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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-05107
PROSPECTUS
1,850,000 Shares
LOGO
Common Stock
Of the 1,850,000 shares of common stock ("Common Stock") offered hereby (the
"Offering"), 1,250,000 shares are being sold by Award Software International,
Inc., a California corporation (the "Company" or "Award"), and 600,000 shares
are being sold by Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any proceeds from the sale of the
Common Stock by the Selling Shareholders.
Prior to the Offering, there has been no public market for the Common Stock. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price.
Vobis Microcomputer AG ("Vobis"), an existing shareholder, has the option, but
not the obligation, to purchase up to 238,719 shares of Common Stock in a
private placement at the initial public offering per share price. The sale of
these shares by the Company would not be registered in the Offering. See
"Underwriting."
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "AWRD."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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Per Share $8.00 $0.56 $7.44 $7.44
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Total(3) $14,800,000 $1,036,000 $9,300,000 $4,464,000
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(1) The Company and certain of the Selling Shareholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $975,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 277,500 shares of Common Stock, on the same terms as set forth above,
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will be
$17,020,000, $1,191,400 and $11,364,600, respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are being offered by
the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, P.C., counsel for the Underwriters. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor on or about October 30, 1996 at the offices of J.P. Morgan
Securities Inc., 60 Wall Street, New York, New York.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
NEEDHAM & COMPANY, INC.
October 25, 1996
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(COLOR ART WORK)
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Shareholders or by any Underwriter that would permit a public offering
of the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the United
States. Persons into whose possession this Prospectus comes are required by the
Company, the Selling Shareholders and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Common Stock and
the distribution of this Prospectus.
TABLE OF CONTENTS
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Prospectus Summary.................... 4
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Information......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 26
Management............................ 34
Certain Transactions.................. 38
Principal and Selling Shareholders.... 42
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 50
Additional Information................ 50
Index to Consolidated Financial
Statements.......................... F-1
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UNTIL NOVEMBER 19, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Company intends to furnish its shareholders annual reports containing
consolidated financial statements audited by its independent accountants and
quarterly reports containing consolidated unaudited financial statements for
each of the first three quarters of each year.
Award Software International, the Company's logo, SMSAccess, USBAccess,
RPBAccess, APMAccess, DMIAccess, WWWAccess, CardWare, CardWare Socket Services,
CardWare Card Services and BIOSAccess are trademarks of the Company. This
Prospectus also includes trademarks of companies other than the Company.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in this Prospectus. For a discussion of certain factors to
be considered in evaluating an investment in the shares of Common Stock offered
hereby, see "Risk Factors." Except as otherwise noted, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting."
THE COMPANY
Award designs, develops and markets system management software for the global
computing market. System management software is one of the fundamental layers in
personal computer ("PC") architecture and provides an essential interface
between a PC's operating system software and hardware. The Company's principal
system management software products include a suite of Basic Input/Output System
software ("BIOS"). Award's customers include designers and manufacturers of
motherboards, PC systems and other microprocessor-based (or "embedded") devices.
The Company believes that its products and engineering services enable customers
to rapidly develop new motherboard designs for state-of-the-art computer
systems. The Company markets and licenses its products and services worldwide
and has established itself as a leading provider of desktop system management
software in Asia, which accounts for approximately 40% of worldwide desktop
motherboard production.
The BIOS, which is the software initially executed after the system is turned
on, tests and initializes hardware components, initiates the operating system
and then provides advanced interface functions. Award's desktop BIOS products
enable a PC to support a number of key advanced technologies, including Plug and
Play, Peripheral Component Interconnect ("PCI"), Desktop Management Interface
("DMI") and Advanced Power Management ("APM"). The Company is currently
developing further enhancements to its BIOS, including support for Universal
Serial Bus ("USB"). The Company's embedded device BIOS provides customized
features to address the specialized needs of its customers in this market. In
addition to the Company's proprietary suite of system management software
products, Award offers PC Card software that enables PCs and other electronic
devices to recognize, install, configure and operate peripheral devices, such as
network or modem cards.
The Company currently licenses its products to more than 200 customers
worldwide. In response to its customers' need to develop and integrate new
technologies rapidly, the Company has developed its business with a particular
emphasis on providing local engineering service and support in each of its major
target regions: Asia (especially Taiwan), North America and Europe. The Company
is increasing its presence in Europe through a strategic relationship with Vobis
Microcomputer AG ("Vobis"), pursuant to which the Company and Vobis are jointly
developing BIOS and utilities for the desktop PC and embedded device markets. As
part of this relationship, Vobis purchased shares representing approximately 11%
of the Company's Common Stock outstanding at the time of its investment.
The Company has also entered into a joint technology development and support
agreement with Advanced Micro Devices, Inc. ("AMD") to support the design and
development of products related to AMD's K86 microprocessor (the "K86"). As part
of this relationship, AMD has designated Award as its primary supplier of
BIOS-related products and engineering services for its baseline reference and
production-ready K86 platform designs and made an equity investment in the
Company's Common Stock.
The Company is leveraging its existing customer relationships and desktop
expertise to develop system management software for the mobile and network
computing markets. The Company anticipates that leading Taiwanese desktop system
and motherboard manufacturers, many of which are Award customers, will enter the
mobile PC market and, in response, the Company is developing enhanced system
management software for mobile PCs. In addition, the Company is developing a
suite of applications called SMSAccess that, among other functions, will enable
remote access to and diagnosis and repair of disabled systems.
The Company was incorporated in California in 1983. The Company's executive
offices are located at 777 East Middlefield Road, Mountain View, California
94043, and its telephone number is (415) 968-4433. Award maintains a web site on
the World Wide Web. Information contained in the Company's web site shall not be
deemed to be a part of this Prospectus.
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THE OFFERING
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COMMON STOCK OFFERED:
By the Company(1)............................ 1,250,000 shares
By the Selling Shareholders.................. 600,000 shares
Total Offering(1)............................ 1,850,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING(1).................................. 6,507,754 shares
USE OF PROCEEDS BY THE COMPANY................. Product development, working capital and
other general corporate purposes, including
possible acquisitions of complementary
products and technologies. See "Use of
Proceeds."
NASDAQ NATIONAL MARKET SYMBOL.................. "AWRD"
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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PREDECESSOR
AND THE
PREDECESSOR COMPANY THE COMPANY
------------------ ----------- ------------------------------------------
SIX MONTHS ENDED
Dollars in thousands, except YEARS ENDED DECEMBER 31, JUNE 30,
per share data 1991 1992 1993(2) 1994 1995 1995 1996
------- ------- ----------- ------- ------- ------- -------
(UNAUDITED)
(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees....... $ 6,307 $ 5,416 $ 3,666 $ 5,585 $ 6,989 $ 3,125 $ 5,049
Engineering services........ 180 282 154 161 239 147 291
Related parties............. -- -- 50 972 1,902 765 814
------- ------- ----------- ------- ------- ------- -------
Total revenues....... 6,487 5,698 3,870 6,718 9,130 4,037 6,154
Gross profit.................. 5,673 5,182 3,662 6,127 8,494 3,815 5,723
Net income (loss)............. $ (72) $ (296) $(1,833) $ 1,258 $ 1,165 $ 381 $ 1,103
Net income per share(3)....... $ 0.20 $ 0.18 $ 0.06 $ 0.18
Weighted average common and
common equivalent shares in
thousands(3)................ 6,345 6,538 6,693 6,068
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THE COMPANY
JUNE 30, 1996
Dollars in thousands ACTUAL PRO FORMA (4) AS ADJUSTED(5)
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $10,934 $13,436 $21,761
Working capital........................................ 11,904 14,406 22,731
Total assets........................................... 14,919 17,421 25,746
Total shareholders' equity............................. 12,700 15,202 23,527
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(1) Assumes no exercise of the Underwriters' over-allotment option. Excludes an
aggregate of 1,199,709 shares reserved for issuance under the Company's 1995
Stock Option Plan, of which 955,655 shares were subject to outstanding options
as of August 31, 1996, 518,227 shares of Common Stock issuable upon exercise of
outstanding warrants and 238,719 shares issuable upon exercise of the Catch-up
Right (as hereinafter defined). See "Capitalization," "Management-Stock Option
Plan," "Certain Transactions" and Notes 7 and 11 of Notes to Consolidated
Financial Statements.
(2) Includes the combined results of operations for the Company and its
predecessor, Award Software, Inc. (the "Predecessor"). The Company was acquired
in July 1993, which resulted in a new historical accounting basis for the
Company. The results of operations for the Predecessor for the period January 1,
1993 through July 1, 1993 and the Company for the period July 2, 1993 through
December 31, 1993 have been combined to facilitate presentation of the results
of operations on a calendar year basis. See Consolidated Financial Statements.
(3) For an explanation of the determination of the weighted average number of
shares used in computing net income per share, see Note 2 of Notes to
Consolidated Financial Statements.
(4) Reflects (i) the issuance of 160,000 shares of Common Stock at $12.50 per
share to AMD for aggregate proceeds of $2,000 in July 1996, (ii) reflects the
exercise of options to purchase 12,375 shares of Common Stock for aggregate
proceeds of $12 in July and August 1996, (iii) reflects the exercise of warrants
to purchase 77,500 shares of Common Stock for aggregate proceeds of $78 in July
1996, and (iv) the issuance of 41,169 shares of Common Stock at $10.00 per share
to Vobis for aggregate proceeds of $412 in July 1996.
(5) As adjusted to reflect the sale of 1,250,000 shares of Common Stock offered
by the Company hereby, at the public offering price of $8.00 per share, after
deducting underwriting discounts and estimated offering expenses payable by the
Company.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully by potential investors in evaluating an
investment in the Common Stock offered hereby. This Prospectus contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21A of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed below.
DEPENDENCE UPON THE UNDERLYING PC INDUSTRY; DEPENDENCE ON CURRENT PC INDUSTRY
STANDARDS
The demand for the Company's system management software depends principally on
(i) PC manufacturers and other customers licensing the Company's software rather
than developing their own system management software, (ii) the market acceptance
of the products incorporating the Company's software sold by the Company's
original equipment manufacturer ("OEM") customers, (iii) the emergence of new PC
technologies that require system management software solutions to provide
functionality, user value and performance, and (iv) the technological competence
of the Company's core products. Sales of PCs fluctuate substantially from time
to time based on numerous factors, including general economic conditions in the
markets for the Company's customers' products, new hardware and software product
introductions, demand for new applications and shortages of key components.
Further, the markets in the PC industry are extremely competitive and
characterized by rapid and frequent price reductions.
The introduction of new hardware architectures, microprocessors, peripheral
equipment and operating systems within the PC industry has increased the
complexity, time to market and cost to develop PCs. A number of computer
manufacturers, including IBM Corporation ("IBM") and Compaq Computer Corporation
("Compaq"), develop their own BIOS products to achieve compatibility with and
integrate new technologies into their products. While the Company believes that
price and time-to-market pressures will continue to foster a trend among its
customers and potential customers to outsource system management software
requirements to third parties, there can be no assurance that this trend will
continue or will not reverse itself, which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Industry Background" and "-- Award Strategy."
The Company's software to date has been primarily based on central processing
units ("CPUs") designed by or compatible with those of Intel Corporation
("Intel") and operating system software designed by Microsoft Corp.
("Microsoft"). If the market for Intel and Intel-compatible CPUs with x86
architecture is materially diminished or if another CPU, such as Motorola,
Inc.'s "PowerPC," achieves a high degree of success, demand for the Company's
current software would be reduced. In addition, most of the Company's software
has been installed on computers using Microsoft's MS/DOS or Windows operating
systems. If Microsoft's operating systems cease to be the dominant operating
systems for the PC industry, or if PC manufacturers use other operating systems,
which are not compatible with MS/DOS or Windows, the Company could experience
increased product development costs and/or diminished revenues.
CONCENTRATION OF REVENUES FROM DESKTOP BIOS
The Company depends on sales of desktop BIOS for a substantial majority of its
revenues. The Company has not generated substantial revenues from the sale of
other products to date, including sales of mobile PC products. If sales of the
Company's desktop BIOS decline for any reason, the Company's business, financial
condition and results of operations would be adversely affected, unless the
Company is able to replace those sales with increased sales of other products.
Sales of desktop BIOS could decline for a number of reasons, including a shift
in the market for PCs away from desktop PCs in favor of mobile PCs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION FROM SYSTEM MANAGEMENT SOFTWARE COMPANIES AND OTHER PARTICIPANTS,
INCLUDING MICROSOFT AND INTEL, IN THE PC INDUSTRY
The markets for the Company's software are highly competitive. The Company faces
competition primarily from other system management software companies, including
American Megatrends, Inc., Phoenix Technologies Ltd. and SystemSoft Corporation,
as well as in-house software development staffs of current and prospective
customers. Certain of
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the companies with which the Company competes or may in the future compete have
substantially greater financial, marketing, sales and support resources and
greater brand name and technology leadership recognition than the Company. There
can be no assurance that the Company will be able to develop software comparable
or superior to software offered by its competitors. In addition, the PC market
experiences intense price competition and the Company expects that, in order to
remain competitive, it may have to decrease unit prices on some or all of its
software products. Any such decrease would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that interdependencies may develop between system
management software companies and their customers, which would need to be
overcome in order to replace an entrenched competitor. While the Company
believes that such entrenchment may benefit the Company in its existing
relationships with key participants in the desktop PC market, customer
entrenchment may make it more difficult for the Company to displace entrenched
competitors or increase market presence, particularly in the mobile PC market,
where competitors may already have strong relationships with certain mobile PC
manufacturers. Intel has entered into formal agreements with, and has become a
significant shareholder in, Phoenix Technologies Ltd. and SystemSoft
Corporation. In addition, SystemSoft Corporation has entered into agreements
with Microsoft, IBM and Compaq to license its PC Card software.
Operating system software vendors may in the future enter the Company's primary
markets as direct competitors or incorporate enough features into their products
so as to reduce the need for the Company's products. Microsoft includes basic PC
Card software in its Windows 95 operating system and has announced the inclusion
of full PC Card software support in its next generation Windows 9x and Windows
NT operating systems. As software developers provide greater functionality and
features, user value and performance in their products that eliminate or reduce
the need for the Company's system management software, the market for the
Company's products could be materially diminished. In addition, chipset
manufacturers, including Intel, may increase their presence in the motherboard
manufacturing market, which may have an adverse effect on the Company's OEM
customers. There can be no assurance that other participants in the PC industry
will not develop products and solutions that reduce the demand or obviate the
need for the Company's products. See "Business -- Competition."
