).
10.41 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).+
10.42 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 Form of Software License Agreement used in connection with the
CSA Agreement (incorporated by reference to Exhibit 10.47 of
the 1996 10-K).
</TABLE>
<PAGE> 33
<TABLE>
<S> <C>
10.44 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).+
10.45 Cooperative Marketing Agreement, dated June 28, 1997, between
the Company and Siemens Nixdorf Informationssysteme AG
(incorporated by reference to Exhibit 10.49 of the 1997
Registration Statement).+
10.46 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).+
10.47 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).+
10.48 Software License and Development Agreement, dated as of
January 15, 1998, between the Company and Intercept Systems,
Inc. (incorporated by reference to Exhibit 10.2 of the First
Quarter 1998 10-Q).+
10.49 Source Code License and Marketing Agreement, dated as of March
31, 1998, between the Company and CSA (incorporated by
reference to Exhibit 10.2 to the First Quarter 1998 10-Q).+
10.50 Agreement for Software Services in Relation to Phoenix Banking
system dated September 30, 1998 between the Company and
Siemens Nixdorf Information Systems Pty. Limited (incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q, dated
November 4, 1998, File No. 0-20937).
10.51 Disaster Recovery Services Marketing Agreement dated as of
December 15, 1998 between the Company and SunGard Recovery
Services Int.++
13.1 Registrant's 1998 Annual Report to Shareholders. Except for the
portions of said Annual Report specifically 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.
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).
</TABLE>
- -----------------
+ Confidential treatment previously granted for portions of such
exhibit.
++ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-z under the Securities
Exchange Act of 1934, as amended. In accordance with this rule, these
confidential portions have been omitted from this exhibit and filed
separately with the Securities and Exchange Commission.
* 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
[Phoenix International Letterhead]
August 1, 1998
Mr. Brian Morgan
Orchard Cottage - Holmes Chapel Road
Lach Dennis
Cheshire, England CW 97S2
PRIVATE AND CONFIDENTIAL
I am very pleased to be able to offer you employment with Phoenix EMEA Limited,
hereafter called Phoenix. This offer is valid for a period of three weeks from
the date shown above. It will automatically lapse on the twenty first day of
August 1998.
To comply with Section 1 of the Employment Protection (Consolidation) Act of
1978, the following includes those terms of employment, which have to be
notified in writing.
1. DATE THIS EMPLOYMENT BEGINS
No later than August 21, 1998
2. JOB
Senior Vice President, International Division
You will report to Raju Shivdasani and will spend time in Orlando to become
knowledgeable in the Company's products, operational procedures, and business
issues. A business plan will be created and agreed upon for the Region. It is
anticipated that the plan will be completed by the end of 1998.
For you to be eligible to work in the United States during this training period,
it is your responsibility to obtain a B-1 visa. You can obtain this visa at the
U. S. consulate. The procedure will take a day or two and will require a
passport valid for the period of time you will be in the U.S. and a letter from
Phoenix International describing the purpose and length of the visit. Phoenix
will provide the letter upon receipt of this signed offer of employment.
The B-1 visa is your right to work in this country for a limited period of time
(6 months, with a possible extension to one year). Family members would need B-2
visas for an extended stay in the U.S. These would be for the same period of
time. It is customary for spouse and family of the B-1 visa recipient to acquire
B-2 visas.
<PAGE> 2
3. RESPONSIBILITIES
Oversee the acquisition and development of International business.
It is the overall responsibility of every Phoenix sales employee to maintain the
highest levels of professional competence and personal discipline in order to
represent the Company in the most effective way possible and to ensure that the
expectations of sales prospects are met accurately and in a manner that
encourages the development of strong business partnerships.
4. REMUNERATION
Your earnings for 1998 will be as follows:
Annual Base Salary US $120,000 GBP 75,000
Annual Draw US $60,000 GBP 37,500 (recoverable from bonus)
Annual Base Salary and Draw will be paid at the rate of GBP 9,375 ( US $15,000)
per month
Annual Bonus of GBP 75,000 (US $120,000) will be paid based on attainment of
agreed upon objectives paid based on 75% sales overrides and 25% profit bonus
effective from April 20, 1998. Pension contribution of (pound)7,500 ($12,000)
annually, paid monthly Life Insurance of (pound)1,875 ($3,000) annually, paid
monthly Health Insurance of (pound)1,250 ($2,000) annually, paid monthly
Apartment cost paid by Phoenix International not to exceed daily rate of $58 or
$16,000 for 9 months from October 1, 1998 through July 31, 1999. Car Lease equal
to $6,000, to be paid by Phoenix International
This offer also includes an option of 30,000 shares of Phoenix International
Stock Effective August 1, 1998. These options will vest according to the
following schedule:
20% of the shares vest on start of employment and 20% of the shares
vest consecutively on your first, second, third, and fourth year
anniversaries
All payments will be made through the United Kingdom office.
HOURS OF WORK
Normal hours of work are: 09.00-17.30 (1 hour off for lunch). Because of the
nature of the work performed by your position, longer hours, or weekend work,
may be required. The possibility of such longer or non-business/weekend hours
has been considered in determining your compensation set out above.
5. HOLIDAYS
In addition the UK Bank and Public holidays observed by Phoenix, your basic
holiday entitlement will be 20 working days paid holiday each year between
January 1st and December 31st, accrued at the rate of 1.67 days/month. Carry
forward of current year's unused vacation into the New Year is discouraged.
The actual dates of taking holiday leave will be subject to staff co-ordination
and mutual agreement with Raju Shivdasani.
<PAGE> 3
6. ABSENCE DUE TO SICKNESS, INJURY OR DISABILITY
You will be required to notify your Manager on the first day of absence.
Sickness absence of more than seven days must be accompanied by a Medical
Certification from your Doctor.
During sickness absence up to 28 days duration in any 12-month period you will
continue to receive your salary in accordance with Phoenix sick pay policy.
When Payment under the Phoenix sick pay policy coincides with SSP entitlement,
your payment pursuant to such policy will consist of three (3) full days pay and
following that the SSP payment plus a supplement from the Company as necessary
to bring the daily total payments up to your daily rate payable hereunder for
the first eight (8) weeks and seventy (70) percent of your daily rate for the
remaining twenty (20) weeks.
7. RETIREMENT
Normal retirement is at age 60 years.
8. OPEN DOOR POLICY/DISCIPLINARY PROCEDURES
Open Door Policy: The Company has an Open Door policy for use by employees who
have employment-related complaints or concerns.
Disciplinary Policy: The Company has a written Disciplinary Policy which, among
other things provides for immediate dismissal for violation of certain company
policies. The terms of such Disciplinary Policy are incorporated by reference. A
copy of this policy will be provided to you.
9. PROBATIONARY PERIOD - NOTICE OF TERMINATION
9.1 Probationary Period: The employment grated hereunder shall be
subject to an initial probationary period of 24 weeks beginning on the date of
employment. During such probationary period, you may be terminated at any time
and without notice. The employee, by acceptance of this employment, waives any
right to notice of termination during such probationary period.
In the event that during the probationary period the Company materially changes
ownership or management, the probationary period shall be deemed to have lapsed
and paragraph 10.2 shall control notice of termination.
9.2 Notice of Termination: After completion of the probationary period
and unless a shorter period is provided by the Company's disciplinary policy as
herein described, this employment will continue until terminated by either party
giving to the other not less than 1 month's previous notice in writing, unless a
longer or shorter period is mutually agreed upon.
10. PLACE OF WORK
The staff of Phoenix is based in offices in London. You will, however, be
required to spend time in Florida.
During the interim training period in Orlando, Phoenix International will
provide you with the use of a furnished two-bedroom apartment and rental car.
Incidental expenses, such as food, dry cleaning etc. will be your
responsibility.
<PAGE> 4
11. DISCLOSURE OF INFORMATION
It is a condition that you shall keep the secrets of Phoenix International Ltd.
Inc. and its subsidiaries or associated companies and shall not, either during
your employment or at any time after its termination, divulge or utilize any
secret or confidential knowledge or information acquired during your service for
our own purposes or to the detriment and prejudice of Phoenix International Ltd.
Inc. or associated companies.
It is also a condition that you shall keep the secrets of any company or firm or
person with which Phoenix International Ltd., Inc. may at anytime during your
service be in commercial or technical co-operation or association and shall not
divulge either during your service or subsequently any matter which is secret or
confidential or information relating to the business or interests of any such
company, firm or person which can be detrimental or prejudicial to those
businesses and interests.
However, nothing herein shall prevent the employee from using his/her own skill
in any business in which he/she may be lawfully engaged after the period of
his/her employment has ended.
At the end of your employment you will deliver to Phoenix International Ltd.
Inc. all books, documents, papers, materials and copies thereof of Phoenix
International Ltd. Inc. or any of its subsidiaries which may then be in your
possession or under your control.
12. TERMS AND CONDITIONS
Information on general terms, conditions, benefits, facilities and regulations
associated with employment by Phoenix are attached and form a part of this offer
letter. If there are any policy variations between this letter and our "Employee
Policy Manual," this letter will be used as the deciding document.
13. NOTIFICATION OF CHANGES
Any changes which are made to the terms recorded above will be notified to you
in writing either by individual letter, a general notice to staff, or following
discussions between you and Phoenix management.
Please signify acceptance of the job offer by signing and returning to me a
duplicate of this letter. The original should then be kept as the written
statement required to be given to you under The Employment Protection
(Consolidation) Act 1978.
<PAGE> 5
If you have any questions, please do not hesitate to ask me. We are confident
that you will contribute greatly to our success and we are looking forward very
much to having you join us at Phoenix International.
Sincerely,
/s/ Raju Shivdasani
Raju Shivdasani
President
I accept your offer of employment and acknowledge receipt of this written
statement.
Signed: /s/ Brian Morgan Date: 29 July 98
-------------------------------------- -----------------
Brian Morgan
<PAGE> 1
Exhibit 10.20
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is entered into by and between
PHOENIX INTERNATIONAL LTD., INC., a Florida corporation (the "Company"), and
XXX, (the "Employee"), this XXXX, XXXX.
Certain terms used in this Agreement are defined in Section 18.
In consideration of the mutual covenants contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree that on the date set forth in the recitals (the "Effective Date"):
1. Employment. The Company shall employ the Employee, and the
Employee shall serve the Company, as XXX upon the terms and conditions set
forth herein. The Employee shall have such authority and responsibilities as
are consistent with his position and which may be set forth in this Agreement,
in the Bylaws or assigned by the CEO and/or the President and Chief Operating
Officer from time to time. The Employee shall devote his full business time,
attention, skill and efforts to the performance of his duties hereunder, except
during periods of illness or periods of vacation and leaves of absence
consistent with Company policy. The Employee may devote reasonable periods of
time to perform charitable and other community activities and to manage his
personal investments; provided, however, that such activities do not materially
interfere with the performance of his duties hereunder and are not in conflict
or competitive with, or adverse to, the interests of the Company.
2. Term. Unless earlier terminated as provided herein, the
Employee's employment under this Agreement shall be for a continuing term (the
"Term") of one year, which shall be extended automatically (without further
action of the Company or the Employee) each day for an additional day so that
the remaining term shall continue to be one year; provided, however, that
either party may at any time, by written notice to the other, fix the Term to a
finite term of one year, without further automatic extension, commencing with
the date of such notice.
3. Compensation and Benefits.
a. The Company shall pay the Employee a salary at a rate of not
less than $XXX per annum in accordance with the salary payment practices of the
Company. The CEO and President shall review the Employee's salary at least
annually and may increase the Employee's base salary if they determine in their
sole discretion that an increase is appropriate.
b. From time to time, the Company may also in its discretion
establish bonus programs in which the Employee may participate. In the event
that such a bonus program is made available to the Employee, the Employee may
be eligible to receive quarterly payments of the bonus amount based upon
achievement of targeted levels of performance and such other criteria as the
CEO and President shall establish from time to time pursuant to the bonus
program.
<PAGE> 2
c. The Employee shall participate in the 1995 Phoenix
International Ltd., Inc. Employee Stock Option Plan (adopted by the Board on
October 21, 1995) (hereinafter "the Plan") and shall be eligible for the grant
of stock options, restricted stock and other awards thereunder.
d. The Employee shall participate in all retirement, welfare,
deferred compensation, life and health insurance, and other benefit plans or
programs of the Company now or hereafter applicable to the Employee or
applicable generally to employees of the Company. The Company expressly
reserves the right to discontinue or otherwise change from time to time the
benefits made available to its employees.
e. The Company shall reimburse the Employee for travel and other
expenses related to the Employee's duties which are incurred and accounted for
in accordance with the historic practices of the Company.
4. Termination.
a. The Employee's employment under this Agreement may be
terminated prior to the end of the Term only as follows:
(i) upon the death of the Employee;
(ii) by the Company, in accordance with applicable state
and federal laws and regulations, due to the
Disability of the Employee upon delivery of a Notice
of Termination to the Employee. (For purposes of
this provision, "Disability" means the inability of
Employee to perform substantially all of his current
duties as required hereunder for a continuous period
of 90 days because of mental or physical condition,
illness or injury);
(iii) by the Company for Cause upon delivery of a Notice
of Termination to the Employee;
(iv) by either party without Cause upon 60 days written
notice to the other party and upon delivery of a
Notice of Termination to the other party.
b. If the Employee's employment with the Company shall be
terminated by either party during the Term, the Company shall pay to the
Employee (or in the case of his death, the Employee's estate) within 15 days
after the Termination Date, a lump sum cash payment equal to the Accrued
Compensation.
c. If the Company terminates the Employee without Cause, the
Company shall pay to the Employee in cash at the end of each of the six
consecutive 30-day periods following the Termination Date an amount equal to
one-twelfth of the Base Amount. The employee will not continue to participate
in employee benefit plans during this six-month period.
2
<PAGE> 3
d. The severance pay provided for in this Section 4 shall be in
lieu of any other severance or termination pay to which the Employee may be
entitled under any Company severance or termination plan, program, practice or
arrangement. The Employee's entitlement to any other compensation or benefits
shall be determined in accordance with the Company's employee benefit plans and
other applicable programs, policies and practices then in effect.
e. In the event that the Employee is a director of the Company
or any of its affiliates and his employment hereunder is terminated for any
reason, the Employee shall, and does hereby, tender his resignation as a
director of the Company and any of its affiliates effective as of the
Termination Date.
5. Rights to Work Product. Except as expressly provided in this
Agreement, the Company alone shall be entitled to all benefits, profits and
results arising from or incidental to Employee's performance under this
Agreement. To the greatest extent possible, any work product, property, data,
documentation or information or materials prepared, conceived, discovered,
developed or created by Employee in connection with performing his employment
responsibilities during the Term ("Work Product") shall be deemed to be "work
made for hire" as defined in the Copyright Act, 17 U.S.C.A. ss. 101 et seq., as
amended, and owned exclusively and perpetually by the Company. Employee hereby
unconditionally and irrevocably transfers and assigns to the Company all
intellectual property or other rights, title and interest Employee may
currently have (or in the future may have) by operation of law or otherwise in
or to any Work Product. Employee agrees to execute and deliver to the Company
any transfers, assignments, documents or other instruments which the Company
may deem necessary or appropriate to vest complete and perpetual title and
ownership of any Work Product and all associated rights exclusively in the
Company. The Company shall have the right to adapt, change, revise, delete
from, add to and/or rearrange the Work Product or any part thereof written or
created by Employee, and to combine the same with other works to any extent,
and to change or substitute the title thereof, and in this connection Employee
hereby waives the "moral rights" of authors as that term is commonly understood
throughout the world including, without limitation, any similar rights or
principles of law which Employee may now or later have by virtue of the law of
any locality, state, nation, treaty, convention or other source. Unless
otherwise specifically agreed, Employee shall not be entitled to any
compensation in addition to that provided for in Section 3 of this Agreement
for any exercise by the Company of its rights set forth in this Section 5.
6. Noncompetition, Nonsolicitation, Confidentiality and Related
Matters.
(a) Employee acknowledges that during the course of his
employment, Employee will have significant access to, and involvement with, the
Company's Trade Secrets, Confidential Information and customers. Employee
further acknowledges that the Company has a reasonable and legitimate interest
in protecting its Trade Secrets, Confidential Information, and customer
goodwill. As a result Employee acknowledges and agrees that the covenants set
forth below are reasonable and necessary to protect and preserve the business
interests of the Company, including, but not limited to: the Company's Trade
Secrets; its Confidential Information; its relationships with its prospective
or existing customers; its customer goodwill; and the extraordinary and
specialized training that the Company has provided to the Employee. The
Employee further acknowledges and agrees that the Company
3
<PAGE> 4
would suffer great loss and irreparable damage if the Employee should breach or
violate any of the terms or provisions of the covenants and agreements set
forth in Section 5 or 6, and that money damages will be insufficient to
compensate for any breaches thereof. Employee further acknowledges and agrees
that the existence of any claim, demand, action, or cause of action against the
Company, whether predicated upon this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of any of the covenants
contained in this Agreement. The Employee further acknowledges and agrees that:
each of these covenants and agreements in Sections 5 and 6 is separate,
distinct and severable not only from the other covenants and agreements but
also from the remaining provisions of this Agreement; and, the unenforceability
of any covenants or agreements shall not affect the validity or enforceability
of any of the other covenants or agreements or any other provision or
provisions of this Agreement. The Employee acknowledges and agrees that if any
of the provisions of Section 5 or 6 shall ever be deemed to exceed the time,
activity, or geographic limitations permitted by applicable law, then such
provisions shall be and hereby are reformed to the maximum time, activity, or
geographical limitations permitted by applicable law.
(b) Through exercise of his rights and performance of his
obligations under this Agreement, Employee will be exposed to "Trade Secrets"
and "Confidential Information" (as those terms are defined below). "Trade
Secrets" shall mean information or data of or about the Company including, but
not limited to, technical or nontechnical data, formulas, patterns,
compilations, programs, devices, methods, techniques, drawings, processes,
financial data, financial plans, products plans, or lists of actual or
potential customers, clients, distributors, or licensees, that: (i) derive
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from their disclosure or use; and (ii) are the subject of
efforts that are reasonable under the circumstances to maintain their secrecy.
To the extent that the foregoing definition is inconsistent with a definition
of "trade secret" mandated under applicable law, the latter definition shall
govern for purposes of interpreting Employee's obligations under this
Agreement. Except as required to perform his or her obligations under this
Agreement or except with Company's prior written permission, Employee shall not
use, redistribute, market, publish, disclose or divulge to any other person or
entity any Trade Secrets of the Company. The Employee's obligations under this
provision shall remain in force (during or after the Term) for so long as such
information or data shall continue to constitute a "trade secret" under
applicable law. Employee agrees to cooperate with any and all confidentiality
requirements of the Company and Employee shall immediately notify the Company
of any unauthorized disclosure or use of any Trade Secrets of which Employee
becomes aware.
(c) The Employee agrees to maintain in strict confidence and,
except as necessary to perform his duties for the Company, not to use or
disclose the Company's Confidential Information, either during the term of his
employment or for a period of two years after the Employee's last date of
employment, so long as the pertinent data or information remains Confidential
Information. "Confidential Information" shall mean any non-public information
of a competitively sensitive or personal nature, other than Trade Secrets,
acquired by the Employee, directly or indirectly, in connection with the
Employee's employment (including his employment with the Company prior to the
date of this Agreement), including (without limitation) oral and written
information concerning the Company or its affiliates relating to financial
position and
4
<PAGE> 5
results of operations (revenues, margins, assets, net income, etc.), annual and
long-range business plans, marketing plans and methods, account invoices, oral
or written customer information, and personnel information. Confidential
Information also includes information recorded in manuals, memoranda,
projections, minutes, plans, computer programs, and records, whether or not
legended or otherwise identified by the Company as Confidential Information, as
well as information which is the subject of meetings and discussions and not so
recorded; provided, however, that Confidential Information shall not include
information that is generally available to the public, other than as a result
of disclosure, directly or indirectly, by the Employee, or was available to the
Employee on a non-confidential basis prior to its disclosure to the Employee.
(d) Upon termination of employment, the Employee shall leave with
the Company all business records relating to the Company including, without
limitation, all contracts, calendars, and other materials or business records
concerning its business or customers, including all physical, electronic, and
computer copies thereof, whether or not the Employee prepared such materials or
records. Upon such termination, the Employee shall retain no copies of any such
materials.
(e) As set forth above, the Employee shall not disclose Trade
Secrets or Confidential Information. However, nothing in this provision shall
prevent the Employee from disclosing Trade Secrets or Confidential Information
pursuant to a court order or court-issued subpoena, so long as the Employee
first notifies the Company of said order or subpoena in sufficient time to
allow the Company to seek an appropriate protective order. The Employee agrees
that if he receives any formal or informal discovery request, court order, or
subpoena requesting that he disclose Trade Secrets or Confidential Information,
he will immediately notify the Company and provide the Company with a copy of
said request, court order, or subpoena.
(f) If the Employee resigns or the Company terminates Employee's
employment with the Company for Cause (as defined in Section 18), then for a
period of one year following the Employee's last day of employment with the
Company, the Employee shall not (without the prior written consent of the
Company) compete with the Company in any way. Specifically, Employee shall not
serve as an officer of, director of, employee of, or consultant to a Competing
Business in the Territory; shall not directly or indirectly form a Competing
Business in the Territory; and shall not directly or indirectly acquire more
than a 5% investment in a Competing Business in the Territory. For purposes of
section 6, subsections (f) through (i) of this Agreement, "Competing Business"
shall be defined as any business which engages in the development, marketing or
implementation of core retail banking software (the "Product") directly or
through a software service bureau to the banking or financial industry in the
Territory. The "Territory" shall be defined as the entire United States of
America, and any other country in which the Employee performed any of his job
duties on behalf of the Company, including but not limited to contacting by
telephone or correspondence customers or prospective customers within that
country, during the last two years of his employment with the Company.
(g) If the Employee is terminated by the Company without Cause,
then the no-compete period referred to in paragraph (f) above shall be reduced
from one year to six months.
5
<PAGE> 6
(h) If the Employee's employment with the Company ceases for any
reason, including, but not limited to, termination or resignation, then for a
period of two years following the Employee's last day of employment with the
Company, the Employee shall not (without the prior written consent of the
Company) either directly or indirectly, on the Employee's own behalf or in the
service of or on behalf of others, solicit, divert, or appropriate, or attempt
to solicit, divert, or appropriate, to or for a Competing Business located in
the Territory, any person or entity that was a customer or a prospective
customer of the Company on the Employee's last date of employment.
(i) If the Employee's employment with the Company ceases for any
reason, including, but not limited to, termination or resignation, then for a
period of two years following the Employee's last day of employment with the
Company, the Employee shall not (without the prior written consent of the
Company) either directly or indirectly, on the Employee's own behalf or in the
service of or on behalf of others, solicit, divert, or hire away, or attempt to
solicit, divert, or hire away, to any Competing Business located in the
Territory, any person who was an employee of or consultant to the Company
during the period of Employee's employment. This provision shall apply to each
and every such employee or consultant of the Company, regardless of whether the
employee or consultant is full-time or temporary, the employment or engagement
is pursuant to written agreement, or the employment is for a determined period
or is at will.
7. Successors; Binding Agreement.
a. This Agreement shall be binding upon and shall inure to the
benefit of the Company, its Successors and Assigns and the Company shall
require any Successors and Assigns to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession or assignment had taken place.
b. Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Employee, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's legal personal representative.
8. Notice. Any notice the Employee is required to provide to the
Company pursuant to this Agreement shall be made by certified mail, return
receipt requested, or by Federal Express, signature required, to the CEO of the
Company at the address shown below. Notice will be effective upon the date of
receipt by the Company. In addition, Employee shall send a copy of the notice
to Glenn W. Sturm, at the address listed below, at the same time and by the
same method of delivery as to the Company. However, the copy to Mr. Sturm shall
not constitute notice.
6
<PAGE> 7
Notice to Company: Mr. Bahram Yusefzadeh
Chief Executive Officer
Phoenix International Ltd., Inc.
500 International Parkway
Heathrow, Florida 32746
Copy to Mr. Sturm: Mr. Glenn W. Sturm
Attorney for Phoenix International Ltd., Inc.