ABILITY TO RESPOND TO RAPID TECHNOLOGICAL CHANGE
The market for system management software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The general trend in the PC industry is toward shorter product life cycles,
resulting in rapid product and technology obsolescence. The life cycle of the
Company's products is highly dependent on the life cycles of the products sold
by its customers, who are primarily in the desktop PC industry. Although the
Company's core products, specifically, the desktop and embedded device BIOS and
PC Card software, may have a life cycle as long as several years, specific
customized adaptations of the Company's core products are generally expected to
have a life cycle of six months to one year. The Company's future success will
depend upon its ability to enhance its core software and to develop and
introduce new software which keeps pace with technological developments and
evolving industry standards as well as to respond to its customers' and
end-users' demand for greater features and functionality. The Company is
currently developing certain technologies that it will need to remain
competitive, particularly system management software that supports USB. If the
Company fails to introduce such products by the time USB becomes an industry
standard, the Company's business, financial condition and results of operations
will be adversely affected. There can be no assurance that the Company will be
successful in developing such enhancements or new software, or, even if
successful, that it will not experience delays in achieving such developments.
Any failure or delay by the Company to develop such enhancements or new software
or the failure of its software to achieve market acceptance would adversely
affect the Company's business, financial condition and results of operations. In
addition, there can be no assurance that products or technologies developed by
others will not render the Company's software or technologies non-competitive or
obsolete. See "Business -- Industry Background" and "-- Product Development."
DEPENDENCE ON KEY CUSTOMER RELATIONSHIPS; CONCENTRATION OF CREDIT RISK
The Company believes that its success to date has been largely due to its
relationship with participants in the desktop PC industry, particularly OEMs in
the desktop PC market. The Company works closely with its customers to provide
quick response to their product design needs and assists them in evaluating new
technological developments as they affect future products and enhancements to be
sold by the Company's customers. The loss of any one of these strategic
relationships or any other significant customer in the PC industry could
adversely affect the Company's product development efforts, business, financial
condition and results of operations.
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In the year ended December 31, 1995, Vobis and Toshiba Europa (I.E.) GmbH
("Toshiba") accounted for approximately 13% and 14%, respectively, of the
Company's total revenues. For the six months ended June 30, 1996, Vobis and
Toshiba accounted for approximately 12% and 11%, respectively, of the Company's
total revenues. The loss of any key customer or the inability of the Company to
replace revenues provided by a key customer would have a material adverse effect
on the Company's business, financial condition and results of operations. For
reasons unknown to the Company, Toshiba recently indicated that it intends to
discontinue licensing the Company's PC Card software, and, therefore, the
Company does not currently expect to receive any revenues from this customer
from the distribution of the Company's PC Card software during the second half
of 1996. In the six months ended June 30, 1996 and the year ended December 1995,
Toshiba accounted for 96% and 86% of the Company's PC Card software revenues,
respectively. Revenues from the distribution of the Company's PC Card software
accounted for 11% and 15% of the Company's total revenues in the six months
ended June 30, 1996 and the year ended December 31, 1995, respectively. The
Company anticipates that the growth in revenues from its existing customers and
products for the remainder of 1996 will offset the loss of revenues from Toshiba
from the distribution of the Company's PC Card software such that the Company
believes that such loss will not have a material adverse effect on the Company's
business, financial condition and results of operations. No other customer of
the Company accounted for more than 1% of the Company's PC Card software
business. The Company does not believe that any of its key customers will take
actions similar to Toshiba. If any customer were to take such similar action,
the Company believes that it would not be material to its business, financial
condition and results of operations. Further, the Company's customer base
consists primarily of motherboard manufacturers and OEMs in the desktop PC
market, and as a result the Company maintains individually significant
receivable balances from these customers. If these customers fail to satisfy
their payment obligations, the Company's business, financial condition and
results of operations would be adversely affected.
UNCERTAIN ACCEPTANCE IN NEW AND DEVELOPING MARKETS
The Company's future success is dependent on customer acceptance of new products
and penetration of markets outside the desktop PC market. There can be no
assurance that the Company will be able to expand its products and technologies
into the mobile PC, embedded device and network computing and Internet markets
or that the Company will be able to increase its market presence in the desktop
PC market. Expansion of the Company's software and technology into the mobile PC
market will depend primarily on the Company's ability to replace entrenched
competitors. Penetration of markets outside the desktop PC market, such as the
embedded device market, will depend upon the development and availability of
system management software providing the necessary functionality and customer
acceptance of such new technology. There can be no assurance that the Company
will be able to develop or obtain from third parties the necessary software and
technology to penetrate these markets, or that, if such software and technology
is developed by the Company or obtained from third parties through licensing,
which may include payments of license fees or royalties in advance, the Company
will be able to successfully distribute such products. There can be no assurance
that such products will not be developed by others rendering the Company's
products non-competitive or obsolete. In addition, there can be no assurance
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of such new products, or
that such products will achieve market acceptance.
Any increase in the demand for the Company's embedded device products is
dependent upon the increasing use and complexity of embedded computer systems in
new and traditional products. No assurance can be given that this trend will
continue or, even if it does, that the Company will be able to design system
management software that will address the unique requirements of the embedded
device market. Further, since the Company's experience and expertise are based
on Intel x86 architecture, the Company's success in the embedded device market
is significantly dependent on Intel's continued commitment to, and the increased
presence of x86 architecture in, this market. There can be no assurance that
Intel will not de-emphasize or withdraw its support of the embedded device
market, or that the trend toward x86 architecture in the embedded device market
will continue, any of which could result in a material adverse effect on the
Company's growth strategies, financial condition and results of operations.
Certain of the markets for the Company's existing and future products, such as
the Internet and private internet protocol networks ("Intranet"), have only
recently begun to develop and are rapidly evolving. Demand and market acceptance
for recently introduced or developing products are subject to a high level of
uncertainty and risk. Critical issues concerning the commercial use of the
Internet remain unresolved and could adversely affect the growth of Internet
use. There can be no assurance that commerce and communication over the Internet
or Intranet will become widespread, or that the Company's planned products
addressing the Internet and Intranet markets will become widely accepted.
Because these markets for the Company's existing and developing products are new
and rapidly emerging, it is difficult to
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predict the future growth rate, if any, and size of these markets. There can be
no assurance that such markets for the Company's existing and developing
products and technology will develop or that such products will be accepted. If
these markets fail to develop, develop more slowly than anticipated or become
saturated with competitors, or if the Company's products do not obtain customer
acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business -- Award
Strategy."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results of operations. The Company's revenues are affected by a
number of factors, including the demand for PCs and embedded devices, timing of
new product introductions, product mix, volume and timing of customer orders,
activities of competitors and the ability of the Company to penetrate new
markets. The Company's business is seasonal with revenues generally increasing
in the fourth quarter as the result of increased PC shipments during the holiday
season. Consequently, during the three quarters ending in March, June and
September, the Company has historically not been as profitable as in the quarter
ending in December. In addition, the Company's revenues and profits have
historically decreased in the first quarter of each year as compared with the
fourth quarter of the previous year. The Company generally ships orders as they
are received and, as a result, has little or no backlog. Quarterly revenues and
results of operations therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, delays in the receipt of orders can cause significant variations in
results of operations from quarter to quarter. The Company also may choose to
reduce prices, increase spending in response to competition or pursue new market
opportunities, each of which decisions may adversely affect the Company's
business, financial condition and results of operations. Therefore, the Company
believes that period-to-period comparisons of its revenues and operating results
are not necessarily meaningful and should not be relied upon as indicators of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Due to all of the foregoing factors, it is likely that in some future quarters
the Company's operating results will be below the expectations of public market
analysts and investors. Regardless of the general outlook for the Company's
business, the announcement of quarterly results of operations below analyst and
investor expectations is likely to result in a decline in the trading price of
the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN KEY TECHNICAL
EMPLOYEES
The Company's success to date has depended to a significant extent upon a number
of key management and technical employees. The loss of services of one or more
of these key employees, particularly George C. Huang, the Company's Chairman of
the Board, President and Chief Executive Officer; Lyon T. Lin, General Manager,
Taiwan and President, Award Software Hong Kong Limited, Taiwan Branch; and
Maurice W. Bizzarri, the Company's Vice President, Engineering and Product
Marketing, could have a material adverse effect on the Company's business,
financial condition and results of operations. Except for the Company's
employees in Germany, none of the Company's employees is party to an employment
agreement with the Company. The Company believes that its future success will
also depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Moreover, because the
development of the Company's software requires knowledge of computer hardware,
operating system software, system management software and application software,
key technical personnel must be proficient in a number of disciplines.
Competition for such technical personnel is intense, and the failure of the
Company to hire and retain talented technical personnel or the loss of one or
more key employees could have an adverse effect on the Company's business,
financial condition and results of operations.
Future growth, if any, of the Company will require additional engineering, sales
and marketing, financial and administrative personnel, to expand customer
services and support and to expand operational and financial systems. There can
be no assurance that the Company will be able to attract and retain the
necessary personnel to accomplish its growth strategies or that it will not
experience constraints that will adversely affect its ability to satisfy
customer demand in a timely fashion. If the Company's management is unable to
manage growth effectively, the Company's business, financial condition and
results of operations could be adversely affected.
9
<PAGE> 10
MANAGEMENT OF GROWTH
The growth of the Company's business and, in particular, the Company's customer
base, has placed, and is expected to continue to place, a strain on the
Company's management systems and resources. The Company's ability to compete
effectively and manage future growth, if any, will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis and expand, train and manage its work force. There
can be no assurance that the Company will be able to do so successfully, and the
failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company's success
will depend to a significant degree on the ability of its executive officers and
other members of its senior management, none of whom has any prior experience
managing public companies in their current roles, to manage future growth, if
any.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS; INTERNATIONAL UNREST
The Company operates on a multinational basis, and a significant portion of its
business is conducted in currencies other than the U.S. Dollar. As a result, the
Company is subject to various risks, including exposure to currency
fluctuations, greater difficulty in administering its business globally,
multiple regulatory requirements and other risks associated with international
sales, such as import and export licenses, political and economic instability,
overlapping or differing tax structures, trade restrictions, changes in tariff
rates, different legal regimes and difficulty in protecting intellectual
property, enforcing agreements and collecting accounts receivable. During the
year ended December 31, 1995, approximately 32.9% and 24.0% of the Company's
revenues were denominated in New Taiwan Dollars and German Marks, respectively.
During the six months ended June 30, 1996, approximately 41.3% and 15.3% of the
Company's revenues were denominated in New Taiwan Dollars and German Marks,
respectively. While the impact of foreign exchange rate movements have not had a
material impact on the Company's financial statements, there can be no assurance
that fluctuation in foreign currency exchange rates will not have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not currently engage in foreign currency hedging
transactions. There can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
In addition, recent events such as the elections in Taiwan and the military
maneuvers conducted by the People's Republic of China in the Straits of Taiwan
have increased tensions in that area. During the year ended December 31, 1995,
and the six months ended June 30, 1996, approximately 43.8% and 54.1% of the
Company's revenues, respectively, were derived from this region. In the event
that actual hostilities erupted between the two areas, the operations of the
Company's customers might be interrupted for an indeterminate period of time,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards all
of its software as proprietary and attempts to protect it with a combination of
patents, copyrights, trademarks and trade secrets, employee and third-party
nondisclosure agreements and other methods of protection. Despite these
precautions and the protection of copyright laws, it may be possible for
unauthorized third parties to copy the Company's software or to reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company has patent applications pending in the U.S. and/or abroad on six
inventions, three of which are owned jointly with a third party. There are
currently no issued patents covering the Company's products. However, the
Company does not generally rely on patents to protect its products. The Company
licenses its object and source code under written license agreements. Certain
provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed programs, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign jurisdictions, including Taiwan, do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the protections put in place by the Company will be
adequate.
Significant and protracted litigation may be necessary to protect the Company's
intellectual property to determine the scope of the proprietary rights of others
or to defend against claims of infringement. Moreover, although the Company is
not currently involved in any litigation with respect to intellectual property
rights, in the past there have been allegations that certain portions of the
Company's core BIOS infringed on a third party's copyrights. In response, the
Company
10
<PAGE> 11
rewrote certain software routines in a "clean room" procedure and is upgrading
its customers to the new version of such software routines in order to avoid any
further allegations of infringement. The Company believes that its software does
not infringe the copyrights of any third parties. However, there can be no
assurance that other parties will not make allegations of infringement in the
future. Such assertions could require the Company to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. Although the Company has been able to acquire licenses
from third parties in the past, there can be no assurance that the Company would
be able to develop alternative technologies or to obtain such licenses or, if a
license were obtainable, that the terms would be commercially acceptable to the
Company in the event such assertions are made in the future.
CONTROL BY MANAGEMENT SHAREHOLDERS
Upon completion of the Offering, the directors and executive officers of the
Company as a group will beneficially own approximately 48% of the outstanding
Common Stock, excluding the exercise of the Underwriters' over-allotment option.
As a result, such persons will have the ability to control the business and
affairs of the Company. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal and Selling Shareholders."
SIGNIFICANT UNALLOCATED NET PROCEEDS
The principal purposes of the Offering are to create a public market for the
Company's Common Stock, facilitate future access to capital markets and enhance
the Company's ability to use its Common Stock as consideration for acquisitions
and as a means of attracting and retaining key employees. The Company intends to
use the net proceeds for general corporate purposes, including working capital
and product development. The Company may use a portion of the net proceeds to
acquire technologies or products complementary to the Company's business and
growth strategy. The Company has no other specific uses of the proceeds of the
Offering, and the exact uses of such proceeds will be subject to the discretion
of management. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Company's
Common Stock. Upon completion of the Offering, the Company will have outstanding
6,507,754 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, the 1,850,000 shares sold in the Offering will be freely tradable
without restrictions or further registration under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 4,657,754 shares of Common
Stock held by existing shareholders are "restricted securities" as such term is
defined in Rule 144 under the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701 or
Regulation S promulgated under the Securities Act. The Company, all directors
and executive officers and certain shareholders of the Company have agreed not
to sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of J.P.