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza - Suite 1400
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
9. Modification and Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Employee and the Company. No waiver
by any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
10. Arbitration. Any controversy or claim against the Company or
any of its officers, directors, employees or agents arising from, out of or
relating to this Agreement, the breach thereof (other than controversies or
claims arising from, out of or relating to the provisions in Sections 5 and 6,
which may be litigated in a court of competent jurisdiction as set forth in
Section 11 below), or the employment or termination thereof of Employee by the
Company which would give rise to a claim under federal, state or local law
(including but not limited to claims based in tort or contract, claims for
discrimination under state or federal law, and/or claims for violation of any
federal, state or local law, statute or regulation) ("Claims") shall be
submitted to an impartial mediator ("Mediator") selected jointly by the
parties. Both parties shall attend a mediation conference and attempt to
resolve any and all Claims. If they are not able to resolve all Claims, any
unresolved Claims, including any dispute as to whether a matter constitutes a
Claim which must be submitted to arbitration, shall be determined by final and
binding arbitration in Florida in accordance with the Model Employment Dispute
Resolution Rules ("Rules") of the American Arbitration Association, by an
experienced employment arbitrator licensed to practice law in the State of
Florida in accordance with the Rules, except as herein specified. The
arbitrator shall be selected by alternate striking from a list of six
arbitrators, half of which shall be supplied by the Company and half by
Employee. The party not initiating the arbitration shall strike first. The
process shall be repeated twice until an arbitrator is selected. If an
arbitrator is still not selected, the Mediator shall provide a list of three
names which will be alternately struck, with the party initiating the
arbitration striking first, until a selection is made.
A demand for arbitration shall be made within a reasonable time after
the Claim has arisen. In no event shall the demand for arbitration be made
after the date when institution of legal and/or equitable proceedings based on
such Claim would be barred by the applicable statute of limitations. Each party
to the arbitration will be entitled to be represented by counsel and will have
the opportunity to take one deposition of an opposing party or witness before
the arbitration
7
<PAGE> 8
hearing. By mutual agreement of the parties, additional depositions may be
taken. The arbitrator shall have the authority to hear and grant a motion to
dismiss and/or for summary judgment, applying the standards governing such
motions under the Federal Rules of Civil Procedure. Each party shall have the
right to subpoena witnesses and documents for the arbitration hearing. A court
reporter shall record all arbitration proceedings.
With respect to any Claim brought to arbitration hereunder, either
party may be entitled to recover whatever damages would otherwise be available
to that party in any legal proceeding based upon the federal and/or state law
applicable to the matter and as specified by Section 11. The decision of the
arbitrator may be entered and enforced in any court of competent jurisdiction
by either the Company or Employee. Each party shall pay the fees of their
respective attorneys (except as otherwise awarded by the arbitrator), the
expenses of their witnesses and any other expenses connected with presenting
their Claim or defense. Other costs of the arbitration, including the fees of
the Mediator, the arbitrator, the cost of any record or transcript of the
arbitration, administrative fees, and other fees and costs, shall be borne
equally by the parties, one-half by Employee, on the one hand, and one-half by
the Company, on the other hand. Should Employee or the Company pursue any
dispute or matter covered by this Section by any method other than said
arbitration, the responding party shall be entitled to recover from the other
party all damages, costs, expenses, and attorneys' fees incurred as a result of
such action. The provisions contained in this Section 10 shall survive the
termination and/or expiration of this Agreement.
The parties indicate their acceptance of the foregoing arbitration
requirement by initialing below:
------------------------- ------------------------------
For the Company Employee
8
<PAGE> 9
11. Governing Law. This Agreement shall be deemed to be made in,
and in all respects shall be interpreted, construed and governed by and in
accordance with, the laws of the State of Florida. The parties hereto agree
that the state or federal courts in the State of Florida shall have personal
jurisdiction over them with respect to, and shall be the exclusive forum for
the resolution of, any matter or controversy arising from or with respect to
Sections 5 and 6 of this Agreement.
12. Headings. The section and subsection headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
13. Notices. Unless otherwise agreed to in writing by the Parties
hereto, all communications provided for hereunder shall be in writing and shall
be deemed to be given when delivered if delivered in person or by telecopy or
five (5) business days after being sent by first-class mail, registered or
certified, return receipt requested, with proper postage prepaid, addressed to
the respective addresses last given by each party to the other.
14. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
15. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto with respect to the subject matter hereof.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
17. Gender Neutrality. The terms "he," "his," "him," and
"himself," where used in this Agreement, shall refer to both the masculine and
feminine genders, as may be appropriate.
18. Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
a. "Accrued Compensation" shall mean any earned, accrued but
unpaid compensation, as of the Termination Date. Accrued Compensation may
include, as appropriate, (i) base salary, (ii) reimbursement for reasonable and
necessary expenses incurred by the Employee on behalf of the Company during the
period ending on the Termination Date, or (iii) bonuses and incentive
compensation, if any.
b. "Base Amount" shall mean the Employee's annual base salary at
the rate in effect on the Termination Date. It may also include amounts of his
base salary that are deferred under the qualified and non-qualified employee
benefit plans of the Company, if those amounts are accrued and payable under
the terms of those benefit plans. Nothing in this Agreement is intended to
modify or amend those plans.
9
<PAGE> 10
c. "Business" shall mean the development, marketing or
implementation of core retail banking software directly or through a software
service bureau to the banking and financial industry, and any other related
business which the Company or any of its affiliates is engaged in as of the
Employee's last date of employment.
d. "Bylaws" shall mean the Amended and Restated Bylaws of the
Company, as amended, supplemented or otherwise modified from time to time.
e. The termination of the Employee's employment shall be for
"Cause" if it is the result of:
(i) the commission or omission of an act by the Employee
of a willful or negligent act which causes harm to
the Company;
(ii) the conviction of the Employee for the commission or
perpetration by the Employee of any felony or any
act of fraud;
(iii) the failure of the Employee to devote his full time
and attention to the business as provided in Section
1; or
(iv) the failure of the Employee to perform his duties
hereunder in a manner satisfactory to the [insert
title of officer to whom he reports], as determined
in his or her sole discretion; provided, however,
that the Employee shall have 30 days to cure such
failure after receiving notice from the Company. The
Company shall be obligated to provide only one
notice to Employee pursuant to this Section 18
(e)(iv). Thereafter, the Company may terminate the
Employee, without the Employee having a right to
cure, if the Employee fails to perform the duties in
a manner satisfactory to the CEO and President, as
determined in their sole discretion.
f. "Competing Business" shall mean any business which engages in
the development, marketing or implementation of core retail banking software
(the "Product"), directly or through a software service bureau to the banking
or financial industry in the Territory.
g. "Confidential Information" shall mean any non-public
information of a competitively sensitive or personal nature, other than Trade
Secrets, acquired by the Employee, directly or indirectly, in connection with
the Employee's employment (including his employment with the Company prior to
the date of this Agreement), including (without limitation) oral and written
information concerning the Company or its affiliates relating to financial
position and results of operations (revenues, margins, assets, net income,
etc.), annual and long-range business plans, marketing plans and methods,
account invoices, oral or written customer information, and personnel
information. Confidential Information also includes information recorded in
manuals, memoranda, projections, minutes, plans, computer programs, and
records, whether or not legended or otherwise identified by the Company and its
affiliates as Confidential Information, as well as information which is the
subject of meetings and discussions and not so recorded; provided, however,
that Confidential Information shall not include information that is generally
10
<PAGE> 11
available to the public, other than as a result of disclosure, directly or
indirectly, by the Employee, or was available to the Employee on a
non-confidential basis prior to its disclosure to the Employee.
h. "Effective Date" shall mean the date set forth in the
recitals.
i. "Notice of Termination" shall mean a written notice of
termination from the Company or the Employee which specifies an effective date
of termination, indicates the specific termination provision in this Agreement
relied upon, and sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated.
j. "Plan" shall mean the 1995 Phoenix International Ltd., Inc.
Employee Stock Option Plan adopted by the Board of Directors on October 21,
1995.
k. "Stockholders Agreement" shall mean the Amended and Restated
Stockholders Agreement, dated August 31, 1995, by and among the Company and the
stockholders named therein, as amended, supplemented or otherwise modified from
time to time.
l. "Successors and Assigns" shall mean a corporation or other
entity acquiring all or substantially all the assets and business of the
Company (including this Agreement), whether by operation of law or otherwise.
m. "Termination Date" shall mean, in the case of the Employee's
death, his date of death, and in all other cases, the date specified in the
Notice of Termination.
n. "Territory" shall mean the entire United States of America,
and any other country in which the Employee performed any of his job duties on
behalf of the Company, including but not limited to contacting by telephone or
correspondence customers or prospective customers within that country, during
the last two years of his employment with the Company.
o. "Trade Secrets" shall mean information or data of or about
the Company or any affiliated entity, including, but not limited to, technical
or nontechnical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data, financial plans,
products plans, or lists of actual or potential customers, clients,
distributors, or licensees, that: (i) derive economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from their disclosure or use; and (ii) are the subject of efforts that are
reasonable under the circumstances to maintain their secrecy. To the extent
that the foregoing definition is inconsistent with a definition of "trade
secret" mandated under applicable law, the latter definition shall govern for
purposes of interpreting Employee's obligations under this Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed, and the Employee has signed and sealed this Agreement, effective as
of the date first above written.
PHOENIX INTERNATIONAL LTD., INC.
By:
---------------------------------
Name:
Title:
EMPLOYEE
-------------------------------------
12
<PAGE> 13
EMPLOYMENT AGREEMENT
BY AND BETWEEN
PHOENIX INTERNATIONAL LTD., INC.
AND
DATED:
<PAGE> 14
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Employment............................................................................................. 1
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2. Term................................................................................................... 1
----
3. Compensation and Benefits.............................................................................. 1
-------------------------
4. Termination............................................................................................ 2
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5. Rights to Work Product................................................................................. 3
----------------------
6. Notice................................................................................................. 6
------
7. Modification and Waiver................................................................................ 7
-----------------------
8. Arbitration............................................................................................ 7
-----------
9. Governing Law.......................................................................................... 9
-------------
10. Headings............................................................................................... 9
--------
11. Notices................................................................................................ 9
-------
12. Severability........................................................................................... 9
------------
13. Entire Agreement....................................................................................... 9
----------------
14. Counterparts........................................................................................... 9
------------
15. Definitions............................................................................................ 9
-----------
</TABLE>
<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT 10.51
DISASTER RECOVERY SERVICES MARKETING AGREEMENT
THIS AGREEMENT, dated as of the 15th day of December, 1998, between
Phoenix International Ltd., Inc., a corporation organized under the laws of the
State of Florida, 500 International Parkway, Heathrow, Florida ("Phoenix") and
SunGard Recovery Services Inc., 1285 Drummers Lane, Wayne, PA 19087, a
corporation organized under the laws of the Commonwealth of Pennsylvania
("SRS").
BACKGROUND
Phoenix is a recognized supplier in banking software. SRS is a
recognized provider of disaster recovery, communications recovery and
contingency planning services and software ("DR Services"). The parties desire
to provide to each other assistance and support in the marketing and support of
disaster recovery-related services to users of banking software produced by
Phoenix, all on the terms and conditions set forth in this Agreement.
Phoenix acknowledges that SRS is a subsidiary of SunGard Data Systems
Inc. ("SDS"), and that SDS, through its other subsidiaries, engages in the
following business areas:
(a) Trust and investment accounting, portfolio management and
administration, securities trading, custody and employee benefit plan systems
for financial institutions, stockbrokers and corporations; mutual fund, stock
and bond accounting systems for mutual funds, transfer agents and corporations;
accounting systems for nonprofit organizations.
(b) Trading, risk management and accounting systems for
derivative instruments, securities and foreign exchange for international
financial institutions, brokerage firms and corporations.
(c) Portfolio management and securities trading and accounting
systems for financial institutions, broker-dealers, insurance companies,
governments and corporation.
INTENDING TO BE LEGALLY BOUND, and in consideration of the foregoing
and the mutual covenants and agreements stated below, Phoenix and SRS agree as
follows:
1. CURRENT PHOENIX DISASTER RECOVERY SERVICES AND CUSTOMERS.
(a) Phoenix is currently engaged in the provision of certain DR
Services to licensees of its software pursuant to Disaster Recovery Services
Agreements substantially in the form attached hereto as Exhibit "A." Phoenix no
longer desires to provide such DR Services and SRS is willing to provide the DR
Services as specified herein. Phoenix shall provide SRS with a list of its
current customers for DR Services ("Current Customers"), along with the terms
of each Current Customer's agreement
<PAGE> 2
(b) for DR Services with Phoenix, including customer address and
contact name, fees (annual subscription and other) and term. Phoenix will
introduce SRS to each of its Current Customers and recommend that they contract
with SRS for DR Services. SRS may market its DR Services to such Current
Customers, and Phoenix shall provide reasonable assistance as requested by SRS
from time-to-time to encourage and assist each Current Customer to transfer its
DR Services from Phoenix to SRS.
(c) SRS shall enter into its standard Recovery Services Agreement
substantially in the form attached hereto as Exhibit "B" ("RSA") with each
Current Customer who chooses to contract for DR Services with SRS. Such RSA's
shall provide for DR Services for configurations at least equal to those
provided by Phoenix and shall have an initial term and subscription fee which
are equivalent to those in each Current Customer's agreement with Phoenix, if
any. Phoenix will release from their contracts and terminate such contracts for
all Current Customers who contract with SRS. SRS shall be solely responsible
for negotiating and executing the RSA's with the Current Customers and shall
not be obligated to enter into an RSA with terms and conditions different from
those specified in Exhibit "B."
(d) During the initial and any renewal term of each RSA with a
Current Customer, Phoenix shall provide, at no charge to SRS, reasonable
database and application support as required in support of SRS' provision of
testing and recovery DR Services to such customers.
2. COMMISSIONS TO PHOENIX. With respect to Current Customers who execute
an RSA with SRS, Phoenix shall not be entitled to any royalty, commission or
other fees unless and until the Monthly Run Rate (as defined below) of all
Current Customer RSA's signed within 180 days of the Effective Date of this
Agreement ("Conversion Period") exceeds $***. At the end of the Conversion
Period, SRS shall measure the Monthly Run Rate of all Current Customer RSA's
and shall pay Phoenix *** percent (***%) of the amount by which the total
Monthly Run Rate exceeds $***. Such commissions shall be paid within thirty
(30) days after the end of the Conversion Period. If the total Current Customer
RSA's is less than *** at the end of the Conversion Period or the Monthly Run
Rate of the Current Customer RSA's is less than $***, the amount of commissions
payable to Phoenix for future referrals as further described below shall be as
follows:
CUSTOMERS PERCENTAGE
*** ***
*** ***
*** ***
*** ***
- ------------------------
*** Denotes information that has been omitted from this Exhibit pursuant to a
confidential treatment request filed with the Commission.
2
<PAGE> 3
"Monthly Run Rate" shall consist of the monthly subscription fee invoiced under
the RSA and shall not include any fees for block time, disaster declaration,
usage, testing or fees for specifically purchased computer hardware or special
services.
3. FUTURE BUSINESS. Provided that SRS is not in breach of any RSA with
any Current Customer, Phoenix shall, during the term of this Agreement, provide
SRS with the names, addresses and contact information for each of its
customers, and recommended SRS for DR Services ("Leads"). SRS shall register
any such Lead in accordance with its lead registration process, which includes
verifying that such Lead is not a current subscriber or active prospect of SRS.
SRS shall inform Phoenix within 48 hours of receipt of any Lead from Phoenix as
to whether the Lead can be registered. SRS shall use commercially reasonable
efforts to enter into RSA's with the Leads; provided, however, SRS shall not be
required to enter into RSA's with any international customers of Phoenix unless
in SRS' sole discretion SRS believes it can service such customers. Nothing
herein shall be construed to create an exclusive arrangement between Phoenix
and SRS.
If any Lead registered in accordance with SRS' then current registration
procedure executes an RSA with a commencement date which occurs during the term
of this Agreement, SRS shall pay to Phoenix a commission equal to
*** percent (***%) of the net committed revenue
under the particular RSA for DR Services applicable to platforms which are then
running Phoenix software. "Net committed revenue" under a RSA shall mean the
net subscription fees under the RSA excluding platforms and peripherals not
directly associated with the Phoenix software application, all upgrade fees,
disaster declaration and usage fees, equipment acquisition fees, block time and
testing fees or any fees for special services. No commissions will be paid in
connection with any RSA executed by the Lead more than twelve (12) months after
initial referral hereunder, or in connection with any RSA with entities who
then are active prospects of SRS or customers of SRS or who were registered
with SRS by a third party. SRS will make commission payments quarterly.
Commission payments shall be accompanied by an accounting of the calculation of
such fees.
4. CONFIDENTIALITY. The terms and conditions of the Mutual Non-Disclosure
Agreement attached hereto and Exhibit C are hereby incorporated by reference
and shall be a part of this Agreement.
5. DURATION AND RENEWAL; TERM CONCURRENT WITH PHOENIX RSA. This Agreement
is effective as of December 15, 1998 ("Effective Date"), and shall have an
initial term of five (5) years, unless otherwise terminated as set forth
herein. Thereafter, this Agreement shall renew from year to year for successive
one-year renewal terms unless either party shall give the other written notice
of nonrenewal not less than ninety (90) days prior to the anniversary date.
Either party may sooner terminate this Agreement upon notice to the other party
if (a) the other party is bankrupt or insolvent, or (b) the other party has
failed to perform any material obligation under this Agreement, and such
failure has continued for more than 30 days after written notice to such party
of such failure. Concurrent with the execution of this Agreement, SRS and
Phoenix have
- ----------------------------
*** Denotes information that has been omitted from this Exhibit pursuant to a
confidential treatment request filed with the Commission.
3
<PAGE> 4
executed a Recovery Services Agreement whereby SRS is providing DR Services to
Phoenix for Phoenix's Heathrow, Florida location ("Phoenix RSA"). This
Agreement shall immediately terminate upon the expiration or termination of the
Phoenix RSA.
6. LIABILITY AND INDEMNIFICATION. Each party ("liable party") shall be
fully liable to the other party for any direct damages caused by any breach of
contract, negligence or willful misconduct of the liable party (or any of its
employees or agents) in connection with any matter related to this Agreement.
During the term of this Agreement and thereafter, each party will indemnify and
hold harmless the other party and its affiliates, and their officers,
directors, employees and agents, from and against any and all demands, claims,
actions, proceedings, orders, awards, decrees, judgments, debts, liabilities,
obligations, losses, damages, deficiencies, settlements, assessments, charges,
costs, penalties and expenses (including reasonable attorneys' fees and court
costs) (collectively, "Damages") directly or indirectly caused by, arising out
of or in connection with the breach of contract, negligence or intentional
misconduct of the liable party or its affiliates, employees or agents. In
addition, Phoenix shall indemnify and hold harmless SRS and its affiliates,
officers, directors and agents from and against any Damages arising out of or
in connection with Phoenix's breach of contract, negligence or willful
misconduct with respect to any recovery services agreement with a Current
Customer. SRS shall indemnify and hold harmless Phoenix and its affiliates,
officers, directors and agents from and against any Damages arising out of or
in connection with SRS' breach of contract, negligence or willful misconduct
with respect to any RSA with a Current Customer.
7. DISCLAIMERS AND LIMITATIONS. EXCEPT AS SET FORTH HEREIN, NEITHER PARTY
MAKES ANY WARRANTIES OR REPRESENTATIONS OF ANY NATURE WITH RESPECT TO ITS
OBLIGATIONS HEREUNDER, THE DR SERVICES, ANY OTHER SERVICES PROVIDED HEREUNDER,
OR ANY OTHER MATTER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.
FURTHERMORE, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY, ANY
CUSTOMERS OR OTHER PERSONS FOR DAMAGES MEASURED BY LOST REVENUES, LOST PROFITS,
LOST BUSINESS OR BUSINESS EXPECTANCY, OR FOR ANY OTHER INDIRECT, INCIDENTAL,
SPECIAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES, ARISING OUT OF OR
RELATED TO THIS AGREEMENT, WHETHER OR NOT SUCH PARTY COULD HAVE FORESEEN SUCH
LOSS OR WAS ADVISED BY THE OTHER PARTY OF THE POSSIBILITY OF SUCH LOSS.
8. PRESS RELEASES AND PUBLICITY. Neither party shall issue any press
release or make any public announcements regarding the matters contained in
this Agreement without the prior written consent and approval of the other,
subject to applicable laws and regulations, including, but not limited to,
securities laws and regulations.
9. WARRANTIES. SRS warrants that it has the facilities, personnel and
experience necessary to provide the DR Services and to fulfill its obligations
under each RSA with a Current Customer. SRS agrees to perform its obligations
under any RSA in accordance with its terms. If SRS materially fails to perform
its obligations in accordance with any RSA with a Current Customer and such
failure is not substantially cured within the cure period, at the request of
Phoenix, SRS shall assign such RSA to
4
<PAGE> 5
Phoenix for performance. Upon any such assignment, Phoenix shall be entitled to
receive all fees under such assigned RSA's. Phoenix shall indemnify SRS for
Phoenix's breach of contract, negligence or willful misconduct with respect to
any assigned RSA.
Phoenix will not make any oral or written warranties or representations
regarding the DR Services or any other SRS products or services. SRS will not
make any oral or written warranties or representations regarding any Phoenix
products or services. Each party will conduct all of its activities under its
own name and will not use the other party's trademarks or trade names except as
expressly authorized by the other party.
10. FORCE MAJEURE. Neither party shall be liable for, nor shall either
party be considered in breach of this Agreement due to, any failure to perform
its obligations under this Agreement as a result of a cause beyond its control,
including any military, civil or regulatory authority, change in any law or
regulation, disruption or outage of communications, power or other utility,
failure to perform by any supplier or other third party, or other cause which
could not have been prevented with reasonable care.
11. GENERAL. Notices and other communications under this Agreement will be
in writing and will be deemed to have been duly given if and when (a) delivered
personally or by a nationally-recognized overnight courier service, (b)
transmitted by facsimile, or (c) mailed by first-class certified air mail,
return receipt requested, postage prepaid, to the parties at their addresses
stated above, to the attention of John Winstanley, Senior Vice President -
Client Services (with respect to notices to Phoenix) and William J. Flounders,
Senior Vice President and Chief Financial Officer (with respect to notices to
SRS).
The relationship between Phoenix and SRS will be that of independent
contractors, and no provision of this Agreement will be construed to constitute
SRS as a partner, joint venturer or agent of Phoenix. Neither party will have
any authority to bind the other party in any manner, and neither party will be
liable in any manner for the debts and liabilities of the other party. Neither
party will assign any of its rights or obligations under this Agreement to any
other person, whether by operation of law or otherwise, without the prior
written consent of the other party.
If any of the provisions of this Agreement are unenforceable, illegal
or invalid for any reason, the remaining provisions of this Agreement will be
unimpaired and will be enforceable without regard thereto, and the
unenforceable, illegal or invalid provisions will be replaced by mutually
acceptable provisions. This Agreement is made under, and will be construed and
enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without
giving effect to principles of conflicts of law.
This Agreement, including any Schedules or Exhibits hereto, states the
entire and exclusive agreement between the parties with respect to the subject
matter hereof. This Agreement will not be modified except in a writing signed
by duly authorized representatives of each of the parties. For the purposes of
this Agreement, "person" means any individual, sole proprietorship, joint
venture, partnership, corporation, association, trust, estate, governmental
agency, regulatory authority, or any other entity, and "including" means
"including but not limited to."
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereunto set their respective hands
and seals, as of the date and year first above written.
SUNGARD RECOVERY SERVICES, INC. PHOENIX INTERNATIONAL LTD., INC.
By: /s/ Robert F. Powell By: /s/ Raju M. Shivdasani
-------------------------------- ------------------------------
Name: Robert F. Powell Name: Raju M. Shivdasani
------------------------------- ----------------------------
Title: SENIOR VICE PRESIDENT Title: President & C.O.O.