Morgan Securities Inc. As a result of contractual restrictions and the
provisions of Rules 144 and 701 and Regulation S, additional shares will be
available for sale in the public market as follows: (i) 45,462 Restricted Shares
will be eligible for immediate sale on the date of this Prospectus, (ii) no
Restricted Shares and 363,145 shares of Common Stock issuable upon exercise of
currently outstanding options will be eligible for sale beginning 90 days after
the date of this Prospectus and (iii) 4,452,292 Restricted Shares, 50,918
additional shares of Common Stock issuable upon exercise of currently
outstanding options and 518,227 shares of Common Stock issuable upon exercise of
currently outstanding warrants will be eligible for sale beginning 180 days
after the date of this Prospectus upon expiration of lock-up agreements. The
Restricted Shares will be eligible for sale from time to time after completion
of the Offering. After the Offering, the holders of approximately 1,831,587
(which includes the right to purchase up to 238,719 shares of Common Stock by
Vobis, assuming the exercise of the Underwriters' over-allotment option) shares
of Common Stock and warrants to purchase 518,227 shares of Common Stock will be
entitled to certain demand and piggyback rights with respect to registration of
such shares under the Securities Act. If such holders, by exercising their
demand rights, cause a large number of securities to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If such holders, by exercising their piggyback
registration rights, cause a
11
<PAGE> 12
large number of their shares to be included in a public offering by the Company,
the obligation to include such shares could have an adverse effect on the market
price for the Company's Common Stock or on the Company's ability to raise
capital. See "Underwriting" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been any public market for the Company's
Common Stock, and there cannot be any assurance that an active trading market
will develop or be sustained after the Offering. The initial public offering
price for the Common Stock to be sold by the Company and the Selling
Shareholders was determined by negotiation among representatives of the Company,
the Selling Shareholders and the representatives of the Underwriters and may not
be indicative of the future market price. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, changes in earnings estimates by analysts,
announcement of technological innovations or new products by the Company or its
competitors, general conditions in the system management software and PC
industries and other events or factors. In addition, in recent years the stock
market in general, and the shares of technology companies in particular, have
experienced extreme price fluctuations. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting." In
addition, there has been significant volatility in the market price of
securities of technology-based companies similar in size to the Company. Factors
such as announcements of technological developments or new products by the
Company or its competitors, variations in the Company's quarterly operating
results, or general economic or stock market conditions unrelated to the
Company's operating performance may adversely affect the market price of the
Company's Common Stock.
DILUTION
Purchasers of shares of Common Stock offered hereby will suffer an immediate and
substantial dilution of $4.41 in the pro forma net tangible book value per share
of the Common Stock at the initial public offering price of $8.00 per share. In
the event the Company raises additional funds through the issuance of equity
securities, the investors participating in the Offering may experience further
dilution. To the extent outstanding options, warrants and other rights to
purchase shares of Common Stock are exercised, there will be further dilution.
See "Dilution," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Certain
Transactions" and "Capitalization."
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $8,325,000
($10,390,000 if the Underwriters' over-allotment option is exercised in full),
at the initial public offering price of $8.00 per share. The Company will not
receive any of the net proceeds from the sale of shares by the Selling
Shareholders. The principal purposes of the Offering are to create a public
market for the Company's Common Stock, facilitate future access to capital
markets and enhance the Company's ability to use its Common Stock as
consideration for acquisitions and as a means of attracting and retaining key
employees.
The Company intends to use the net proceeds for working capital and general
corporate purposes, including an increase in the Company's internal product
development, staffing in connection with new product introductions and other
related product development expenditures. A portion of the proceeds may also be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the ordinary
course of business, the Company evaluates potential acquisitions of such
businesses, products or technologies. The Company has no present understandings,
commitments or agreements with respect to any material acquisitions of other
businesses, products or technologies. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company does not pay any cash dividends on its capital stock. The Company
currently intends to retain any future earnings to finance the growth and
development of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. Any future determination relating to
dividend policy will be made at the discretion of the Board of Directors of the
Company and will depend on a number of factors, including the future earnings,
capital requirements, financial condition and future prospects of the Company
and such other factors as the Board of Directors may deem relevant.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company as
of June 30, 1996, (ii) the pro forma capitalization and (iii) as adjusted to
reflect the sale by the Company of 1,250,000 shares in the Offering (at the
initial public offering price of $8.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses) and the
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
---------------------------------------------
<S> <C> <C> <C>
JUNE 30, 1996
ACTUAL
-----------
Dollars in thousands PRO FORMA(1) AS ADJUSTED
----------- -----------
(UNAUDITED)
Shareholders' equity
Preferred Stock, no par value, 5,000,000 shares
authorized;
no shares issued or outstanding...................... $ -- $ -- $ --
Common Stock, no par value, 40,000,000 shares
authorized;
4,966,710 shares issued and outstanding, actual...... 10,697 -- --
5,257,754 shares issued and outstanding, pro forma... -- 13,199 --
6,507,754 shares issued and outstanding, as
adjusted(2)....................................... -- -- 21,524
Deferred stock compensation............................ (218) (218) (218)
Retained earnings...................................... 2,348 2,348 2,348
Cumulative translation adjustment...................... (127) (127) (127)
----------- ----------- -----------
Total shareholders' equity............................. 12,700 15,202 23,527
----------- ----------- -----------
Total capitalization............................ $ 12,700 $ 15,202 $ 23,527
========== ========== ==========
</TABLE>
- ------------------------------
(1) Reflects (i) the issuance of 160,000 shares of Common Stock at $12.50 per
share to AMD for aggregate proceeds of $2,000 in July 1996, (ii) reflects the
exercise of options to purchase 12,375 shares of Common Stock for aggregate
proceeds of $12 in July and August 1996, (iii) reflects the exercise of warrants
to purchase 77,500 shares of Common Stock for aggregate proceeds of $78 in July
1996 and (iv) the issuance of 41,169 shares of Common Stock at $10.00 per share
to Vobis for aggregate proceeds of $412 in July 1996.
(2) Excludes 1,199,709 shares of Common Stock reserved for issuance upon
exercise of stock options, of which 955,655 shares were subject to outstanding
options at August 31, 1996, 518,227 shares issuable upon the exercise of Common
Stock warrants outstanding as of August 31, 1996 and 238,719 shares issuable
upon exercise of the Catch-up Right (as hereinafter defined). See
"Management -- Stock Option Plan" and "Certain Transactions."
14
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996, was
$15,018,000, or approximately $2.86 per share of Common Stock. The pro forma net
tangible book value per share represents the amount of total pro forma tangible
assets of the Company less total liabilities divided by the pro forma number of
shares of the Company's outstanding Common Stock. See "Risk
Factors -- Dilution."
The pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of Common Stock in
the Offering and the as adjusted net tangible book value per share of the Common
Stock immediately after completion of the Offering. After giving effect to the
sale of 1,250,000 shares of Common Stock in the Offering, the as adjusted net
tangible book value of the Company at June 30, 1996 would have been $23,343,000
or $3.59 per share. This represents an immediate increase in net tangible book
value of $.73 per share to existing shareholders and an immediate dilution in
net tangible book value of $4.41 per share to purchasers of Common Stock in the
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share................................ $ 8.00
Pro forma net tangible book value per share at June 30, 1996(1)........ $ 2.86
Increase per share attributable to new shareholders.................... .73
-----------
As adjusted net tangible book value per share as of June 30, 1996
after the Offering................................................... 3.59
-----------
Dilution per share to new investors.................................... $ 4.41
==========
</TABLE>
The following table summarizes, as of June 30, 1996, on a pro forma basis the
total consideration paid and the average price per share paid by the existing
shareholders and by new investors (at the initial public offering price of $8.00
per share and before deduction of underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHARES PURCHASED
--------------------- TOTAL CONSIDERATION
---------------------- AVERAGE PRICE
NUMBER PERCENT PERCENT PER SHARE
---------- ------- ------- -------------
AMOUNT
-----------
Existing shareholders(2)................ 5,257,754 81% $11,870,000 54% $ 2.26
New investors(2)........................ 1,250,000 19% 10,000,000 46% 8.00
---------- ------- ----------- -------
Total.......................... 6,507,754 100% $21,870,000 100%
========== ====== =========== ======
</TABLE>
- ------------------------------
(1) Reflects (i) the issuance of 160,000 shares of Common Stock at $12.50 per
share to AMD for aggregate proceeds of $2,000,000 in July 1996, (ii) reflects
the exercise of options to purchase 12,375 shares of Common Stock for aggregate
proceeds of $12,000 in July and August 1996, (iii) reflects the exercise of
warrants to purchase 77,500 shares of Common Stock for aggregate proceeds of
$78,000 in July 1996 and (iv) the issuance of 41,169 shares of Common Stock at
$10.00 per share to Vobis for aggregate proceeds of $412,000 in July 1996.
(2) The foregoing table computations assume no exercise of the Underwriters'
over-allotment option or outstanding stock options or warrants except as stated
above in footnote (1). At August 31, 1996, there were outstanding options to
purchase an aggregate of 955,655 shares of Common Stock at a weighted average
exercise price of $4.11 per share and outstanding warrants to purchase an
aggregate 518,227 shares of Common Stock at a weighted average exercise price of
$6.93 per share. If certain of these options and warrants are exercised, there
will be further dilution to new investors. See "Risk Factors -- Dilution,"
"Management -- Stock Option Plan," "Certain Transactions" and "Description of
Capital Stock." Sales by the Selling Shareholders in the Offering will reduce
the number of shares of Common Stock held by existing shareholders to 4,657,754
or 72% of the total number of shares of Common Stock outstanding immediately
after the Offering, and will increase the number of shares of Common Stock held
by new investors to 1,850,000 or 28% of the total number of shares of Common
Stock outstanding immediately after the Offering. See "Principal and Selling
Shareholders."
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information set forth below should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The consolidated
financial information as of December 31, 1994 and 1995 and for the six months
ended July 1, 1993 and December 31, 1993, and the years ended December 31, 1994
and 1995, have been derived from the Consolidated Financial Statements of the
Company and the Predecessor, audited by Price Waterhouse LLP and are included
elsewhere in this Prospectus. The consolidated financial information for the
years ended December 31, 1991 and 1992 and the six months ended June 30, 1995
and 1996 have been derived from the unaudited consolidated financial statements
of the Predecessor and the Company, respectively, which in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the full year or for any future period.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
PREDECESSOR THE COMPANY
---------------------------- --------------------------------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, July 1, DECEMBER 31, DECEMBER 31, JUNE 30,
Dollars in thousands, 1991 1992 1993 1993 1994 1995 1995 1996
except per share data ----- ----- --------- ------------ ------ ---- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software license fees.... $6,307 $5,416 $1,763 $ 1,903 $5,585 $6,989 $3,125 $5,049
Engineering services..... 180 282 47 107 161 239 147 291
Related parties.......... -- -- -- 50 972 1,902 765 814
------ ------ ---------- ------------ ------ ------ ------ ------
Total revenues.... 6,487 5,698 1,810 2,060 6,718 9,130 4,037 6,154
------ ------ ---------- ------------ ------ ------ ------ ------
Cost of revenues:
Software license fees.... 798 448 85 84 467 387 111 139
Engineering services..... 16 68 6 21 28 43 30 57
Related parties.......... -- -- -- 12 96 206 81 235
------ ------ ---------- ------------ ------ ------ ------ ------
Total cost of
revenues........ 814 516 91 117 591 636 222 431
------ ------ ---------- ------------ ------ ------ ------ ------
Gross profit............... 5,673 5,182 1,719 1,943 6,127 8,494 3,815 5,723
------ ------ ---------- ------------ ------ ------ ------ ------
Operating expenses:
Research and
development............ 1,003 836 887 2,071 1,601 2,751 1,274 1,866
Sales and marketing...... 2,557 1,040 845 647 1,537 2,282 1,037 1,258
General and
administrative......... 2,129 3,505 615 350 932 1,600 852 1,046
------ ------ ---------- ------------ ------ ------ ------ ------
Total operating
expenses........ 5,689 5,381 2,347 3,068 4,070 6,633 3,163 4,170
------ ------ ---------- ------------ ------ ------ ------ ------
Income (loss) from
operations............... (16) (199) (628) (1,125) 2,057 1,861 652 1,553
Interest expense........... (56) (83) (27) (54) (19) (9) (6) (4)
Interest and other
income................... -- 1 -- 1 4 105 (7) 174
------ ------ ---------- ------------ ------ ------ ------ ------
Income (loss) before
income taxes............. (72) (281) (655) (1,178) 2,042 1,957 639 1,723
Provision for income
taxes.................... -- 15 -- -- 784 792 258 620
------ ------ ---------- ------------ ------ ------ ------ ------
Net income (loss).......... $ (72) $ (296) $ (655) $ (1,178) $1,258 $1,165 $ 381 $1,103
======= ======= ========== ============= ======= ======= ======= =======
Net income (loss) per
share(1)................. $ (0.19) $ 0.20 $ 0.18 $ 0.06 $ 0.18
============= ======= ======= ======= =======
Weighted average common and
common equivalent shares
in thousands............. 6,345 6,345 6,538 6,693 6,068
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
PREDECESSOR THE COMPANY
------------------------- ---------------------------------------
DECEMBER 31, JULY 1, DECEMBER 31, JUNE 30,
Dollars in thousands 1991 1992 1993 1993 1994 1995 1995 1996
------ ------ ------- ------- ------ ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $ 452 $ 313 $ 156 $ 280 $1,374 $6,498 $10,934
Working capital (deficit)........... (44) (461) (1,189) (1,113) 1,173 6,642 11,904
Total assets........................ 1,596 1,085 1,088 1,807 3,119 9,083 14,919
Shareholders' equity (deficit)...... (177) (451) (1,099) (468) 1,695 7,169 12,700
</TABLE>
- ------------------------------
(1) For an explanation of the number of shares used to compute net income (loss)
per share, see Note 2 of Notes to Consolidated Financial Statements.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1983 to design, develop and market a suite of Basic
Input/Output System software ("BIOS") for the system management software market.
During the mid- and late-1980s, the Company established a significant market
presence by providing BIOS for the 286/386 PC markets and achieved early market
success as a BIOS supplier to the Taiwanese motherboard market. The Company was
acquired in July 1993 by GCH Systems, Inc. ("GCH"), an independent developer of
microcomputers and application-specific integrated circuits, and operated as a
wholly owned subsidiary. By 1994, the Company further established itself in the
system management software market with the successful introduction of enhanced
system management software products including its Green BIOS and PCI BIOS. In
December 1994, all of the Common Stock of the Company was distributed to the
existing GCH shareholders on a pro rata basis in a spin-off transaction to allow
the Company to focus exclusively on its system management software business and
facilitate the Company's access to future financing, including the public
capital markets. The Company markets and licenses its products and services
worldwide and is a leading provider of system management software to the PC
motherboard market in Asia, which accounts for approximately 40% of worldwide
motherboard production. More recently, the Company has been focusing on
expanding its core desktop product line by developing a suite of system
management software products for the mobile and network computing markets. In
addition, the Company is developing a suite of applications called SMSAccess
which will enable remote access to, diagnosis and repair of disabled systems.