- --------------------------- --------------------------
12/24/98
6
<PAGE> 1
ANNUAL REPORT - FINANCIAL STATEMENTS
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Eleven months Fiscal year
Year ended Year ended Year ended ended ended
December 31, December 31, December 31, December 31, January 31,
1998 1997 1996 1995(1) 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
License fees and other ....................... $16,034,499 $12,664,491 $ 6,827,699 $3,467,547 $ 57,776
Implementation, customer and software support
and other service fees .................. 9,903,709 5,178,543 3,577,848 1,556,164 369,711
----------------------------------------------------------------------------
Total revenues .................................... 25,938,208 17,843,034 10,405,547 5,023,711 427,487
Expenses:
Cost of license fees and other ............... 1,693,769 1,594,711 674,037 375,783 --
Cost of implementation, customer
and software support and other service fees 6,356,617 3,886,878 2,272,710 1,246,886 637,427
Sales and marketing .......................... 4,440,521 3,264,055 1,377,353 983,290 358,948
General and administrative ................... 4,561,586 2,743,100 1,822,871 1,058,190 981,930
Product development .......................... 6,869,311 3,274,238 1,760,691 654,797 1,362,780
----------------------------------------------------------------------------
Total expenses .................................... 23,921,804 14,762,982 7,907,662 4,318,946 3,341,085
Other income (expense):
Interest income .............................. 1,698,308 799,676 223,548 121,815 26,610
Interest expense ............................. (57,102) (52,376) (19,231) (12,060) (19,366)
Other income (expense) ....................... 82,407 133,656 (2,242) (4,252) 75,989
----------------------------------------------------------------------------
Income (loss) before income taxes ................. 3,740,017 3,961,008 2,699,960 810,268 (2,830,365)
Income tax expense ................................ 1,309,006 920,492 481,666 255,999 --
----------------------------------------------------------------------------
Net income (loss) ................................. $ 2,431,011 $ 3,040,516 $ 2,218,294 $ 554,269 $(2,830,365)
============================================================================
Net income (loss) per share(2) - basic ............ $ 0.29 $ 0.45 $ 0.43 $ 0.13 $ (0.81)
============================================================================
Net income (loss) per share(2) - diluted .......... $ 0.27 $ 0.41 $ 0.40 $ 0.12 $ (0.81)
============================================================================
Weighted average shares outstanding(2) - basic .... 8,378,784 6,698,317 5,110,173 4,394,276 3,495,587
============================================================================
Weighted average shares outstanding(2) - diluted .. 8,865,782 7,329,383 5,572,680 4,543,877 3,495,587
============================================================================
OTHER DATA
Total product development expenditures(3) ......... $11,705,993 $ 5,132,271 $ 2,966,515 $1,788,172 $ 1,455,781
Total personnel(4) ................................ 368 193 124 87 48
Implemented customers(5) .......................... 64 39 27 12 2
Backlog(6) ........................................ $35,900,000 $21,200,000 $ 6,800,000 $7,300,000 $ 3,100,000
<CAPTION>
At
-------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, January 31,
1998 1997 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital (deficit) .......... $24,090,146 $27,488,029 $ 6,864,961 $(2,263,338) $(2,156,814)
Total assets ....................... 59,502,573 52,157,495 12,083,167 3,228,289 1,726,511
Long-term obligations .............. 357,299 595,821 190,000 -- --
Retained earnings (deficit) ........ 4,297,722 1,866,711 (1,070,944) (3,289,238) (3,843,507)
Total shareholders' equity (deficit) 50,811,992 45,835,131 9,584,017 (568,102) (1,619,412)
</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.
<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.
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 were recorded in accordance with the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 91-1, Software Revenue
Recognition ("SOP 91-1"), through December 31, 1997. Fees for the Company's
software products are charged separately from fees for the Company's services
and are recognized upon delivery, when no significant vendor obligations remain
and collection of the resulting receivables is deemed probable. Revenues for
implementation, conversion, installation, training, interface and consulting
services are recognized when the services are performed. Service revenues for
ongoing customer and software support and product updates and disaster recovery
services provide recurring revenues as they are recognized ratably over each
year of the license agreement, the term of which is typically five years.
In October 1997 the AICPA issued Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), which was amended by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions ("SOP 98-9"), which supersedes SOP 91-1 and was adopted by the
Company effective January 1, 1998. The Company has applied SOP 97-2 to all
contracts signed during 1998. While some principles remain the same, there are
several key differences between the two pronouncements, including accounting for
multiple element arrangements. Management believes that the Company's accounting
for its software revenue is in compliance with SOP 97-2, as amended.
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
commercial banks and savings institutions with asset sizes ranging from $100
million to $2 billion and will continue to expand its presence in the
international market by focusing its marketing efforts on retail-oriented banks
with up to 300 branches and/or one million accounts ("Tier 2 Banks"). 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 in the United States. 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 the composition of revenue and expenses will vary depending on
whether a sale was made directly by the Company or by a value
2
<PAGE> 3
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.
The Company expects increased competition from many sources and intends to
invest significantly in product development and other aspects of its business to
stay competitive. Management believes that the banking software market for
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, and 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, year
2000 compliance issues; and competitive 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
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees and other ...................... 61.8% 71.0% 65.6%
Implementation, customer and software support
and other service fees ................... 38.2% 29.0% 34.4%
--------------------------------
Total revenues .......................... 100.0% 100.0% 100.0%
Expenses:
Cost of license fees and other .............. 6.5% 8.9% 6.5%
Cost of implementation, customer and software
support and other service fees .......... 24.5% 21.8% 21.8%
Sales and marketing ......................... 17.1% 18.3% 13.2%
General and administrative .................. 17.6% 15.4% 17.5%
Product development ......................... 26.5% 18.3% 17.0%
--------------------------------
Total expenses .......................... 92.2% 82.7% 76.0%
Other income (expense):
Interest income .................................. 6.5% 4.5% 2.1%
Interest expense ............................ (0.2%) (0.3%) (0.2%)
Other income (expense) ...................... 0.3% 0.7% --
--------------------------------
Income before income taxes ....................... 14.4% 22.2% 25.9%
Income tax expense ............................... 5.0% 5.2% 4.6%
--------------------------------
Net income ....................................... 9.4% 17.0% 21.3%
================================
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues increased 45.4% to $25.9 million in the year ended
December 31, 1998 from $17.8 million in the year ended December 31, 1997.
International sales accounted for approximately 63.0% of total revenues in the
year ended December 31, 1998, an increase from 53.0% from 1997. License fees and
other revenues increased 26.6%, rising from $12.7 million to $16.0 million due
to increased prices for licenses of the Phoenix System and an expanded product
line. Implementation, customer and software support and other service fees
increased 91.2% to $9.9 million in the year ended December 31, 1998 from $5.2
million in the year ended December 31, 1997. Implementation, customer and
software support and other service fees increased due to increased numbers of
installations and customers under support agreements.
Expenses. The Company's operating expenses increased 62.0% to $23.9 million in
the year ended December 31, 1998 from $14.8 million in the year ended December
31, 1997.
4
<PAGE> 5
Cost of license fees and other fees increased 6.2% to $1.7 million in the year
ended December 31, 1998 from $1.6 million in the year ended December 31, 1997.
These costs increased in the 1998 period mainly as a result of higher
amortization of capitalized software development costs.
Cost of implementation, customer and software support and other service fees
increased 63.5% to $6.4 million in the year ended December 31, 1998 from $3.9
million in the year ended December 31, 1997 as a result of increased staffing
levels required to support increased numbers of installations and customers
under support agreements. 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 36.0% to $4.4 million in the year ended
December 31, 1998 from $3.3 million in the year ended December 31, 1997,
primarily as a result of increased staffing, travel and personnel related costs.
General and administrative expenses increased 66.3% to $4.6 million in the year
ended December 31, 1998 from $2.7 million in the year ended December 31, 1997.
The increase was the result of increased professional service fees, rent,
personnel related costs and bad debt expense.
Product development expenses increased 109.8% to $6.9 million in the year ended
December 31, 1998 from $3.3 million in the year ended December 31, 1997. Product
development expenses increased primarily as a result of increased personnel
related costs. Capitalized software development costs increased 156.9% to $4.8
million for the year ended December 31, 1998 from $1.9 million in the year ended
December 31, 1997. The total of product development expenses and capitalized
software development costs ("Total Product Development Expenditures") increased
128.1% to $11.7 million during the year ended December 31, 1998 from $5.1
million during the year ended December 31, 1997. The increase in Total Product
Development Expenditures was primarily attributable to increased staffing to
expand and enhance the Company's product line.
Other Income (Expense). Interest income was $1.7 million and $800,000 for the
years ended December 31, 1998 and 1997, respectively. Interest income increased
in 1998 due to twelve full months of income earned from interest bearing
accounts in 1998, compared to five months in 1997. Interest income is primarily
the result of income earned from the investment of proceeds from the Company's
secondary public offering of common stock in August 1997. Interest expense was
$57,000 and $52,000 in the years ended December 31, 1998 and 1997, respectively.
Other income was $82,000 and $134,000 in the years ended December 31, 1998 and
1997, primarily as a result of fulfilling obligations under an economic
development grant and realizing foreign gains from the operations of two of the
Company's foreign subsidiaries, Phoenix International A.P. Limited and Phoenix
EMEA Limited.
Income Tax Expense. Income tax expense was $1.3 million and $920,000, resulting
in effective rates of 35.0% and 23.2%, in the years ended December 31, 1998 and
1997, respectively. At December 31, 1998, Phoenix had available net operating
loss carryforwards of approximately $6.4 million that expire in years 2009
through 2012 to offset future taxable income for federal income tax purposes. In
addition, Phoenix has available research and development tax credit
carryforwards of $900,000 that expire in years 2008 through 2013. 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
5
<PAGE> 6
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. The Company determined that the deferred tax assets resulting from the
net operating loss and tax credit carryforwards and other tax benefits were more
likely than not to be realized, and reduced the valuation allowance related to
these deferred tax assets to zero in 1997. As a result, the Company's effective
tax rate in 1998 was not similarly reduced in 1998 by the benefit from the
reduction in this valuation allowance. See Note 8 of the Notes to the
Consolidated Financial Statements.
Net Income. Net income decreased 20.0% to $2.4 million in the year ended
December 31, 1998 from $3.0 million in the year ended December 31, 1997. The
decline in net income was primarily the result of decreased operating margins.
COMPARISON OF THE 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 53.0% of total revenues in each
of 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 expanded 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.
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. Excluding nonrecurring acquisition expenses of $274,000 related to the
Phoenix International 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
direct result of increased amortization of capitalized software development
costs and third party software royalties.
Cost of implementation, customer and software support and other services
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.
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 International A.P. Limited, personnel
related costs and other overhead costs.
6
<PAGE> 7
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. 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 Company's secondary public offering of
common stock in August 1997. Interest expense was $52,000 and $19,000 in 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 International A.P.
Limited and Phoenix EMEA Limited.
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 and research and development tax credit carryforwards of
$500,000 that expire in years 2008 and 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 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 determined that the deferred tax assets resulting from the net operating
loss and tax credit carryforwards and other tax benefits are more likely than
not to be realized.
Net Income. Net income increased 37.1% to $3.0 million in the year ended
December 31, 1997 from $2.2 million in December 31, 1996, primarily as a result
of increased revenue. Excluding nonrecurring acquisition expenses of $274,000
related to the acquisition of Phoenix International A.P. Limited, net income for
the year ended December 31, 1997 would have been $3.3 million.
BACKLOG
Backlog, defined as the contract value of executed agreements minus revenue
recognized from these contracts, totaled $35.9 million, $21.2 million and $6.8
million at December 31, 1998, 1997, and 1996, respectively. At December 31, 1998
backlog consisted of $0.8 million for software licenses, $6.6 million for
implementation services, $2.5 million for other professional services and $26.0
million for five-year customer support and disaster recovery service agreements.
The backlog of software license and implementation revenues is expected to be
realized within a period of approximately one year, and the backlog of customer
support service revenue is expected to be realized within a period of
approximately five years.
7
<PAGE> 8
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, 1998, cash and cash equivalents were $3.8 million, short term investments
were $6.0 million and long term investments were $16.5 million. Short and long
term investments consist primarily of U.S. Treasury securities. For the year
ended December 31, 1998, net cash used by operations was $535,000. Investing
activities used cash of $9.9 million, including $4.8 million for capitalized
software costs. Purchases of property and equipment used $3.2 million of cash.
Increases in other assets which include minority investments in other companies
and non-current prepaid royalties used $349,000 of cash. Purchases of long term
investments used $3.4 million of cash and sales of short term investments
provided $1.9 million of cash. Financing activities provided $1.2 million of
cash primarily from the issuance of common stock. Working capital was $24.0
million as of December 31, 1998.
The Company believes its cash balances, investments and cash flow from
operations will be sufficient to meet its working capital, capital expenditure
and software development requirements at least through 1999. Cash flows from
operating activities are dependent on continued advance payments from customers,
and there is no assurance that the Company will continue to receive these
payments from customers or that it will continue to receive these payments in
advance of contract performance 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. These statements are
"forward looking" statements which are subject to risks and uncertainties
discussed below.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 1998, the AICPA issued SOP 98-9. SOP 98-9, which amends Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2,
extends the application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. SOP 98-9 requires the recognition of
revenue using the "residual method" when valuing certain elements of software
agreements when vendor specific objective evidence ("VSOE") does not exist. The
Company has adopted SOP 98-9 in the first quarter of fiscal year 1999.
Management does not expect there to be a material impact from the adoption of
SOP 98-9.
In March 1998, Statement of Position 98-2, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, was issued. SOP 98-2 provides
guidance that requires capitalization of certain costs incurred during an
internal-use software development project. SOP 98-2 is effective as of January
1, 1999 for the Company. Management does not expect there to be a material
impact from the adoption of SOP 98-2.
YEAR 2000 ISSUES
The Company's business and relationships with its customers, marketing agents,
VARs and other parties depend significantly on a number of computer software
programs, internal operating systems and network, telephonic and internet
connections. If any of these software programs, systems or connections are not
able to recognize, store, transmit and properly process dates before, on and
after January 1, 2000 (the "Year 2000 issue"), significant system failures or
errors may result which could have a material adverse effect on the business,
financial condition and results of operations of the affected customers, agents,
other parties and the Company. In an effort to protect against possible Year
2000 problems, Phoenix has examined the Year 2000 issue as it affects three
critical areas of its business operations: (1) the Phoenix System; (2) its
internal operating and accounting systems; and (3) its customers' core
processing systems.
8
<PAGE> 9
Phoenix believes that the Phoenix System already addresses the Year 2000 issue
because it was designed to require a four-digit year to be entered into the date
fields of the program and has always stored and processed information using
four-digit years. The Phoenix System employs sophisticated database and other
technologies provided by recognized companies in the software industry (e.g.,
Sybase, Microsoft and Centura). Many of these industry companies have published
materials indicating their products are Year 2000 compliant and the Company
believes these products are capable of addressing the Year 2000 issue. The
Company has tested the Phoenix System repeatedly using various dates before, on
and after January 1, 2000, including all of the dates established by the Federal
Financial Institutions Examination Council in its April 10, 1998 statement of
guidelines for Year 2000 readiness. Phoenix discovered no Year 2000 problems
during such tests. Phoenix plans to continue testing the Phoenix System
periodically using any additional dates set forth for testing in any future
guidelines established for financial institutions in the United States or by
foreign governmental regulatory agencies. Phoenix has not made any material
modification to the coding for the Phoenix System software and does not
anticipate making any such changes to accommodate the Year 2000 issue.
Phoenix has also reviewed its internal accounting and operating systems in the
United States and currently believes that these programs and systems are
adequately programmed to address the Year 2000 issue or can be modified or
replaced to address the Year 2000 issue without material costs or delays.
Phoenix is currently conducting tests on the third party products or systems
used in its business and at its offices and on the systems used by its marketing
agents, VARs and other third parties. The Company has contacted the providers of
material goods and services used in Phoenix's operations and has received
written assurances from several of these providers that their products and
services are capable of addressing the Year 2000 issue. The Company has not yet
completed a review of the accounting and operating systems of its VARs. Phoenix
currently expects to complete its Year 2000 examination of its internal
accounting and operating systems by the end of March 1999. The Company has not
yet completed a review of the operating systems used in its international
offices in London, England, Wellington, New Zealand, Singapore and Sydney,
Australia and currently expects that this review will not be complete until the
middle of 1999. There can be no assurances, however, that any or all of these
products and services are Year 2000 compliant. However, Phoenix believes that if
any Year 2000 issues are discovered when these international office systems are
examined and tested, the Company will be able to modify or replace these systems
without material costs or delays.
Phoenix believes that if its customers do not successfully address Year 2000
issues in their operations, the Company's operations may be interrupted,
hindered or delayed. This would have a material adverse effect on Phoenix's
business, financial condition and results of operations. Phoenix (with
assistance from some of its customers) has developed a Year 2000 readiness
program that is designed to assist its customers in testing their core
processing systems for Year 2000 problems. Phoenix has begun testing United
States customers and offered others to test their core processing systems at
Phoenix's facilities, using all of the same hardware and other third-party
products employed at their institutions. The customer institution selects the
dates and other information to be tested and Phoenix monitors the performance of
the customer's processing system and reports on any Year 2000 problems
identified. Testing under this program began in November 1998 and is expected to
last between two and three days for each customer institution.
The Company believes that many financial institutions, industry vendors and
suppliers, and other third parties are still analyzing their software and
systems to address Year 2000 issues. It is not possible, therefore, for the
Company to accurately analyze or predict possible "worst-case scenarios" related
to the Year 2000 issue
9
<PAGE> 10
and the potential impact to the Company's business if any of these parties fail
to adequately address the Year 2000 issue in their business operations. The
Company currently believes that the greatest risk to its business from Year 2000
issues will come from its customers and third parties whose systems fail as a
result of the Year 2000 issue. The Company has not developed a contingency plan
for Year 2000 problems experienced by these customers and third parties. It is
impossible to estimate the potential expenses involved or delays which may
result from a large-scale failure of the Company's customer institutions and
third parties to resolve their Year 2000 issues in a timely manner and there can
be no assurance that such expenses, failures or delays will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
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 Section 21E of 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. Actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Among the key risks,
assumptions and factors that may affect operating results, performance and
financial condition are the Company's reliance on significant new customers and
the timing of customer contracts; dependence on its strategic alliances and
marketing relationships; its ability to expand and leverage its sales force and
other distribution channels worldwide; fluctuations in its quarterly results;
ability to continue and manage its growth; Year 2000 risks and concerns;
competition and the other factors discussed herein and 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
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 3,795,962 $13,034,491
Investments, available for sale ............................................. 5,995,640 7,705,000
Accounts receivable, net of allowance for doubtful accounts
of $473,000 and $155,000 at December 31, 1998 and 1997, respectively 8,158,104 4,578,485
Unbilled accounts receivable ................................................ 7,497,682 3,766,322
Deferred tax asset ..................................................... 3,737,198 2,229,000
Prepaid expenses and other current assets ................................... 420,903 592,274
-----------------------------
Total current assets ........................................................ 29,605,489 31,905,572
Long term investments, available for sale ................................... 16,533,770 13,088,014
Property and equipment:
Computer equipment and purchased software .............................. 4,245,907 2,217,366
Furniture, office equipment and leasehold improvements ...................... 2,307,329 1,100,275
-----------------------------
6,553,236 3,317,641
Accumulated depreciation and amortization ................................... (2,224,508) (972,616)
-----------------------------
4,328,728 2,345,025
Capitalized software development costs, net of accumulated amortization of
$2,282,480 and $1,078,749 at December 31, 1998 and 1997, respectively .... 7,155,436 3,522,484
Other assets ................................................................ 1,879,150 1,296,400
-----------------------------
Total assets ................................................................ $59,502,573 $52,157,495
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable ....................................................... $ 599,660 $ 624,924
Accrued expenses ............................................................ 2,124,268 1,810,662
Capital lease, current portion ......................................... 142,051 129,997
Deferred revenue ............................................................ 2,649,364 1,851,960
Total current liabilities ................................................... 5,515,343 4,417,543
Deferred revenue under economic development grant ........................... -- 95,000
Deferred tax liability ...................................................... 2,817,939 1,309,000
Capital lease, long term portion ............................................ 357,299 500,821
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 shares authorized; 8,498,633 and 8,153,127 issued and
outstanding at December 31, 1998 and 1997, respectively ............ 84,986 81,531
Additional paid-in capital .................................................. 46,191,279 43,900,249
Stock subscription receivables .............................................. -- (13,360)
Unrealized gains on investments available for sale ..................... 238,005 --
Retained earnings ...................................................... 4,297,722 1,866,711
-----------------------------
Total shareholders' equity .................................................. 50,811,992 45,835,131
-----------------------------
Total liabilities and shareholders' equity .................................. $59,502,573 $52,157,495
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
License fees and other .................... $16,034,499 $12,664,491 $ 6,827,699
Implementation, customer and software
support and other service fees ........ 9,903,709 5,178,543 3,577,848
-----------------------------------------------
Total revenues ................................. 25,938,208 17,843,034 10,405,547
Expenses:
Costs of license fees and other ........... 1,693,769 1,594,711 674,037
Costs of implementation, customer and
software support and other service fees 6,356,617 3,886,878 2,272,710
Sales and marketing ....................... 4,440,521 3,264,055 1,377,353
General and administrative ................ 4,561,586 2,743,100 1,822,871
Product development ....................... 6,869,311 3,274,238 1,760,691
-----------------------------------------------
Total expenses ................................. 23,921,804 14,762,982 7,907,662
Other income (expense):
Interest income ........................... 1,698,308 799,676 223,548
Interest expense .......................... (57,102) (52,376) (19,231)
Other income (expense) .................... 82,407 133,656 (2,242)
-----------------------------------------------
Income before income taxes ..................... 3,740,017 3,961,008 2,699,960
Income tax expense ............................. 1,309,006 920,492 481,666
-----------------------------------------------
Net income ..................................... $ 2,431,011 $3,040,516 $ 2,218,294
===============================================
Net income per share - basic ................... $ 0.29 $ 0.45 $ 0.43
===============================================
Net income per share - diluted ................. $ 0.27 $ 0.41 $ 0.40
===============================================
Weighted average shares outstanding - basic .... 8,378,784 6,698,317 5,110,173
===============================================
Weighted average shares outstanding - diluted .. 8,865,782 7,329,383 5,572,680
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized
Common Stock Gains on Total
All Classes Additional Stock Investments Retained Shareholders'
----------------------- Paid-In Subscription Available Earnings/ Earnings/
Shares Amount Capital Receivables for Sale (Deficit) (Deficit)
------ ------ ------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,488,495 $ 1,687,002 $ 2,352,658 $(1,318,524) -- $(3,289,238) $ (568,102)
Issuance of shares of Class E
common stock from exercise of
stock options 255,403 183,230 137,940 (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 1,005,000 10,050 6,363,845 -- -- -- 6,373,895
Issuance of common stock from
exercise of stock options 11,210 112 32,057 -- -- -- 32,169
Repurchase of employee stock (1,743) (17) (1,233) -- -- -- (1,250)
Net income -- -- -- -- -- 2,218,294 2,218,294
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 5,758,365 57,583 10,708,061 (110,683) (1,070,944) 9,584,017
Common stock issued in
connection with a public
offering, net of expenses 2,211,000 22,110 31,508,362 -- -- -- 31,530,472
Issuance of common stock from
exercise of stock options 68,622 686 234,915 -- -- -- 235,601
Payment of employee stock
receivable -- -- -- 97,323 -- -- 97,323
Issuance of common stock in
connection with acquisition 115,140 1,152 (1,089) -- -- -- 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 8,153,127 81,531 43,900,249 (13,360) -- 1,866,711 45,835,131
Comprehensive income:
Net income -- -- -- -- -- 2,431,011 2,431,011
Other comprehensive income:
Unrealized appreciation
on certain securities
available for sale (net of
taxes of $128,000) -- -- -- -- 238,005 -- 238,005
Comprehensive income -- -- -- -- -- -- 2,669,016
Issuance of common stock from
exercise of stock options 345,506 3,455 1,331,030 -- -- -- 1,334,485
Payment of employee stock
receivable -- -- -- 13,360 -- -- 13,360
Tax benefit related to
non-qualified and incentive
stock options -- -- 960,000 -- -- -- 960,000
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 8,498,633 $ 84,986 $46,191,279 $ -- $ 238,005 $ 4,297,722 $50,811,992
========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,431,011 $ 3,040,516 $ 2,218,294
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,455,797 1,157,665 594,227
Satisfaction of payable to vendor -- -- (100,000)
Provision for doubtful accounts 347,150 140,000 5,000
Deferred taxes 960,741 530,298 390,769
Revenue under economic development grant (95,000) (95,000) 190,000
Changes in operating assets and liabilities:
Accounts receivable (3,926,769) (4,068,749) (612,043)
Unbilled accounts receivable (3,731,360) (2,578,040) (1,079,962)
Interest receivable, related party -- -- 105,001
Prepaid expenses and other current assets (62,229) (43,895) (374,040)
Accounts payable (25,264) 240,231 120,419
Accrued expenses 313,606 888,622 642,519
Deferred revenue 797,404 849,543 (2,074,976)
-----------------------------------------------
Net cash provided by (used in) operating activities (534,913) 61,191 25,208
INVESTING ACTIVITIES
Sales of investments, available for sale 1,930,450 -- --
Purchases of investments, available for sale (3,428,841) (18,062,189) (2,730,825)
Purchases of property and equipment (3,235,769) (1,352,946) (572,223)
Capitalized software development costs (4,836,683) (1,883,033) (1,205,824)
Increase in other assets (349,150) (1,266,400) (30,000)
-----------------------------------------------
Net cash used in investing activities (9,919,993) (22,564,568) (4,538,872)
FINANCING ACTIVITIES
Capital lease payments (131,468) (96,182) --
Proceeds from short-term debt -- -- 247,031
Payment on short-term debt -- -- (322,234)
Net proceeds from issuance of common stock 1,334,485 31,765,838 6,607,704
Cash payments for stock subscription receivables 13,360 97,323 1,326,121
-----------------------------------------------
Net cash provided by financing activities 1,216,377 31,766,979 7,858,622
Net increase (decrease) in cash and cash equivalents (9,238,529) 9,263,602 3,344,958
Cash and cash equivalents at beginning of period 13,034,491 3,770,889 425,931
-----------------------------------------------
Cash and cash equivalents at end of period $ 3,795,962 $13,034,491 $ 3,770,889
===============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period
for:
Interest $ 54,352 $ 50,597 $ 56,406
===============================================
Income taxes $ 43,727 $ 24,500 $ 481,666
===============================================
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
===============================================
Investment in common stock through cancellation of prepaid
royalties $ 650,000 $ -- $ --
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
the following wholly-owned subsidiaries: Phoenix International A.P. Limited in
New Zealand, Phoenix EMEA Limited in the United Kingdom, Phoenix International
(Australia) Pty. Limited (incorporated in November 1998, with no material
operations in 1998) and Phoenix FSC Inc., a company domiciled in the U.S. Virgin
Islands. All significant intercompany balances and transactions have been
eliminated.