The Company's strategy is to strengthen its presence in Taiwan while pursuing
additional opportunities on a worldwide basis. In November 1993, the Company
entered a joint development agreement with Vobis, a leading PC manufacturer in
Europe. This collaboration resulted in the development of a specialized desktop
BIOS for Vobis; the Company and Vobis have pending three joint patent
applications on inventions relating to such desktop BIOS. In January 1996, Vobis
acquired 570,033 shares of the Company's Common Stock and a warrant to purchase
an additional 272,394 shares. The Company believes that this relationship will
enable it to further penetrate the European market. See "Risk
Factors -- International Operations; Currency Fluctuations; International
Unrest" and "Certain Transactions."
The Company has historically generated the substantial majority of its revenues
from the licensing of desktop system management software, primarily to
motherboard manufacturers and PC OEMs. Sales from international operations,
particularly to customers in Taiwan, comprise a substantial portion of the
Company's total revenues. During the three years in the period ended December
31, 1995, revenues from international operations represented 76%, 75% and 68% of
the Company's total revenues, respectively. Software license fees are recognized
upon delivery of the product, fulfillment of acceptance terms, if any, and
satisfaction of significant support obligations, if any. Engineering services
revenues generally consist of amounts charged for customization of the software
prior to delivery and are generally recognized as the services are performed.
Related parties revenues include software license fees and non-recurring
engineering services provided to a Common Stock shareholder and a Common Stock
warrant holder. The Company believes that its business is subject to seasonal
fluctuation, with shipments in the fourth calendar quarter being somewhat higher
due to higher levels of PC shipments in that time period.
The Company plans to increase the number and scope of system management software
products it offers in order to add features and functionality to existing
products and to address new market opportunities. For example, the Company is
developing products to support remote system access, including remote diagnosis
and repair, network-related system management software products and enhanced
versions of its core BIOS. The Company also plans to expand its presence in the
mobile PC and embedded device system management software markets, which the
Company believes provide an opportunity for greater revenue per unit than the
desktop PC market. There can be no assurance that the Company will be successful
in implementing these plans or that price competition will not lead to price
decreases in one or more of these markets, adversely affecting the Company's
financial condition and results of operations.
The Company has an established international presence and consequently generates
a significant portion of its revenues and expenses in currencies other than the
U.S. Dollar, primarily the German Mark and New Taiwan Dollar. As a result, any
appreciation or depreciation in the U.S. Dollar against these currencies could
adversely affect the Company's business, financial condition, results of
operations and cashflows. In addition, foreign currency transaction gains and
losses arising from normal business operations are credited to or charged
against earnings in the period incurred. During the three years in the period
ended December 31, 1995, fluctuations in the value of currencies in which the
Company conducts its business relative to the U.S. Dollar have not been
significant on an annual basis.
17
<PAGE> 18
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain consolidated
statement of operations information, as well as the percentage of the Company's
total revenues represented by each item. The results of operations for the
Predecessor for the period January 1, 1993 through July 1, 1993 and the Company
for the period July 2, 1993 through December 31, 1993 have been combined to
facilitate presentation of the results of operations on a calendar year basis.
The Company's historical results are not necessarily indicative of results in
any future period.
<TABLE>
<CAPTION>
------------------------------------------------------------
PREDECESSOR
AND THE
COMPANY
COMBINED THE COMPANY
------------ ------------------------------------------
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
Dollars in thousands, except per share 1993 1994 1995 1995 1996
amounts ------------ ----- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees..................... $ 3,666 $5,585 $6,989 $3,125 $5,049
Engineering services...................... 154 161 239 147 291
Related parties........................... 50 972 1,902 765 814
------------ ------ ------ ------ ------
Total revenues..................... 3,870 6,718 9,130 4,037 6,154
------------ ------ ------ ------ ------
Cost of revenues:
Software license fees..................... 169 467 387 111 139
Engineering services...................... 27 28 43 30 57
Related parties........................... 12 96 206 81 235
------------ ------ ------ ------ ------
Total cost of revenues............. 208 591 636 222 431
------------ ------ ------ ------ ------
Gross profit................................ 3,662 6,127 8,494 3,815 5,723
------------ ------ ------ ------ ------
Operating expenses:
Research and development.................. 2,958 1,601 2,751 1,274 1,866
Sales and marketing....................... 1,492 1,537 2,282 1,037 1,258
General and administrative................ 965 932 1,600 852 1,046
------------ ------ ------ ------ ------
Total operating expenses........... 5,415 4,070 6,633 3,163 4,170
------------ ------ ------ ------ ------
Income (loss) from operations............... (1,753) 2,057 1,861 652 1,553
Interest expense............................ (81) (19) (9) (6) (4)
Interest and other income................... 1 4 105 (7) 174
------------ ------ ------ ------ ------
Income (loss) before income taxes........... (1,833) 2,042 1,957 639 1,723
Provision for income taxes.................. -- 784 792 258 620
------------ ------ ------ ------ ------
Net income (loss)........................... $ (1,833) $1,258 $1,165 $ 381 $1,103
=========== ====== ====== ====== ======
Net income per share........................ $ 0.20 $ 0.18 $ 0.06 $ 0.18
====== ====== ====== ======
Weighted average common and common
equivalent shares in thousands............ 6,345 6,538 6,693 6,068
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
AND THE
COMPANY
COMBINED
------------ THE COMPANY
------------------------------------------
YEAR ENDED
DECEMBER 31,
1993 YEARS ENDED SIX MONTHS ENDED
------------ DECEMBER 31, JUNE 30,
As a percentage of total revenues 1995 1996
------ ------
1995
1994 ------
------
(UNAUDITED)
Revenues:
Software license fees..................... 95% 83% 77% 77% 82%
Engineering services...................... 4 3 2 4 5
Related parties........................... 1 14 21 19 13
------------ ------ ------ ------ ------
Total revenues..................... 100 100 100 100 100
------------ ------ ------ ------ ------
Cost of revenues:
Software license fees..................... 4 7 4 3 2
Engineering services...................... 1 1 1 -- 1
Related parties........................... -- 1 2 2 4
------------ ------ ------ ------ ------
Total cost of revenues............. 5 9 7 5 7
------------ ------ ------ ------ ------
Gross profit................................ 95 91 93 95 93
------------ ------ ------ ------ ------
Operating expenses:
Research and development.................. 76 24 30 32 30
Sales and marketing....................... 39 23 25 26 20
General and administrative................ 25 14 17 21 17
------------ ------ ------ ------ ------
Total operating expenses........... 140 61 72 79 67
------------ ------ ------ ------ ------
Income (loss) from operations............... (45) 30 21 16 26
Interest expense............................ 2 -- -- -- --
Interest and other income................... -- -- 1 -- 3
------------ ------ ------ ------ ------
Income (loss) before income taxes........... (47) 30 22 16 29
Provision for income taxes.................. -- 12 9 6 10
------------ ------ ------ ------ ------
Net income (loss)........................... (47)% 18% 13% 10% 19%
=========== ====== ====== ====== ======
</TABLE>
Comparison of Six Months Ended June 30, 1995 and June 30, 1996
Revenues. The Company's revenues consist of software license fees and
engineering services revenues. Revenues increased 52% from $4.0 million to $6.2
million in the six months ended June 30, 1995 and June 30, 1996, respectively.
Software license fees increased 62% from $3.1 million to $5.0 million in the six
months ended June 30, 1995 and June 30, 1996, respectively. This increase was
primarily due to higher unit shipments to the Company's existing Taiwanese
motherboard customers, and to a lesser degree to existing U.S. customers. This
increase was partially offset by a decrease in software license fees from a
European customer. A significant customer, which accounted for 11% of total
revenues and approximately 96% of revenues from distribution of the Company's PC
Card software for the six months ended June 30, 1996, recently indicated, for
reasons unknown to the Company, that it intends to discontinue licensing the
Company's PC Card software. Accordingly, the Company does not currently expect
to receive any revenues from that customer from the distribution of the
Company's PC Card software during the second half of 1996. Revenues from the
distribution of the Company's PC Card software accounted for 11% and 15% of the
Company's total revenues in the six months ended June 30, 1996 and the year
ended December 31, 1995, respectively. The Company anticipates that the growth
in revenues from its existing customers and products for the remainder of 1996
will offset the loss of revenues from this customer from the distribution of the
Company's PC Card software such that the Company believes that such loss will
not have a material adverse effect on the Company's business, financial
condition and results of operations. Engineering services revenues increased 98%
from $147,000 to $291,000 in the six months ended June 30, 1995 and June 30,
1996, respectively. This increase was primarily due to higher engineering
services revenues from customers in the U.S. Related parties revenues increased
6% from $765,000 to $814,000 in the six months ended June 30, 1995 and June 30,
1996, respectively. The increase was primarily due to higher software license
fees. Revenues derived from international operations represented 70% and 69% of
the Company's revenues for the six months ended June 30, 1995 and June 30, 1996,
respectively. During the six months
19
<PAGE> 20
ended June 30, 1996, 41% and 15% of the Company's revenues were denominated in
New Taiwan Dollars and in German Marks, respectively. Fluctuations in foreign
currency exchange rates did not have a material effect on total revenues in the
periods presented. However, there can be no assurance that future fluctuations
in foreign currency exchange rates will not have a material adverse effect on
the Company's future revenues and results of operations.
Cost of Revenues. Cost of revenues consist primarily of the cost of materials
and freight expenses associated with software license fees and direct costs
associated with engineering services revenues. Cost of revenues increased from
$222,000, or 5% of revenues, to $431,000, or 7% of revenues, in the six months
ended June 30, 1995 and June 30, 1996, respectively. Approximately $154,000 of
the increase resulted from engineering services revenues associated with a
product development effort with a related party. The remaining increase was
attributed primarily to the cost of software license revenues.
Research and Development. Research and development expenses consist primarily
of engineering personnel and related expenses and equipment costs. Research and
development expenses increased 46% from $1.3 million, or 32% of revenues, to
$1.9 million, or 30% of revenues, in the six months ended June 30, 1995 and June
30, 1996, respectively. This increase was primarily due to the hiring of
engineering personnel and outside consultants to develop new software products,
such as mobile PC BIOS and the SMSAccess product suite. The Company anticipates
that it will continue to devote substantial resources to product research and
development and that such expenses will continue to increase in absolute
dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related expenses, sales commissions and travel costs. Sales and
marketing expenses increased 21% from $1.0 million, or 26% of revenues, to $1.3
million, or 20% of revenues, in the six months ended June 30, 1995 and June 30,
1996, respectively. This increase in expenses was primarily due to higher sales
commissions for increased revenues and increased participation in industry
standards groups and trade shows.
General and Administrative. General and administrative expenses consist
primarily of personnel and related expenses, professional services and
facilities costs. General and administrative expenses increased 23% from
$852,000, or 21% of revenues, to $1.0 million, or 17% of revenues, in the six
months ended June 30, 1995 and June 30, 1996, respectively. This increase was
primarily due to a one-time employee severance cost of $90,000 in the Company's
European operations. In addition, during the second half of 1995, the Company
recorded $297,000 of deferred stock compensation related to the difference
between the exercise price of certain Common Stock options and the deemed fair
market value of the Common Stock on the date of grant. Amortization from such
deferred compensation expense equaled $37,000 and is included in general and
administrative expense for the six months ended June 30, 1996.
Interest Expense. Interest expense associated with short-term borrowings
decreased from $6,000 to $4,000 in the six months ended June 30, 1995 and June
30, 1996, respectively, due to a decrease in short-term borrowings.
Interest and Other Income. Interest income consists of interest income on cash
and cash equivalents and other income, net of expenses. Interest and other
income increased from ($7,000) to $174,000 in the six months ended June 30, 1995
and June 30, 1996, respectively, due to an increase in interest income earned on
higher cash balances.
Provision for Income Taxes. The Company's effective tax rate decreased from 40%
to 36% for the six months ended June 30, 1995 and June 30, 1996, respectively.
This decrease was primarily due to an increase in income taxable in Taiwan at
rates lower than the applicable statutory rates in the U.S. and Germany.
Comparison of Years Ended December 31, 1994 and December 31, 1995
Revenues. The Company's revenues increased 36% from $6.7 million to $9.1
million in 1994 and 1995, respectively. Software license fees increased 25% from
$5.6 million to $7.0 million in 1994 and 1995, respectively. This increase was
primarily due to increased software license fees resulting from the introduction
of PCI and other enhanced features. A significant customer, which accounted for
14% of total revenues and approximately 86% of revenues from distribution of the
Company's PC Card software for the year ended December 31, 1995, recently
indicated, for reasons unknown to the Company, that it intends to discontinue
licensing the Company's PC Card software; accordingly the Company does not
currently expect to receive any revenues from that customer from the
distribution of the Company's PC Card software during the second half of 1996.
Revenues from the distribution of the Company's PC Card software accounted for
11% and 15% of the Company's total revenues in the six months ended June 30,
1996 and the year ended December 31, 1995, respectively. The Company anticipates
that the growth in revenues from its existing customers and products for the
remainder of 1996 will offset the loss of revenues from this customer from the
distribution of the Company's PC
20
<PAGE> 21
Card software such that the Company believes that such loss will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Engineering services revenues increased from $161,000 to
$239,000 in 1994 and 1995, respectively. This increase was primarily due to
higher engineering services revenues from customers in the U.S. and Taiwan.
Related parties revenues increased 96% from $1.0 million to $1.9 million in 1994
and 1995, respectively. This increase was primarily due to the growth in
software license fees. Revenues derived from international operations were 75%
and 68% of the Company's revenues in 1994 and 1995, respectively. During the
year ended December 31, 1995, 32.9% and 24.0% of the Company's revenues were
denominated in New Taiwan Dollars and German Marks, respectively. Fluctuations
in foreign currency exchange rates did not have a material impact on total
revenues in 1994 or 1995. However, there can be no assurance that future
fluctuations in foreign currency exchange rates will not have a material adverse
effect on the Company's future revenues, business, financial condition and
results of operations.
Cost of Revenues. Cost of revenues increased 8% from $591,000, or 9% of
revenues, to $636,000, or 7% of revenues, in 1994 and 1995, respectively. Cost
of software license fees decreased 17% from $467,000 to $387,000 in 1994 and
1995, respectively. This decrease was primarily due to the phasing out of a
lower gross margin product during the course of the year, offset by a one-time
royalty payment of $200,000 to a third party. Cost of engineering services
revenues increased from $28,000 to $43,000 in 1994 and 1995, respectively. Cost
of related parties revenues increased from $96,000 to $206,000 in 1994 and 1995,
respectively. This increase was primarily due to direct costs associated with
engineering services.
Research and Development. Research and development expenses increased 72% from
$1.6 million, or 24% of revenues, to $2.8 million, or 30% of revenues, in 1994
and 1995, respectively. This increase was primarily due to the growth in
research and development personnel from 33 to 45 individuals during the year.
These additional personnel were hired as part of the effort to assist customers
in certifying their products for Windows 95, as well as to develop mobile BIOS
and SMSAccess.
Sales and Marketing. Sales and marketing expenses increased 48% from $1.5
million, or 23% of revenues, to $2.3 million, or 25% of revenues, in 1994 and
1995, respectively. This increase was primarily due to non-recurring charges of
$283,000 related to the recognition of warrants issued to a related party and
$36,000 related to warrants issued to a shareholder in exchange for marketing
services. In addition, higher payroll and related expenses, including sales
commissions, increased travel related to the improvement of customer relations,
and increased participation in industry trade shows and user conferences
accounted for the remainder of the increase. See "Certain Transactions."
General and Administrative. General and administrative expenses increased 72%
from $932,000, or 14% of revenues, to $1.6 million, or 17% of revenues, in 1994
and 1995, respectively. The increase was primarily due to increased employee
compensation and office facilities cost, as well as higher professional service
fees. In addition, during the second half of 1995, the Company recorded $297,000
of deferred stock compensation for the difference between the exercise price of
certain Common Stock options and the deemed fair market value of the Common
Stock on the date of grant. The deferred compensation expense will be recognized
over the four-year vesting period of the options. Amortization of deferred
compensation expense of $42,000 is included in general and administrative
expense for the year ended December 31, 1995.
Interest Expense. Interest expense decreased from $19,000 to $9,000 in 1994 and
1995, respectively, due to a decrease in short-term borrowings.
Interest and Other Income. Interest and other income increased from $4,000 to
$105,000 in 1994 and 1995, respectively, primarily due to higher interest income
earned on higher cash balances during the period.
Provision for Income Taxes. Provision for income taxes increased from $784,000
to $792,000 in 1994 and 1995, respectively, representing effective tax rates of
38% and 41%, respectively. This increase was primarily due to an increase in
income. The higher effective income tax rate for 1995 was primarily due to
one-time non-deductible sales and marketing charges of $319,000 associated with
warrants issued offset by the recognition of $117,000 of deferred tax assets
which were previously reserved based on a reevaluation of the realizability of
future tax benefits based on the income earned in 1995.
Comparison of Years Ended December 31, 1993 and December 31, 1994
The results of operations for the Predecessor for the period January 1, 1993
through July 1, 1993 and the Company for the period July 2, 1993 through
December 31, 1993 have been determined based upon the historical cost basis of
the
21
<PAGE> 22
Predecessor and the Company and have been combined to facilitate presentation of
the results of operations on a calendar year basis.
Revenues. The Company's revenues increased 74% from $3.9 million to $6.7
million in 1993 and 1994, respectively. Software license fees increased 51% from
$3.7 million to $5.6 million in 1993 and 1994, respectively. This increase was
primarily due to higher software license fees resulting from the introduction of
the Company's Green BIOS and CardWare software. Engineering services revenues
increased 5% from $154,000 to $161,000 in 1993 and 1994, respectively. Related
parties revenues increased from $50,000 to $1.0 million in 1993 and 1994,
respectively. This increase was primarily due to an increase in software license
fees from a related party. Revenues derived from international operations were
76% and 75% of the Company's revenues in 1993 and 1994, respectively.
Fluctuations in foreign currency exchange rates did not have a material impact
on total revenues in 1993 or 1994. However, there can be no assurance that
future fluctuations in foreign currency exchange rates will not have a material
adverse effect on the Company's future revenues, business, financial condition
and results of operations.
Cost of Revenues. Cost of revenues increased from $208,000, or 5% of revenues,
to $591,000, or 9% of revenues, in 1993 and 1994, respectively. Cost of software
license fees increased from $169,000 to $467,000 in 1993 and 1994, respectively.
This increase was primarily due to higher sales of a lower margin product that
the Company bundled with its desktop BIOS product. Cost of engineering services
revenues increased from $27,000 to $28,000 in 1993 and 1994, respectively. Cost
of related parties revenues increased from $12,000 to $96,000 in 1993 and 1994,
respectively, as revenues increased.
Research and Development. Research and development expenses decreased 46%, from
$3.0 million, or 76% of revenues, to $1.6 million, or 24% of revenues, in 1993
and 1994, respectively. This decrease was primarily due to a one-time charge of
$1.0 million recorded in 1993 for in-process research and development purchased
as part of the acquisition of the Company by GCH. At the acquisition date, the
in-process technology was not yet technologically feasible and had no
alternative future use.
Sales and Marketing. Sales and marketing expenses increased 3% from $1.5
million, or 39% of revenues, to $1.6 million, or 23% of revenues, in 1993 and
1994, respectively. This increase was primarily due to increased expenses
related to sales commissions and participation in trade shows.
General and Administrative. General and administrative expenses decreased 3%
from $1.0 million, or 25% of revenues, to $932,000, or 14% of revenues, in 1993
and 1994, respectively. This decrease was primarily due to a reduction in
payroll expenses resulting from a change in management, which was partially
offset by an increase in professional service fees.
Interest Expense. Interest expense decreased from $81,000 to $19,000 in 1993
and 1994, respectively, due to a decrease in short-term borrowings.
Interest and Other Income. Interest and other income increased from $1,000 to
$4,000 in 1993 and 1994, respectively, due to an increase in interest income
earned on higher cash balances.
Provision for Income Taxes. For the period from July 2, 1993 through December
3, 1994, Award was included in GCH's consolidated federal and California state
income tax returns. Under a tax sharing arrangement with GCH, the Company was
allocated a proportionate share of GCH's consolidated income tax liability. The
provision for income taxes was calculated using the separate return methodology
in accordance with SFAS No. 109. The provision for income taxes was $0 and
$784,000 in 1993 and 1994, respectively. The Company incurred a net operating
loss in 1993 and consequently paid no federal, state or foreign income taxes.
The Company's effective income tax rate was 38% for the year ended December 31,
1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited results of operations for each
of the quarters in the years ended December 31, 1994 and 1995 and for the
quarters ended March 31, 1996 and June 30, 1996, in both absolute dollars and as
a percentage of the Company's total revenues. In the opinion of management, this
information has been prepared on a basis consistent with the Company's audited
Consolidated Financial Statements, which appear elsewhere in this Prospectus,
and includes all adjustments (consisting only of normal recurring adjustments)
that the Company considers necessary to present fairly the information for the
periods presented when read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto. The operating results for any
quarter are not necessarily indicative of the results for the full year or any
future quarter.
22
<PAGE> 23
The Company's revenues significantly increased in the fourth quarters of 1994
and 1995, reflecting the seasonality of the Company's business. In addition, the
Company's revenues and profits decreased in the first quarter of 1995 and 1996
as compared with the fourth quarter of the previous year. Quarterly fluctuations
in cost of revenues are due to the mix and volume of software license fees and
engineering services revenues. Cost of revenues in the three months ended
December 31, 1995 increased to $315,000 and was attributable primarily to a
one-time royalty payment of $200,000 to a third party. Sales and marketing
expenses in the three months ended September 30, 1995 increased to $757,000.
This increase was attributable primarily to a non-recurring $283,000 charge
related to the recognition of warrants issued to a related party.
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results. The Company's revenues are affected by a number of
factors, including the demand for PCs and other microprocessor-based devices,
timing of new product introductions, product mix, volume and timing of customer
orders, activities of competitors and the ability of the Company to penetrate
new markets. See "Risk Factors -- Fluctuations in Quarterly Operating Results;
Seasonality."
<TABLE>
<CAPTION>
QUARTERS ENDED
Dollars in --------------------------------------------------------------------------------------------
thousands,
except per share 1994 1995 1996
data MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license
fees............ $1,315 $1,404 $1,473 $1,393 $1,496 $1,629 $1,675 $2,189 $2,175 $2,874
Engineering
services........ 20 33 75 33 105 42 48 44 131 160
Related parties... 119 45 140 668 455 310 535 602 506 308
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total
revenues.. 1,454 1,482 1,688 2,094 2,056 1,981 2,258 2,835 2,812 3,342
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Cost of revenues:
Software license
fees............ 249 137 52 29 17 94 47 229 52 87
Engineering
services........ 2 3 17 6 23 7 8 5 26 31
Related parties... 10 4 12 70 45 36 44 81 210 25
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total
cost of
revenues.. 261 144 81 105 85 137 99 315 288 143
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Gross profit........ 1,193 1,338 1,607 1,989 1,971 1,844 2,159 2,520 2,524 3,199
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Operating expenses:
Research and
development..... 351 332 475 443 593 681 674 803 855 1,011
Sales and
marketing....... 327 374 360 476 425 612 757 488 560 698
General and
administrative... 150 208 189 385 415 437 371 377 590 456
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total
operating
expenses.. 828 914 1,024 1,304 1,433 1,730 1,802 1,668 2,005 2,165
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Income from
operations........ 365 424 583 685 538 114 357 852 519 1,034
Interest expense
(income), net..... 8 3 7 (3 ) 8 5 (13) (96 ) (84) (86 )
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Income before income
taxes............. 357 421 576 688 530 109 370 948 603 1,120
Provision for income
taxes............. 138 163 224 259 214 44 150 384 217 403
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Net income.......... $ 219 $ 258 $ 352 $ 429 $ 316 $ 65 $ 220 $ 564 $ 386 $ 717
========== ======== ======== ======== ========== ======== ======== ======== ========== ========
Net income per
share............. $ 0.03 $ 0.04 $ 0.06 $ 0.07 $ 0.05 $ 0.01 $ 0.03 $ 0.09 $ 0.06 $ 0.12
========== ======== ======== ======== ========== ======== ======== ======== ========== ========
Weighted average
common and common
equivalent shares
in thousands...... 6,345 6,345 6,345 6,345 6,659 6,726 6,400 6,365 6,076 6,061
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------
As a percentage of 1994 1995 1996
total revenues MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license
fees............ 90% 95% 87% 67% 73% 82% 74% 77% 77% 86%
Engineering
services........ 2 2 5 1 5 2 2 2 5 5
Related parties... 8 3 8 32 22 16 24 21 18 9
--- ------- --- ------- --- ------- --- ------- --- -------
Total
revenues.. 100 100 100 100 100 100 100 100 100 100
Cost of revenues:
Software license
fees............ 17 9 3 1 1 5 2 8 2 3
Engineering
services........ -- 1 1 1 1 -- -- -- 1 1
Related parties... 1 -- 1 3 2 2 2 3 7 1
--- ------- --- ------- --- ------- --- ------- --- -------
Total
cost of
revenues... 18 10 5 5 4 7 4 11 10 5
--- ------- --- ------- --- ------- --- ------- --- -------
Gross profit........ 82 90 95 95 96 93 96 89 90 95
--- ------- --- ------- --- ------- --- ------- --- -------
Operating expenses:
Research and
development..... 24 23 28 21 29 34 30 28 30 30
Sales and
marketing....... 22 25 22 23 21 31 34 17 20 21
General and
administrative... 10 14 11 18 20 22 16 13 21 14
--- ------- --- ------- --- ------- --- ------- --- -------
Total
operating
expenses.. 56 62 61 62 70 87 80 58 71 65
--- ------- --- ------- --- ------- --- ------- --- -------
Income from
operations........ 26 28 34 33 26 6 16 31 19 30
Interest expense
(income), net..... 1 -- -- -- -- -- (1) (3) (3) (3)
--- ------- --- ------- --- ------- --- ------- --- -------
Income before income
taxes............. 25 28 34 33 26 6 17 34 22 33
Provision for income
taxes............. 10 11 13 12 10 3 7 14 8 12
--- ------- --- ------- --- ------- --- ------- --- -------
Net income.......... 15% 17% 21% 21% 16% 3% 10% 20% 14% 21%
==== ====== ==== ====== ==== ====== ==== ======= ==== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its acquisition by GCH, the Company has funded its operations primarily
through the private sale of equity securities and from cash generated from
operations. As of June 30, 1996, the Company had cash and cash equivalents of
$10.9 million and working capital of $11.9 million. Net cash used in operating
activities was $676,000 in 1993 and was primarily due to a net loss and acquired
in-process research and development. Net cash provided by operating activities
was $1.9 million in 1994 and was primarily due to net income. Net cash provided
by operating activities was $2.1 million in 1995 and was primarily due to net
income and increases in accrued liabilities. Net cash provided by operating
activities was $1.2 million for the six months ended June 30, 1995 and was
primarily due to net income and increases in accrued liabilities. Net cash
provided by operating activities was $394,000 for the six months ended June 30,
1996 and was primarily due to higher net income partially offset by increases in
accounts receivable and other current assets.
Net cash used in investing activities was $659,000 in 1993 and was primarily due
to the acquisition of the Company from the Predecessor. Net cash used in
investing activities was $75,000 in 1994 and was primarily due to the purchase
of general equipment. Net cash used in investing activities was $147,000,
$34,000 and $370,000 in 1995 and for the six months ended June 30, 1995 and
1996, respectively, and was primarily due to the purchase and upgrade of the
Company's computer hardware.
Net cash provided by financing activities was $1.6 million in 1993 and was
primarily due to proceeds from Common Stock issuance and borrowings from GCH.
Net cash used by financing activities was $781,000 in 1994 and was primarily due
to advances and repayments to GCH and principal payments under unaffiliated
third-party note obligations. Net cash provided by financing activities was $3.1
million in 1995. In 1995 and the six months ended June 30, 1996, the net cash
provided by financing activities was primarily due to proceeds from private
equity sales. For
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the six months ended June 30, 1995 and 1996, cash used by financing activities
was $1.5 million and cash provided by financing activities was $4.5 million,
respectively.