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
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Numerator - net income available
to common shareholders $2,431,011 $3,040,516 $2,218,294
==========================================
Denominator for basic net income per share
- weighted average shares outstanding 8,378,784 6,698,317 5,110,173
Effect of dilutive securities -
employee stock options 486,998 631,066 462,507
------------------------------------------
Denominator for diluted net income per
share - adjusted weighted average shares
outstanding and assumed conversion
of dilutive securities 8,865,782 7,329,383 5,572,680
==========================================
Net income per share - basic $ 0.29 $ 0.45 $ 0.43
==========================================
Net income per share - diluted $ 0.27 $ 0.41 $ 0.40
==========================================
</TABLE>
15
<PAGE> 16
Revenue Recognition
During 1996 and 1997 the Company recognized revenues in accordance with AICPA
Statement of Position 91-1 ("SOP 91-1"), Software Revenue Recognition. During
1998 the Company recognized revenues in accordance with AICPA SOP 97-2, Software
Revenue Recognition, amended by SOP 98-4, Deferral of the Effective Date of SOP
97-2, Software Revenue Recognition. Revenue is derived principally from the
licensing of internally produced software and implementation and support
services. Software license fees revenue is recognized when management has
determined that the software is functional without significant modification for
the customer's purposes, service and other software elements to be delivered in
the future are not essential to the functioning of the software for the
customer's purposes, terms of the software agreement are complete and fees are
fixed and determinable. If a software license agreement contains significant
production, modification or customization, then contract accounting is applied
to the entire agreement. Implementation service revenue is recognized as earned
over the service period. When the Company receives payment in advance of
delivering a product or providing implementation services, revenue recognition
is deferred until earned. Support services are billed in advance, and revenue is
recognized over the related service period.
Cash Equivalents
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
at December 31, 1998 includes $95,000 received from a government municipality
under a job growth incentive economic development agreement. This amount was
earned during 1998, and therefore is no longer restricted.
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 $1,252,066, $525,488 and $255,302
for 1998, 1997 and 1996, respectively. Leasehold improvements are amortized over
the related lease term. Property and equipment includes $787,281 of furniture
purchased under a capital lease, with accumulated depreciation of $196,820 at
December 31, 1998.
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. 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-
16
<PAGE> 17
line method over the estimated useful life of the related product (currently
five years). Capitalized software costs also include purchased software costs of
$761,000 at December 31, 1998, and $311,000 at December 31, 1997. Amortization
of capitalized software development costs for 1998, 1997 and 1996 was
$1,203,731, $632,177 and $338,925, respectively, and is included in costs of
license fees and other.
Advertising Expense
Advertising costs are expensed as incurred. The Company incurred $251,946,
$130,242 and $90,432, in advertising costs during 1998, 1997 and 1996,
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 related interpretations 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.
Recently Issued Accounting Standards
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.
The Company adopted SFAS 130 and has reported comprehensive income for 1998. No
comprehensive income is reported for prior years as there were not any other
components of comprehensive income in addition to net income.
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 is effective for financial statements for periods
beginning after December 15, 1997.
The Company aggregates all operations and locations into one reporting segment.
Allocations of resources are not made based on product lines or service type,
revenues or geographic venues; however, the Company utilizes budget models for
the evaluation, measurement, allocation, and
17
<PAGE> 18
projection of financial information. SFAS 131 requires that segment reporting
must be disclosed if any of the Company's foreign entities are 10% or greater of
the combined reported revenues, profit or loss, or assets test. The Company's
four subsidiaries do not meet this test for 1998. These entities, Phoenix
International A.P. Limited, a company domiciled in New Zealand, Phoenix EMEA
Limited, a company domiciled in the United Kingdom, Phoenix FSC Inc., a company
domiciled in the U.S. Virgin Islands, and Phoenix International (Australia) Pty.
Limited, a company domiciled in Australia, do not provide a distinct product or
service, serve a distinct type of customer or customer class, or use different
methods to distribute products or services than their parent company, Phoenix
International Ltd., Inc., located in the United States. These entities are
located in distinct geographic locations, however, the parent supports all
sales, products and services.
The AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. SOP 98-9, which
amends SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2,
extends the deferral of the application of certain passages of SOP 97-2 through
fiscal years beginning on or before March 15, 1999. SOP 98-9 requires the
recognition of revenue using the "residual method" when valuing certain elements
of software agreements when vendor specific objective evidence ("VSOE") does not
exist. The Company will adopt SOP 98-9 in the first quarter of fiscal year 1999.
Management does not expect there to be a material impact from the adoption of
this SOP.
In March 1998, SOP 98-2, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, was issued. The SOP provides guidance that
requires capitalization of certain costs incurred during an internal-use
software development project. SOP 98-2 is effective as of January 1, 1999 for
the Company. Management does not expect there to be a material impact from the
adoption of SOP 98-2.
Reclassifications
Certain amounts within the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
2. FINANCIAL INSTRUMENTS
Concentrations 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, 1998 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.
18
<PAGE> 19
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 (for which
interest rate risk is not considered material). Investments are classified as
available-for-sale and are carried at market 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 $1,382,926, $701,617 and $320,526 in 1998,
1997 and 1996, respectively. Future minimum lease payments under capital leases
and aggregate noncancellable operating leases with terms of one year or more
consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
Years ending December 31,
1999 $180,552 $ 1,619,612
2000 180,552 1,714,834
2001 180,552 1,676,647
2002 30,092 1,690,199
2003 - 1,718,688
Thereafter - 5,391,577
-------- -----------
571,748 $13,811,557
===========
Amounts representing interest 72,398
--------
Net minimum lease payments $499,350
========
</TABLE>
4. ACQUISITION
In May 1997, the Company completed the acquisition 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 115,140 shares of Phoenix common stock. Priority Solutions was
merged into Phoenix's wholly-owned subsidiary, Phoenix International A.P.
Limited, a company domiciled in New Zealand ("Phoenix International A.P.
Limited"). Phoenix International A.P. Limited is a provider of international
banking software products and services.
19
<PAGE> 20
The Phoenix International 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 International A.P. Limited's
ongoing operations in the Company's financial statements, effective April 1,
1997.
5. CAPITALIZATION
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) effective May 6, 1996, and the
Company amended its articles of incorporation to reduce the par value of each of
the shares 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.
On July 1, 1996, the Company's registration statement relating to its initial
public offering of 1,005,000 shares of common stock was declared effective by
the Securities and Exchange Commission. On July 8, 1996, the Company completed
the initial public offering, issued the common stock and received net proceeds
of approximately $6.4 million (after deducting underwriting discounts of $0.6
million and offering costs of $1.1 million). On July 8, 1996, the Company
received approximately $1,319,000 plus accrued interest of approximately
$159,000 for payment of stock subscriptions receivable due from its Chief
Executive Officer out of proceeds of shares sold by the Chief Executive Officer
in the initial public offering.
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 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.
In August 1997, the Company completed a secondary public offering of its common
stock. The Company issued 2,211,000 shares of common stock, including the
underwriter's over-allotment option, at a price of $15.67 per share. The
proceeds to the Company from the offering, net of underwriting discounts and
offering expenses, were approximately $31.5 million.
In May 1998, the Company effected a three-for-two stock split in the form of a
50% stock dividend, distributed on May 18, 1998 to shareholders of record on May
11, 1998. Accordingly, all share and per share amounts have been adjusted to
reflect this 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.
20
<PAGE> 21
6. 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
non-qualified options to purchase shares of the Company's common stock. Stock
options are generally 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, 1998 are the March 1995 Plan,
the October 1995 Plan and the 1996 Director Plan. Up to 780,000 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 further shares under
the March 1995 Plan. The October 1995 Plan authorizes the grant of options to
purchase up to 1,050,000 shares of the Company's Common Stock and the 1996
Director Plan authorizes the grant of options to purchase up to 225,000 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.
At December 31, 1998, the Company had 63,927, 107,817 and 30,500 shares
available for future grant under the March 1995 Plan, October 1995 Plan and 1996
Director Plan, respectively. The Company has reserved 1,711,916 shares of common
stock for issuance upon exercise of options and warrants to purchase common
stock.
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 1998, 1997 and
1996, respectively: risk-free interest rates of 5.18%, 6.24% and 6.33%; no
dividend yield; weighted average volatility factors of the expected market price
of the Company's common stock of 0.54, 0.49 and 0.13; and a weighted average
expected life of the option of 2.80, 3.97 and 3.50 years. The weighted average
fair value of options granted during the years ended December 31, 1998, 1997 and
1996 were $5.21, $8.86 and $2.94, 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>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $1,202,673 $1,929,129 $1,815,606
Pro forma net income per share - basic $ 0.14 $ 0.29 $ 0.36
Pro forma net income per share - diluted $ 0.14 $ 0.27 $ 0.33
</TABLE>
21
<PAGE> 22
A summary of the Company's option activity and related information follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at December 31, 1995 911,286 $ 2.45
Granted 388,397 $ 7.49
Exercised (266,609) $ 1.33
Cancelled (46,044) $ 2.98
---------
Outstanding at December 31, 1996 987,030 $ 4.71
Granted 408,450 $13.97
Exercised (68,622) $ 3.47
Cancelled (11,343) $ 4.10
---------
Outstanding at December 31, 1997 1,315,515 $ 7.66
Granted 639,457 $14.04
Exercised (345,506) $ 4.15
Cancelled (128,294) $ 9.65
---------
Outstanding at December 31, 1998 1,481,172 $11.06
=========
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 range from $2.86
to $19.67 per share. There were 774,383 options exercisable at a weighted
average exercise price of $6.72 at December 31, 1997, and 439,026 options
exercisable at December 31, 1996 at a weighted average exercise price of $6.02.
The following table sets forth by groups of option exercise price ranges, the
number of shares, weighted average exercise price, and weighted average
remaining contractual life of options outstanding, and the number and weighted
average exercise price of options currently exercisable as of December 31, 1998.
<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>
$ 2.86 - $ 8.83 508,647 6.04 $ 5.33 385,195 $ 5.09
$ 9.83 - $14.08 730,275 8.33 $12.79 293,149 $13.35
$15.00 - $19.67 242,250 7.03 $17.87 111,750 $18.23
--------------- --------- ---- ------ ------- ------
$ 2.86 - $19.67 1,481,172 7.33 $11.06 790,094 $10.02
</TABLE>
The Company issued warrants to purchase up to 28,500 shares of common stock at
an exercise price of $9.60 per share to the underwriters of its 1996 initial
public offering pursuant to the underwriting agreement. The warrants are
exercisable from July 1997 to July 2001.