The Company believes that the net proceeds from the sale of Common Stock offered
hereby, together with anticipated cash flow from operations and existing cash
balances, will satisfy the Company's projected expenditures through 1997 for
working capital and general corporate purposes, including an increase in the
Company's internal product development, staffing in connection with new product
introductions and other related product development expenditures. From time to
time, in the ordinary course of business, the Company enters into strategic
relationships with its customers or other participants in the PC industry. Such
strategic relationships may include equity investments in the Company. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the shareholders of the Company will be reduced,
shareholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. Other than its relationships with Vobis and AMD, the
Company has no current commitments or agreements with respect to any strategic
relationships, including any equity investments. See "Risk Factors -- Dilution"
and "Dilution."
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans and also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. SFAS No. 123 defines a "fair value" based
method of accounting for an employee stock option or similar equity instrument
and encourages, but does not require, entities to adopt that method of
accounting for all of their employee stock compensation plans. SFAS No. 123
does, however, require entities to include pro forma disclosures of the
difference, if any, between compensation cost included in net income and the
related cost measured by the fair value method. The Company does not intend to
adopt the accounting provisions of the new standard and will adopt the
disclosure provisions in its financial statements for the year ending December
31, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues increased 50% from $2.3 million to $3.4 million in the three months
ended September 30, 1995 and September 30, 1996, respectively. Software license
fees increased 79% from $1.7 million to $3.0 million in the three months ended
September 30, 1995 and September 30, 1996, respectively. This increase was
primarily due to higher unit shipments to the Company's existing Taiwanese
motherboard customers partially offset by a decrease from a European customer.
Engineering services revenues increased 90% from $48,000 to $91,000 in the three
months ended September 30, 1995 and September 30, 1996, respectively. Related
parties revenues decreased 43% from $535,000 to $304,000 in the three months
ended September 30, 1995 and September 30, 1996, respectively. This decrease was
primarily due to lower software license fees and engineering services revenues.
Net income increased from $220,000 to $608,000 in the three months ended
September 30, 1995 and September 30, 1996, respectively. Cash and cash
equivalents increased from $2.0 million at September 30, 1995 to $13.2 million
at September 30, 1996. This increase was primarily due to proceeds from private
equity sales.
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BUSINESS
Award designs, develops and markets system management software for the global
computing market. System management software is one of the fundamental layers in
PC architecture and provides an essential interface between a PC's operating
system software and hardware. The Company's principal system management software
products include a suite of Basic Input/Output System software ("BIOS"). Award's
customers include designers and manufacturers of motherboards, PC systems and
other microprocessor-based (or "embedded") devices. The Company believes that
its products and engineering services enable customers to rapidly develop new
motherboard designs for state-of-the-art computer systems. The Company markets
and licenses its products and services worldwide and has established itself as a
leading provider of desktop system management software in Asia, which accounts
for approximately 40% of worldwide desktop motherboard production.
The BIOS, which is the software initially executed after the system is turned
on, tests and initializes hardware components, initiates the operating system
and then provides advanced interface functions. Award's desktop BIOS products
enable a PC to support a number of key advanced technologies, including Plug and
Play, PCI, DMI and APM. The Company is currently developing further enhancements
to its BIOS, including support for USB. The Company's embedded device BIOS
provides customized features to address the specialized needs of its customers
in this market. In addition to the Company's proprietary suite of system
management software products, Award offers PC Card software that enables PCs and
other electronic devices to recognize, install, configure and operate peripheral
devices, such as network or modem cards.
The Company currently licenses its products to more than 200 customers
worldwide. In response to its customers' need to develop and integrate new
technologies rapidly, the Company has developed its business with a particular
emphasis on providing local engineering service and support in each of its major
target regions: Asia (especially Taiwan) North America and Europe. The Company
is increasing its presence in Europe through a strategic relationship with
Vobis, pursuant to which the Company and Vobis are jointly developing BIOS and
utilities for the desktop PC and embedded device markets. As part of this
relationship, Vobis purchased shares representing approximately 11% of the
Company's Common Stock outstanding at the time of its investment.
The Company has also entered into a joint technology development and support
agreement with AMD to support the design and development of products related to
AMD's K86 microprocessor. As part of this relationship, AMD has designated Award
as its primary supplier of BIOS-related products and engineering services for
its baseline reference and production-ready K86 platform designs, and made an
equity investment in the Company's Common Stock.
The Company is leveraging its existing customer relationships and desktop
expertise to develop system management software for the mobile and network
computing markets. The Company anticipates that leading Taiwanese desktop system
and motherboard manufacturers, many of which are Award customers, will enter the
mobile PC market, and, in response, the Company is developing enhanced system
management software for mobile PCs. In addition, the Company is developing a
suite of applications called SMSAccess that, among other functions, will enable
remote access to, and diagnosis and repair of, disabled systems.
INDUSTRY BACKGROUND
PC systems consist of four layers: the hardware, the BIOS, the operating system
and the application software. The computer's primary hardware component, the
motherboard, is connected to peripheral hardware devices, such as a keyboard,
hard disk drive and mouse. The BIOS is stored in a non-volatile memory chip on
the motherboard while the operating system and application software are stored
on the hard disk drive. The BIOS, which is the software initially executed after
the system is turned on, tests and initializes hardware components and initiates
the operating system. After the BIOS completes the start up or "booting" of the
system, it serves as the interface between the computer hardware and the
operating system. By acting as the bridge between the operating system and the
computer hardware, the BIOS makes it possible to develop hardware and software
independently. As a result, the pace of innovation for hardware products in the
PC industry, where the typical life cycle of a hardware design is six to twelve
months, has not been constrained by the slower pace of operating system
development, where generational advances can take several years to develop.
Enhanced BIOS and other system management software have been developed to
support implementation of new industry standards and technologies, such as Plug
and Play, PC Card, DMI, "hot-docking" and APM. Improved versions of BIOS are
currently being developed to support USB and the latest PC industry standards.
Many of these new
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technologies will play an important part in the development of PCs and embedded
devices for the Internet and other network computing environments.
Several important trends are currently affecting the system management software
industry:
Outsourcing of System Management Software Development. The rapid pace of
technological innovation in recent years has required system makers to adapt to
short production cycles and operate in an environment of continuous innovation.
As PC and motherboard designers and manufacturers continuously improve their
hardware products, they must ensure the compatibility of these new designs with
existing operating systems through a customized BIOS. While some PC and
motherboard manufacturers develop system management software internally,
increasingly complex technology, demand for compatibility and competitive market
pressures are driving many manufacturers to rely on dedicated system management
software providers. These manufacturers demand high levels of support at all
stages of product development, making it necessary for system management
software vendors to provide effective localized engineering support during the
production process.
Outsourcing of Motherboard Production. Competitive pressures in the PC market
have also caused system manufacturers to outsource PC motherboard production to
reduce cost and stay current with advancing technologies. Manufacturers in
Taiwan have taken advantage of this trend to become significant participants in
the world desktop system and motherboard production market. Further, their role
has expanded to include design decisions, such as the selection of the BIOS and
other system management software. To rapidly integrate new motherboard designs
into the overall PC system, these manufacturers require locally based system
management software engineering resources.
Proliferation of x86 Architecture in the Embedded Device Market. Traditional PC
architecture, which is based on the x86 design, is being adopted for use in the
embedded computer market. The implementation of x86 architecture permits the
development of open systems that can employ standard software, development tools
and peripheral hardware products. Embedded devices perform a single or limited
number of complex applications for a dedicated purpose. These embedded devices
require advanced capabilities for data analysis, communication, control and
ease-of-use and depend upon highly customized system management software
solutions to ensure performance, reliability and functionality.
Demands for Product Support Solutions. As PC use by less technically
sophisticated home and business users has grown, PC system manufacturers have
been searching for cost-effective solutions to provide technical customer
support services. The emerging network computing environment potentially
provides system manufacturers with the ability to access the hardware and
operating systems in order to ascertain the problems of the user and to make
repairs. Additionally, manufacturers of embedded systems are searching for
cost-effective ways to maintain and support their products, which are broadly
distributed and sometimes installed in remote locations that cannot be directly
accessed by support personnel. To address this opportunity, providers of system
management software are beginning to work closely with system manufacturers to
develop products with remote access, diagnostic and repair capabilities. For
example, AMD has committed to license the Company's SMSAccess suite of
applications for use with its platforms as they become commercially available.
AWARD STRATEGY
The Company's objective is to become the leading designer, developer and
marketer of system management software by providing innovative solutions to the
desktop PC, embedded device, mobile PC and network computing markets. The
Company's strategy includes the following key elements:
Build Upon Desktop Leadership in Asia. Award is currently a leading provider of
system management software to the Asian desktop motherboard market and will
attempt to increase market share in this important region. The Company believes
that PC manufacturers worldwide increasingly outsource PC design decisions,
including the selection of system management software, to the OEMs and original
design manufacturers in Taiwan that form the core of the Company's client base.
Award further believes its longstanding focus on Asia positions it to take
advantage of this market growth, and the Company plans to maintain a high level
of engineering and management resources in this region.
Leverage Existing Customer Relationships and Desktop Expertise to Pursue the
Mobile and Embedded Markets. The Company believes that it can leverage its
desktop system management software expertise to design and develop products for
the mobile PC and embedded device markets. To complement its mobile BIOS
products, the Company also offers system management software to support the PC
Card standard, which is broadly implemented in the mobile PC market. The Company
believes that the leading Taiwanese desktop system and motherboard
manufacturers, many of which are
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Award customers, will enter the mobile PC market and provide the Company with
opportunities to license its mobile BIOS products. In addition, the Company is
establishing a full service operation in Tokyo to design, develop and market
system management software to the mobile PC manufacturers in Japan, which are
significant participants in the mobile PC market. The Company is also pursuing
opportunities with manufacturers of embedded devices, a market characterized by
relatively long product life cycles, often from three to seven years.
Provide Innovative Products for the Emerging Network and Internet Computing
Marketplace. The Company is designing and developing a number of products for
the emerging network computing market. For example, as part of the SMSAccess
suite of applications, Award is developing its RPBAccess software, which will
allow an end-user to obtain diagnostic and repair system support service through
a modem or the Internet without a functional operating system or operational
hard disk. In addition, Award's SMSAccess software suite will allow a network
administrator to access and retrieve system management information, either
locally or remotely. The Company's WWWAccess software, which will include web
browser technology licensed from third parties, will provide embedded devices,
such as point-of-sale systems, set-top boxes and personal digital assistants,
with Internet capabilities. There can be no assurance, however, that the Company
will successfully develop and market such software.
Provide Localized Customer Service in Key Markets. The Company provides
responsive and competitive system management software engineering and support by
maintaining engineering, marketing and sales staff in three key PC design
centers around the world: Taiwan, the U.S. and Germany. For many of its
customers, Award serves as an important source of research and development,
providing customized solutions within the tight timeframes required in the
competitive motherboard market. In addition, the Company's local service centers
allow it to act as an important conduit between the technology centers in the
U.S. and key PC design centers. Easy accessibility, frequent communication and
localized interaction are crucial to the selection and implementation of Award
system management software. The Company believes that its emphasis on local
service enables it to perform high quality, reliable and timely engineering and
support services and provides it with a competitive advantage.
PRODUCTS -- SYSTEM MANAGEMENT SOFTWARE
Award System BIOS
The Company's Award System BIOS consists of core software code that can be
combined with additional software modules to add specific functions and
features, including Plug and Play, PCI, APM and DMI. The Company is currently
testing additional modules that support the USB standard. The Company integrates
the core software code with some or all of these software modules to create a
product that meets the needs of its three principal markets: desktop PCs,
embedded devices and mobile PCs. To date, the majority of the Company's software
license fees have been derived from sales in the desktop PC market.
Desktop BIOS integrates the core software code with modules that support the
following technological advancements:
- Plug and Play permits the BIOS and operating system software to
automatically recognize and configure PC hardware and peripherals, such as
printers, network cards and multimedia accessories. A variation of this
technology, known as "hot" Plug and Play, allows for the installation,
recognition and removal of peripherals while power is on.
- PCI was developed by a consortium led by Intel and provides an
automatically configured interface between high-speed peripheral components
and PC systems.
- APM reduces power consumption by continuously monitoring system activity,
sensing idle time and powering down or powering off components.
- DMI is a new industry standard that allows the desktop configuration data
to be easily accessed locally or over a network. This software is capable
of detecting and storing configuration information from devices and systems
that comply with the industry standard Desktop Management Task Force
specification.
The Company is currently developing a module to support USB. USB is a new Plug
and Play interface under development by Microsoft and Intel, which is designed
to provide an easy connection for slow and medium speed peripherals to a PC by
supplying a uniform connector to make installing a peripheral as simple as
plugging in a telephone.
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Embedded Device BIOS integrates the core software code with selected modules and
additional custom features. Award works closely with embedded device customers
to incorporate BIOS into design intensive embedded hardware. Unlike PC products,
which typically experience short product cycles, a typical embedded device
solution has a relatively long product life, with most designs lasting through
the life cycles of the products into which they are integrated, often three to
seven or more years.
Mobile PC BIOS is a new customized BIOS solution for use in notebook and other
portable PCs, which will integrate the core software code with modules that
support Plug and Play, PCI, APM and DMI. In addition, this new product will
support the hardware associated with mobile PCs, such as chipsets and keyboard
controllers, as well as other advanced technologies. For example, "hot docking"
allows users to connect to and disconnect from their mobile PCs to desktop
docking stations without turning off their machines. The Company is also
developing smart battery support which ensures compatibility and monitors
diagnostic information for the advanced batteries found in mobile PCs.
PC Card Software
The Personal Computer Memory Card International Association ("PCMCIA") was
formed to enact standards for credit card size computer memory and peripheral
add-on products called "PC Cards." Award supplies software to enable PCs and
other electronic devices to recognize, install, configure and operate peripheral
devices that comply with PCMCIA standards. Award's PC Card software, CardWare
and CardControl, provides a number of benefits over traditional PC Card
software, including the efficient use of system memory, greater portability,
ease of maintenance, and a more modular design.
CardWare consists of several software components: CardWare Socket Services,
which works with the hardware to recognize PC Card socket status and report that
status to other PC Card software; CardWare Card Services, which provides
resource management as well as the industry standard programming interface and
allows the user to hot-swap multiple PC Cards in the system; and a suite of
software drivers, which handle recognition and configuration of CardWare Socket
Services and CardWare Card Services.
CardControl is a software program that operates under Windows and allows a user
to review or configure a PC Card. In addition, this software contains two unique
advisory modes, which automatically configure a card for optimal performance or
suggest available configurations.
SMSAccess
The Company is currently developing the SMSAccess suite of applications that
includes significant enhancements to traditional system management software
products:
DMIAccess is a Windows application that allows a user to view hardware specific
information without physically looking in the computer or reading the system
start-up messages. Such information includes RAM configuration, system serial
number, motherboard serial number, and hard drive options. In conjunction with
third-party software, DMIAccess provides a complete solution which network
administrators can use to remotely access data provided by DMI-compliant
hardware.
BIOSAccess is a Windows application, currently under development, that will
allow a user to view and change system setup information, such as power
management, display, security, sound, keyboard, and serial/parallel port
options. The application also will allow the user to view basic system
parameters such as RAM size, hard disk size, processor type, and BIOS version.
BIOSAccess is expected to replace traditional, less user-friendly
character-based utilities.
RPBAccess is a patent-pending product, currently under development, that will
allow technical support personnel to remotely access a disabled PC via a modem,
network or Internet connection. The Company believes that this software is
unique because it operates without a functioning hard drive or operating system
and thus can solve a greater number of system problems. RPBAccess will allow an
expert system or technical support person to run BIOS setup, see error messages,
upload and download files (if the hard disk functions), and upload and download
diagnostic software. Consequently, PC manufacturers will be able to efficiently
diagnose and potentially repair systems without the usual user telephone relay
or site visit. RPBAccess will benefit PC system manufacturers because it can
reduce both the time and expense to diagnose and repair the system.
USBAccess is a Windows application the Company plans to develop that will
display the type and status of all connected USB devices, providing the user
with access to such USB options as bandwidth allocation and power management. In
conjunction with third party software, USBAccess will provide a complete
solution that network administrators can use remotely to access data provided by
USB-compliant hardware.
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CUSTOMERS
The Company services over 200 customers worldwide, including designers and
manufacturers of desktop PC motherboards, PC systems and notebooks and hardware
component and embedded device manufacturers. From time to time, the Company has
worked with selected customers to co-develop certain products and expects to
pursue additional co-development opportunities in the future. For example, the
Company is currently working with Vobis to develop custom products for certain
embedded applications and with AMD on the design and development of products
related to its K86 microprocessor.
The following is a list of customers of the Company who individually accounted
for at least $50,000 in revenues in the year ended December 31, 1995,
representing, in the aggregate, approximately 74% of the Company's revenues.
These customers have licensed the Company's software, and certain of such
customers have contracted for the Company to provide non-recurring engineering
("NRE") services, in the categories in which they are listed below.
PC MOTHERBOARD DESIGNERS AND MANUFACTURERS
Ansoon Technology Co.
BCM Advanced Research, Inc.
Chaintech Computer Limited Co.
Diamond Flower International Inc.
Elitegroup Computer Systems Inc.
First International Computer Inc.
Full Yes Industrial Corp.
Gemlight Computer Ltd.
GigaByte Technology Co., Ltd.
Hsing Tech Enterprise Co., Ltd.
Holco Enterprise Co., Ltd.
J. Bond Computer Systems Corp.
Ocean Office Automation Ltd.
Powertech, Inc.
President Technology Inc.
Sukjung
Rectron Ltd.
United Spring Association Ltd.
Vector
Vtech Industries, Inc.
PC SYSTEM AND NOTEBOOK MANUFACTURERS
Kapok
Mitac Electronics Group
Maxdata Computer GmbH
Siemens Components, Inc.
Synnex Information Technologies, Inc.
Toshiba Europa (I.E.) GmbH
Vobis Microcomputer AG
HARDWARE COMPONENT AND EMBEDDED MANUFACTURERS
Advanced Micro Devices, Inc.
Quadrus
Helix Magnetics, Inc.
RadiSys Corporation
In the year ended December 31, 1994, Siemens and Toshiba accounted for
approximately 17% and 12% of the Company's revenues, respectively, and in the
year ended December 31, 1995, Vobis and Toshiba accounted for approximately 13%
and 14% of the Company's revenues, respectively. For the six months ended June
30, 1996, Vobis and Toshiba accounted for approximately 12% and 11% of the
Company's revenues, respectively. Toshiba recently indicated that it would
discontinue licensing the Company's PC Card software during the third quarter of
1996. See "Risk Factors -- Competition" and "-- Dependence on Key Customer
Relationships; Concentration of Credit Risk." See Note 9 of Notes to
Consolidated Financial Statements for geographic segment information.
SALES AND MARKETING
The Company markets its products directly and through independent sales
representatives. In North America, Award sales managers operate from the
Company's headquarters in Mountain View, California. The Company complements its
sales force in the U.S. with an independent sales representative in Southern
California. In Asia, the Company operates from its office in Taipei, Taiwan, and
through independent sales representatives in Korea and Japan. In Europe, the
Company markets through its office in Munich, Germany. The Company supports its
sales efforts with marketing programs that include exhibitions at trade shows,
participation in industry associations, attendance at technical seminars and
designation as hardware reference platform designs by chipset manufacturers. For
example, AMD has designated the Award Desktop BIOS for its baseline K86
microprocessor design for desktop PC and server applications.
The Company believes that customer service and technical support are important
competitive factors in the system management software market. Accordingly, the
Company provides local service and support for its customers in the U.S.,
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Europe and Asia. In addition, the Company provides worldwide technical support
from the U.S. for end-users of its products through dial-in telephone services,
facsimile, e-mail and the Company's web site on the World Wide Web. Information
contained in the Company's home page shall not be deemed to be a part of this
Prospectus. Award believes that close contact with its customers not only
improves its customers' level of satisfaction, but also provides early access to
its customers' new product plans and requirements.
PRODUCT DEVELOPMENT
Award's research and development efforts consist of new product development,
product enhancements and product customization for individual customers. The
Company develops new products in response to emerging standards such as DMI and
to address perceived opportunities in related markets such as mobile computing
and remote diagnostics. Award's engineers actively participate in a number of
relevant industry standard groups, such as the Personal Computer Memory Card
International Association, the Desktop Management Task Force and the Peripheral
Component Interconnect Special Interest Group, which help guide the Company's
product planning. Software is developed in a modular fashion to facilitate
changes and updates as needed to meet customer requirements and rapid
development of new products.
An important function of the Company's engineering group is to perform the
customization of the BIOS for each new motherboard. The Company works closely
with the customer's engineers to ensure that the final motherboard design and
the Award BIOS are developed efficiently. The turnaround time for customizing a
BIOS for a customer (from receipt of motherboard and engineering to quality
assurance and product release) can be as short as one week. Customization of a
BIOS can be done either in the U.S., Taiwan or Europe, depending on resource
availability and customer needs.
Because the development of the Company's software products requires knowledge of
computer hardware, operating system software, system management software and
application software, key technical personnel must be proficient in a number of
disciplines. Competition to attract and retain such personnel is intense, and
the failure of the Company to hire and retain talented technical personnel or
the loss of one or more key technical employees could have an adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Key Personnel; Ability to Attract and Retain Key
Technical Employees."
COMPETITION
The markets for the Company's products are highly competitive. The principal
competitive factors affecting the markets for the Company's software include
technological excellence, timeliness of product introduction, responsiveness to
customer requirements, customer relationships, industry relationships,
engineering services, ease of use, ease of integration and price. Due to its
technological competence, large customer base in the desktop PC market, and
strong relationships with industry participants, the Company believes it
competes favorably with respect to all of these factors. Further, part of the
Company's strategy is to develop innovative software product solutions to
address the emerging trends in the PC and embedded device markets. There can be
no assurance that such products or technologies will be successfully developed
by the Company or that such products will not be developed by others, rendering
the Company's software or technologies non-competitive or obsolete. Failure to
successfully implement this strategy could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Business -- Industry Background" and "-- Product Development."
The Company faces competition primarily from other systems management software
companies, including American Megatrends, Inc., Phoenix Technologies Ltd. and
SystemSoft Corporation, and also from the in-house software development staffs
of current and prospective customers. Certain of the companies with which the
Company competes or may in the future compete have substantially greater
financial, marketing, sales and support resources and greater brand name and
technological leadership recognition than the Company. There can be no assurance
that the Company will be able to develop software comparable or superior to
software offered by its competitors. In addition, the PC market experiences
intense price competition and the Company expects that, in order to remain
competitive, it may have to decrease unit prices on some or all of its software
products. Any such decrease would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that interdependencies may develop between system
management software companies and their customers, which would need to be
overcome in order to replace an entrenched competitor. While Award believes such
entrenchment may benefit the Company in its existing relationships with key
participants in the PC market, especially
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with its customers in Taiwan, customer entrenchment may make it more difficult
for the Company to displace competitors or increase market presence,
particularly in the mobile PC market, where competitors may have strong
relationships with certain mobile PC manufacturers. Intel, for example, has
entered into formal agreements with, and become a significant shareholder in,
Phoenix Technologies Ltd. and SystemSoft Corporation. In addition, SystemSoft
Corporation has entered into agreements with Microsoft, IBM and Compaq to
license its PC Card software.
The Company believes that competitive pressures in the system management
software market may increase as (i) microprocessor manufacturers continue to
enter the motherboard manufacturing market and (ii) operating software system
vendors incorporate more system management software into their products. The
entrance or expansion of microprocessor manufacturers who are not customers of
the Company into the motherboard manufacturing markets may have an adverse
effect on the Company's motherboard manufacturing customers. Further, as
software manufacturers provide greater functionality and features, user value
and performance to their products that eliminate or encroach upon the need for
the Company's software products, the market for such products could be
materially diminished.
Microsoft includes basic PC Card software in its Windows 95 operating system and
has announced the inclusion of full PC Card software support in its next
generation Windows 9x and Windows NT operating systems. Currently, the Company
is developing PC Card software for Microsoft's Windows NT. If end-users of
Microsoft's version of the basic PC Card and Plug and Play software included in
its operating systems perceive such software as being adequate for their
computing needs, Award's revenues from PC Card software would be adversely
affected. While the Company believes that the trend in the PC industry toward
greater complexity will continue and that the Company's products offer a
technologically proven, timely and cost-effective solution to this need, there
can be no assurance that other participants in the PC industry will not develop
products and solutions that encroach upon the demand, or obviate the need, for
the Company's products. See "Risk Factors -- Dependence on Key Customer
Relationships; Concentration of Credit Risk."
INTELLECTUAL PROPERTY
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards all
of its software as proprietary and attempts to protect it with a combination of
patents, copyrights, trademarks and trade secrets, employee and third-party
nondisclosure agreements and other methods of protection. Despite these
precautions and the protection of copyright laws, it may be possible for
unauthorized third parties to copy the Company's software or to reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company has patent applications pending in the U.S. and/or abroad on six
inventions, three of which are owned jointly with a third party. There are
currently no issued patents covering the Company's products. However, the
Company does not generally rely on patents to protect its products. The Company
licenses its object and source code under written license agreements. Certain
provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed programs, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign jurisdictions, including Taiwan, do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the protections put in place by the Company will be
adequate.
Significant and protracted litigation may be necessary to protect the Company's
intellectual property rights to determine the scope of the proprietary rights of
others or to defend against claims of infringement. Moreover, although the
Company is not currently involved in any litigation with respect to intellectual
property rights, in the past there have been allegations that certain portions
of the Company's core BIOS infringed on a third party's copyrights. In response,
the Company rewrote certain software routines in a "clean room" procedure and is
upgrading its customers to the new version of such software routines in order to
avoid any further allegations of infringement. The Company believes that its
software does not presently infringe the copyrights of any third parties.
However, there can be no assurance that other parties will not make allegations
of infringement in the future. Such assertions could require the Company to
discontinue the use of certain software routines, to cease the manufacture, use
and sale of infringing products, to incur significant litigation costs and
expenses and to develop non-infringing technology or to obtain licenses to the
alleged infringing technology. Although the Company has been able to acquire
licenses from third parties in the past, there can be no assurance that the
Company would be able to develop alternative technologies or to obtain such
licenses or, if a license is obtainable, that the terms would be commercially
acceptable to the Company in the event such assertions are made in the future.
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<PAGE> 33
EMPLOYEES
As of August 31, 1996, the Company had 98 full-time employees, of whom 52 are
engaged in engineering and technical positions, 26 in sales and marketing, and
20 in finance, operations and administration. Except for its employees in
Germany, none of the Company's employees is subject to an employment agreement
with the Company. No employee of the Company is represented by a labor union or
is subject to a collective bargaining agreement. The Company has never
experienced a work stoppage due to labor difficulties and believes that its
employee relations are good.
LEGAL PROCEEDINGS
The Company is not currently engaged in any material litigation or legal
proceedings.
FACILITIES
The Company's headquarters are located in Mountain View, California. The Company
subleases approximately 20,000 square feet in this facility under a lease
agreement that expires on December 31, 1996 and may be renewed on a yearly basis
thereafter. The Company also leases office space in Taipei, Taiwan and Munich,
Germany. These offices provide sales and technical support to its customers in
Asia and Europe, respectively. The Company believes that its facilities are
adequate to support operations for the next twelve months. In the event that
additional space is needed, the Company believes that suitable additional or
alternative space adequate to serve its needs will be readily available on
commercially reasonable terms. See "Certain Transactions."
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<PAGE> 34
MANAGEMENT
The executive officers and directors of Award and their ages as of August 31,
1996 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
George C. Huang........ 55 Chairman of the Board, President, Chief Executive Officer
and Director
Reza Afghan............ 35 Vice President, Operations
Kevin J. Berry......... 46 Vice President, Finance, Chief Financial Officer, Treasurer
and Secretary
Maurice W. Bizzarri.... 40 Vice President, Engineering and Product Marketing
Lyon T. Lin............ 44 General Manager, Taiwan; President, Award Software Hong Kong
Limited
Ann P. Shen............ 55 Vice President, Sales and Marketing
Cheng Ming Lee......... 53 Director
David S. Lee(1)(2)..... 59 Director
Theodor L. Lieven...... 44 Director
Masami Maeda........... 61 Director
Anthony Sun(1)......... 44 Director
William P. Tai(1)(2)... 34 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
GEORGE C. HUANG has served as Chairman of the Board of Directors, President,
Chief Executive Officer and Director since July 1993. From January 1984 to the
present, Dr. Huang has served as Chairman of the Board of Directors of GCH
Systems, Inc. ("GCH"), a company that develops and markets embedded controllers,
Application Specific Integrated Circuits and PC systems, and from January 1984
until November 1994, he also served as Chief Executive Officer of GCH. From
February 1987 to the present Dr. Huang has served as a Director of GCH-Sun
Systems Company Ltd. ("GSS"), a subsidiary of GCH. From January 1990 to May
1996, Dr. Huang served as a Director of Fidelity Venture Capital Corporation
("FVCC"), a shareholder of GCH and the Company. Dr. Huang received a B.S. from
the National Taiwan University, an M.S. from Washington State University, and a
Ph.D. in Electrical Engineering from University of Washington.