22
<PAGE> 23
7. RELATED PARTY TRANSACTIONS AND OTHER LONG-TERM ASSETS
In March 1997, the Company entered into a Stock Purchase Agreement with Dyad
Corporation ("Dyad") whereby the Company purchased 4% of the equity in Dyad.
Pursuant to the Company's agreement with Dyad, the Company exercised an option
in September 1997 to increase its equity interest in Dyad to 8%. The total
amount of this investment was $850,000 at December 31, 1997. 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 of $650,000 which were classified as prepaid
royalties against future sales of Dyad products. The parties entered into an
agreement as of September 30, 1998, to convert such prepaid license fees into
shares of Dyad Common stock which increased the Company's equity interest in
Dyad to 11%. The total investment in Dyad Corporation was $1.5 million as of
December 31, 1998. Dyad is developing automated loan, mortgage and financial
services delivery products. The Company's Chief Executive Officer is a director
of Dyad and another shareholder and director of the Company is also a director
and shareholder of Dyad.
In December 1998, the Company entered into a service agreement and a marketing
agent agreement with Towne Services, Inc. ("Towne"). The marketing agent
agreement allows the Company exclusive marketing and distribution rights, in
various regions of the world, of a Towne software product. The agreement is
effective for fiscal 1999 and the Company will pay $485,000 for this right. The
Company's Chief Executive Officer is also a director of Towne and another
shareholder and director of the Company is a shareholder and director of Towne.
In September 1997, the Company entered into a software license and cooperative
marketing agreement with Servers On-Line ("Servers"). The company recognized
$181,500 in revenues during 1998 from Servers. In addition, in May 1998, the
Company entered into a stock purchase agreement with Servers whereby the Company
paid $300,000 for an interest representing 19.7% of the common equity of Servers
at December 31, 1998. This transaction has been recorded under the "cost" method
of investments and is included within other assets for 1998.
In July 1996, following the Company's initial public offering, the Company
repaid a promissory note of $35,203 and accrued interest to the Chief Executive
Officer of the Company and the Company received payment of stock subscription
receivables of $1,318,524 related to the issuance of 206,222 shares of Class E
non-voting common stock and accrued interest out of proceeds of shares sold by
the Chief Executive Officer in the initial public offering.
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 $896,250. Discounts of $41,250, $0 and $450,000 were used in
1998, 1997 and 1996. License fee revenue of $13,750, $480,185 and $744,900, net
of discounts used, was recorded in 1998, 1997 and 1996, respectively, under
license agreements with shareholder banks. Implementation support revenues, and
other services of $121,875, $635,879 and $1,060,000 recorded in 1998, 1997 and
1996, respectively, were from shareholder banks.
23
<PAGE> 24
8. INCOME TAXES
Significant components of the provision for income taxes are as follows for the
years ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current foreign tax expense $ 348,265 $390,194 $ 90,897
Deferred foreign tax expense (benefit) - - 390,769
Deferred domestic tax expense 960,741 530,298 -
----------------------------------------------------
Total tax expense $1,309,006 $920,492 $481,666
====================================================
</TABLE>
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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation $ (94,158) $ (60,018)
Capitalized software (3,375,320) (1,668,901)
Deferred revenue -- (299,573)
Unrealized gains (128,000) --
Other (108,345) --
----------- -----------
Total tax liabilities (3,705,823) (2,028,492)
Deferred income tax assets:
Amortization of capitalized software 887,884 419,919
Alternative minimum tax credit 50,593 20,439
Research and development credit carryforwards 903,063 503,522
Allowance for doubtful accounts 149,123 56,405
Net operating loss carryforwards 2,488,980 1,921,793
Other 145,439 26,414
----------- -----------
Total tax assets 4,625,082 2,948,492
----------- -----------
Net deferred income tax assets $ 919,259 $ 920,000
=========== ===========
</TABLE>
The reconciliation of income tax computed at U.S. Federal statutory tax rates to
income tax expense is:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rates $1,271,606 $1,346,743 $ 944,986
Foreign taxes 197,485 241,377 90,897
State taxes 183,266 194,089 105,298
Tax credits (409,319) 411,939 (310,127)
Restricted stock compensation -- 1,042,119 (1,078,362)
Other 65,968 93,892 (17,561)
Change in valuation allowance -- (2,409,667) 746,535
----------------------------------------------
Total tax expense $1,309,006 $ 920,492 $ 481,666
==============================================
</TABLE>
24
<PAGE> 25
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $6,398,000 for federal income tax purposes that expire in the
years 2009 through 2012. The Company also has research and development tax
credit carryforwards of approximately $900,000 that expire in years 2008 through
2013. The valuation allowance was decreased from approximately $2,400,000 to
zero in 1997 as management determined that it is more likely than not that the
majority of the deferred tax assets will be realized.
9. EMPLOYEE BENEFIT PLANS
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
1998, 1997 or 1996. 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 1998 or 1997.
The Company established an employee stock purchase plan, effective July 1, 1998,
that covers substantially all employees. Eligible employees may purchase the
Common Stock of the Company at a discount to market value at established dates.
The Company has reserved 150,000 shares of Common Stock of the Company for
issuance under this plan. The plan is designed as a non-compensatory plan under
Section 423 of the Internal Revenue Code. Payroll deductions are used to
purchase the Company's Common Stock. These deductions totaled approximately
$75,000 as of December 31, 1998.
10. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its senior executives.
Certain agreements commit 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.
11. MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers, as a percentage of total revenues, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A -- 11% 16%
Customer B -- -- 16%
Customer C 11% -- --
</TABLE>
Export sales from the United States, as a percentage of total revenues, were 63%
in 1998, of which 40% represents sales to Europe, Africa and the Middle East,
17% was to the Pacific Rim and 6% was to Latin America. 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 and 7% was to the Pacific Rim and 4% was to
Europe, Africa and the Middle East.
25
<PAGE> 26
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $4,598,444 $5,666,703 $8,002,479 $7,670,582
Gross profit $2,831,554 $3,732,554 $5,574,276 $5,749,438
Operating income (loss) $ (381,856) $ 361,327 $1,251,261 $ 785,673
Net income $ 35,124 $ 497,665 $1,116,285 $ 781,937
Net income per share - basic (1) $ 0.00 $ 0.06 $ 0.13 $ 0.09
Net income per share - diluted (2) $ 0.00 $ 0.06 $ 0.13 $ 0.09
Weighted average shares
outstanding - basic 8,231,703 8,366,344 8,422,974 8,494,114
Weighted average shares
outstanding - diluted 8,725,621 8,928,034 8,874,710 8,934,755
<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 $ 0.17 $ 0.13 $ 0.00 $ 0.15
Net income per share - diluted (2) $ 0.16 $ 0.12 $ 0.00 $ 0.14
Weighted average shares
outstanding - basic 5,773,046 5,917,110 6,950,588 8,152,524
Weighted average shares
outstanding - diluted 6,429,960 6,568,083 7,647,260 8,672,229
<CAPTION>
Three months ended
------------------------------------------------------------------------------
March 31, 1996 June 30, 1996 September 30, 1996 December 31, 1996(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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) $ 0.03 $ 0.08 $ 0.10 $ 0.20
Net income per share - diluted (2) $ 0.03 $ 0.07 $ 0.09 $ 0.18
Weighted average shares
outstanding - basic 4,500,111 4,530,182 5,661,155 5,749,181
Weighted average shares
outstanding - diluted 4,674,308 5,078,909 6,175,302 6,347,804
</TABLE>
(1) Due to rounding of quarterly calculations varying from rounding of year
to date information, the sum of basic net income per share for the four
quarters does not equal basic net income per share for the year.
(2) Due to the calculation of weighted average shares outstanding for the
year as the average of quarterly weighted average shares outstanding,
the sum of diluted net income per share for the four quarters does not
equal diluted net income per share for the year.
(3) 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.
26
<PAGE> 27
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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity (deficit) and cash flows
for each of the three years in the period ending December 31, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ending December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 3, 1999
<PAGE> 28
<TABLE>
<CAPTION>
Board of Directors Officers
- ------------------ --------
<S> <C>
Bahram Yusefzadeh (1)(3) Bahram Yusefzadeh
Chairman of the Board Chairman of the Board and Chief Executive Officer
and Chief Executive Officer
Raju M. Shivdasani
Raju M. Shivdasani President and Chief Operating Officer
President and Chief Operating Officer
Theodore C. Burns
Ruann F. Ernst (1)(3) Senior Vice President and
President and Chief Executive Officer, Chief Financial Officer
Digital Island, Inc.
Daniel P. Baker
Ronald E. Fenton(2)(3) Senior Vice President,
Chairman of the Board, Research and Development
F&M Bank - Iowa Central
Harold C. Boughton
William C. Hess(2) Senior Vice President,
President, Iowa Savings Bank USA Business Development
James C. Holly(1) Barbara A. Brescia
President and Chief Executive Officer, Senior Vice President,
Bank of the Sierra Human Resources
Paul A. Jones(1) Brian J. Morgan
President and Chief Executive Officer, Senior Vice President,
Glenview State Bank International Business Development
J. Michael Murphy (3) Jocelyn C. Ruggiero
Division President, Senior Vice President,
Palex, Inc. Implementation Services
Glenn W. Sturm(2) John F. Winstanley
Partner, Nelson Mullins Riley & Senior Vice President,
Scarborough, L.L.P. Strategic Operations
O. Jay Tomson(2)
Chairman and Chief Executive Officer,
First Citizens National Bank
</TABLE>
(1) Member of Compensation and
Stock Option Committee
Mr. Yusefzadeh is a non-voting member
(2) Member of Audit Committee
(3) Member of Executive Committee
27
<PAGE> 29
FORM 10-K INVESTOR CONTACT
A copy of the Company's Annual Report on Form 10-K for 1998 (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 7, 1999, at 9:00
a.m. local time at the Company's corporate office.
COMMON STOCK AND DIVIDEND INFORMATION
The Company's common stock trades on the Nasdaq Stock Market under the symbol
PHXX. As of March 15, 1999, Phoenix International Ltd., Inc. had approximately
2,640 beneficial holders of its common stock. Of that total, approximately 126
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 last two fiscal years of the Company, as adjusted
to reflect the Company's three for two stock split, effective May 18, 1998.
<TABLE>
<CAPTION>
STOCK PRICE
HIGH LOW
<S> <C> <C>
1997
First Quarter $17.83 $11.33
Second Quarter 16.67 12.67
Third Quarter 17.25 13.50
Fourth Quarter 16.67 8.66
<CAPTION>
HIGH LOW
<S> <C> <C>
1998
First Quarter $16.00 $10.92
Second Quarter 20.83 14.75
Third Quarter 19.69 13.38
Fourth Quarter 18.81 14.25
</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
28
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF ORGANIZATION
- ---- ----------------------------
<S> <C>
Phoenix International A.P. Limited New Zealand
Phoenix EMEA Limited United Kingdom
Phoenix International (Australia) Pty. Limited Australia
Phoenix FSC Inc. U.S. Virgin Islands
</TABLE>
<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 Statements (Form S-8 No. 333-19121, Form S-8 No. 333-30797 and
Form S-8 No. 333-57559) of our report dated February 3, 1999 included in the
1998 Annual Report to Shareholders of Phoenix International Ltd., Inc.
/s/ Ernst & Young LLP
Ernst & Young LLP
Atlanta, Georgia
March 22, 1999
<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, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FILING.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,795,962
<SECURITIES> 22,529,410
<RECEIVABLES> 16,128,786
<ALLOWANCES> (473,000)
<INVENTORY> 0
<CURRENT-ASSETS> 29,605,489
<PP&E> 6,553,236
<DEPRECIATION> (2,224,508)
<TOTAL-ASSETS> 59,502,573
<CURRENT-LIABILITIES> 5,515,343
<BONDS> 0
0
0
<COMMON> 84,986
<OTHER-SE> 50,727,006
<TOTAL-LIABILITY-AND-EQUITY> 59,502,573
<SALES> 0
<TOTAL-REVENUES> 25,938,208
<CGS> 0
<TOTAL-COSTS> 8,050,386
<OTHER-EXPENSES> 15,871,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57,102)
<INCOME-PRETAX> 3,740,017
<INCOME-TAX> 1,390,006
<INCOME-CONTINUING> 2,413,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,413,011
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