REZA AFGHAN has served as Vice President, Operations since January 1994. From
November 1987 to January 1994, Mr. Afghan served as Vice President, Sales and
Operations of GCH. He received his B.S. in Electrical Engineering from Oregon
State University.
KEVIN J. BERRY has served as Vice President, Finance, Chief Financial Officer
and Treasurer since June 1995 and Secretary since October 1995. From December
1988 to May 1995, Mr. Berry served as Vice President, Finance for the CMX and
Aurora divisions of Chyron Corporation, a developer and manufacturer of software
and systems for the video marketplace. Mr. Berry received a B.S. in Finance and
an M.B.A. from New York University.
MAURICE W. BIZZARRI has served as Vice President, Engineering and Product
Marketing since July 1995. From June 1992 to July 1995, Mr. Bizzarri consulted
in the systems software industry. From November 1990 to June 1992, he served as
Vice President, Research and Development of Connective Strategies, Inc., a
hardware/software company.
LYON T. LIN has served as General Manager, Taiwan, and President, Award Software
Hong Kong Limited since July 1993. From January 1984 to June 1993, Mr. Lin
served as Vice President of GCH. Mr. Lin is also a director of GSS. Mr. Lin
received a B.S. in Electrical Engineering from National Chiao-Tung University
and an M.S. in Electrical Engineering from Santa Clara University. Mr. Lin is
the brother-in-law of George C. Huang.
ANN P. SHEN has served as Vice President, Sales and Marketing since December
1994. From June 1994 to December 1994, she served as Vice President, Engineering
and Marketing and from August 1993 to June 1994 she served as Vice President,
Engineering. Dr. Shen served as Vice President, Engineering at GCH from October
1992 to June 1994. From March 1990 to August 1992, Dr. Shen served as Vice
President, Engineering and Manufacturing Director of OPTA, a digital camera and
high-end graphic/video card company. Dr. Shen received a B.S. in Physics from
National Taiwan University, an M.S. in Physics from the University of
California, Los Angeles and a Ph.D. in Solid State Physics from New York
Polytechnical University.
CHENG MING LEE has served as a director since July 1993. From April 1987 to the
present, Dr. Lee has served as the President and Chief Executive Officer of
Taiwan Venture Capital Corporation ("TVCC") and FVCC, both of which are
shareholders of the Company. Dr. Lee serves on the Board of Directors of Taiwan
Opportunities Fund Limited and
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<PAGE> 35
CNET Technology Corp. Dr. Lee received a B.S. from National Taiwan University,
M.S. from Stanford University and a Ph.D. in Chemical Engineering from the
University of Houston.
DAVID S. LEE has served as a director since December 1994. From May 1995 to the
present, Mr. Lee has served as the Chairman of CMC Industries, Inc., a contract
manufacturing company. From November 1985 to August 1994, Mr. Lee served as the
President and Chief Executive Officer of DTC Data Technology Corporation
(formerly Qume Corporation), a manufacturer of disk controller and communication
peripherals. Mr. Lee serves on the Board of Directors of Linear Technology
Corporation and Photonics Corporation. In addition, Mr. Lee is a member of the
Board of Regents of the University of California. Mr. Lee holds an Honorary
Doctorate of Engineering and B.S. in Mechanical Engineering from Montana State
University and an M.S. in Mechanical Engineering from North Dakota State
University.
THEODOR L. LIEVEN has served as a director since January 1996. From January 1975
to the present, Mr. Lieven has served as Chief Executive Officer of Vobis
Microcomputer AG, a computer and peripherals retailing and production company
which he co-founded in 1975. For a description of the voting agreement relating
to Mr. Lieven and Vobis, see "Certain Transactions."
MASAMI MAEDA has served as a director since January 1995. From April 1971 to the
present, Mr. Maeda has served as President and Chief Executive Officer of Sun
Corporation, a manufacturer of electronic devices. He is also a member of the
Board of Directors of GCH and GSS.
ANTHONY SUN has served as a director since October 1995. From August 1979 to the
present, he has been a general partner of Venrock Associates, a venture capital
partnership. Mr. Sun serves on the Board of Directors of Cognex Corporation,
Conductus, Inc., Centura Software Corporation, Fractal Design Corporation,
Inference Corporation, Komag, Inc., Photonics Corporation, StrataCom, Inc. and
World Talk Communications Corp. Mr. Sun holds S.B.E.E. and S.M.E.E. degrees from
Massachusetts Institute of Technology and an M.B.A. from Harvard University.
WILLIAM P. TAI has served as a director since June 1995. From September 1991 to
the present, Mr. Tai has been a general partner of the Walden Group of Venture
Capital Funds. Concurrently, from August 1995 to the present, he has been
Chairman and Chief Executive Officer of AUNET Corporation, an Asia-based
affiliate of UUNET Technologies, Inc. From August 1987 to September 1991, Mr.
Tai served as Vice President of Alex. Brown & Sons Inc., where he was
responsible for the firm's efforts in the semiconductor industry. Mr. Tai also
serves on the Board of Directors of Network Peripherals Inc. Mr. Tai holds a
B.S. with Honors in Electrical Engineering from the University of Illinois and
an M.B.A. from Harvard University.
Each director of the Company serves for a one year term or until his successor
has been duly elected and qualified. Executive officers of the Company serve at
the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee establishes salaries, incentives and
other forms of compensation for directors, executive officers and employees of
the Company and administers various incentive compensation and benefit plans.
The Audit Committee oversees the work performed by the Company's independent
accountants and reviews the Company's internal controls.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. David S. Lee, Sun and Tai. No
member of the Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee. For a description of transactions and relationships
involving the Company and members of the Compensation Committee, see "Certain
Transactions."
35
<PAGE> 36
EXECUTIVE COMPENSATION
The following table sets forth certain compensation of the Company's Chief
Executive Officer and the three highest paid executive officers of the Company
who earned more than $100,000 in the fiscal year ended December 31, 1995
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
NAME AND PRINCIPAL POSITION --------------------- -----------
SECURITIES
BONUS UNDERLYING ALL OTHER
SALARY EARNED OPTIONS COMPENSATION
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
George C. Huang................................ $ 92,986 $ -- -- $ --
Chairman of the Board, President and Chief
Executive Officer
Lyon T. Lin.................................... 110,618 62,703(1) -- --
General Manager, Taiwan; President, Award
Software Hong Kong Limited
Ann P. Shen.................................... 85,000 32,090(1) -- --
Vice President, Sales and Marketing
Cornelia Schumann(2)........................... 79,930 23,367(1) -- 4,400(3)
General Manager, Munich
</TABLE>
- ---------------
(1) Represents sales commissions earned.
(2) Resigned from the Company effective March 31, 1996.
(3) Allowance for automobile.
STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in December 1994 and amended in November 1995. The purpose of
the Option Plan is to attract and retain qualified personnel, to provide
additional incentives to employees, including officers, directors and
consultants of the Company, and to promote the success of the Company's
business. Pursuant to the Option Plan, the Company may grant or issue incentive
stock options to employees and officers and nonstatutory stock options to
consultants, employees, and directors. A total of 1,250,000 shares of Common
Stock has been reserved for issuance under the Option Plan. At August 31, 1996,
options to purchase 50,291 shares of Common Stock had been exercised under the
Option Plan and the Company had outstanding options to purchase 955,655 shares
of Common Stock at a weighted average per share exercise price of $4.11. A total
of 244,054 shares of Common Stock is available for future issuance under the
Option Plan.
Although no vesting schedule is required under the Option Plan, options
previously granted under the Option Plan generally have become exercisable one
year after date of grant and vest over a maximum period of five years following
the date of grant. The maximum term of a stock option under the Option Plan is
ten years, but if the optionee at the time of grant has voting power over more
than 10% of the Company's outstanding capital stock, the maximum term of
incentive stock option is five years. The exercise price of incentive stock
options granted under the Option Plan must be at least equal to 100%, or 110%
with respect to holders of 10% of the voting power of the Company's outstanding
capital stock, of the fair market value of the stock subject to the option on
the date of grant. The exercise price of nonstatutory stock options granted
under the Option Plan must be at least equal to 85% of the fair market value of
the stock subject to the option on the date of the grant. No executive officer
or director shall be eligible to be granted options covering more than 500,000
shares of the Company's Common Stock in any twelve-month period.
The Option Plan may be amended at any time by the Board, although certain
amendments require shareholder approval. The Option Plan will terminate in
January 2005 unless earlier terminated by the Board.
36
<PAGE> 37
In April 1996, the following Named Executive Officers received grants of options
to purchase shares of Common Stock in the amounts stated below at a weighted
average per share exercise price of $10.56:
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
NAME SUBJECT TO OPTIONS
-------------------
<S> <C>
George C. Huang.................................................................. 35,000
Lyon T. Lin...................................................................... 20,000
Ann P. Shen...................................................................... 7,500
</TABLE>
OPTIONS GRANTED IN LAST FISCAL YEAR
No options were granted during the year ended December 31, 1995 to the Named
Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the fiscal year ended December 31, 1995 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1995.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------ --------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
George C. Huang........... -- -- 0/60,000 $0/$420,000
Lyon T. Lin............... -- -- 0/50,000 $0/$350,000
Ann P. Shen............... -- -- 0/26,050 $0/$182,350
Cornelia Schumann(2)...... -- -- 0/17,500 $0/$122,500
</TABLE>
- ---------------
(1) Value realized and value of unexercised in-the-money options is based on the
initial public offering price of $8.00 per share of the Company's Common Stock,
minus the exercise price, multiplied by the number of shares underlying the
option.
(2) Resigned from the Company effective March 31, 1996.
EXECUTIVE COMPENSATION PLAN
In April 1996, the Company adopted an Executive Compensation Plan, pursuant to
the terms of which the Company's senior management, including the Named
Executive Officers, will receive at the end of 1996 cash bonuses based on the
Company's performance in 1996.
EMPLOYEE STOCK PURCHASE PLAN
In May 1996, the Company's Board of Directors approved the 1996 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 150,000 shares of
Common Stock. The Purchase Plan is to become effective upon the effectiveness of
the Offering. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code
(the "Code"). Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. The offering period for any
offering will be no more than 27 months.
Employees are eligible to participate if they are employed by the Company or an
affiliate of the Company designated by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by the
Board of Directors, to the purchase of shares of Common Stock. The price of
Common Stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
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<PAGE> 38
In the event of certain changes of control, the Company and the Board of
Directors have discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten the offering period and provide for all sums collected
by payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's direction.
401(K) PLAN
In January 1995, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's employees.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the lesser of 15% of eligible compensation or the
statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such
reduction contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at
the direction of each participant, invests the assets of the 401(k) Plan in any
of several designated investment options. The 401(k) Plan is intended to qualify
under Section 401 of the Code so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn, and so that the contributions by employees will be deductible
by the Company when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors, and
may indemnify its officers, employees and other agents, to the fullest extent
not prohibited by California law. The Company is also empowered under its Bylaws
to enter into indemnification agreements with its directors, officers, employees
and other agents and to purchase insurance on behalf of any person whom it is
required or permitted to indemnify. Pursuant to this provision, the Company will
enter into indemnity agreements with each of its directors and executive
officers.
In addition, the Company's Amended and Restated Articles of Incorporation
provide that, to the fullest extent permitted by California law, the Company's
directors will not be liable for monetary damages for breach of the directors'
fiduciary duty of care to the Company and its shareholders. This provision in
the Amended and Restated Articles of Incorporation does not eliminate the duty
of care, and in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company for acts or omissions
not in good faith or involving intentional misconduct or knowing or culpable
violations of law that the director believes to be contrary to the best
interests of the Company or its shareholders, for acts or omissions involving a
reckless disregard for the director's duty to the Company or its shareholders
when the director was aware or should have been aware of a risk of serious
injury to the Company or its shareholders, or an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its shareholders, for improper transactions between the director and the
Company or for improper distributions to shareholders and loans to directors and
officers, or for acts or omissions by the director as an officer. This provision
also does not affect a director's responsibilities under any other laws, such as
the federal securities laws or state or federal environmental laws.
At the present time, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
pending or threatened litigation or proceeding which may result in a claim for
such indemnification by any director, officer, employee or other agent.
CERTAIN TRANSACTIONS
FINANCINGS
In January 1996, Vobis purchased 570,033 shares of Common Stock at $12.28 per
share and a warrant (the "Vobis Warrant") at $0.02 per warrant share to purchase
272,394 shares of Common Stock with an exercise price of $12.28 per share.
Pursuant to that certain Investors' Rights Agreement, dated as of January 12,
1996, among the Company, Vobis and the other parties thereto (the "Investors'
Rights Agreement"), Vobis may elect in respect of future issuances of the
Company's equity securities to purchase that number of shares as is necessary to
maintain its ownership interest (in no event to exceed 17.5% on a fully diluted
basis) in the Company existing immediately prior to such future issuances,
subject to certain restrictions (the "Catch-up Right"). Pursuant to the Catch-up
Right, Vobis is entitled to purchase up to 238,719 shares (assuming exercise of
the Underwriters' over-allotment option) of Common Stock upon the Offering, at
the per share price sold to the public in the Offering. The Catch-up Right
expires and terminates in
38
<PAGE> 39
accordance with its terms upon the earlier of (i) the date upon which Vobis owns
less than 8% of the Company's outstanding shares of Common Stock on a fully
diluted basis, or (ii) completion of an offering of shares of the Company's
Common Stock under the Securities Act with an aggregate offering price to the
public of at least $10,000,000 and a per share price of at least $13.60 (a
"Qualified Public Offering"). The Offering does not satisfy the requirements of
a Qualified Public Offering. Vobis purchased 41,169 shares at $10.00 per share
in July 1996. Assuming exercise of its warrant and Catch-up Right, Vobis would
own approximately 1,122,315 shares of the Company's Common Stock, or
approximately 16% of the Company's outstanding shares, subsequent to the
Offering. See "Principal and Selling Shareholders."
In 1994, 1995 and the six months ended June 30, 1996, Vobis accounted for
revenues of $622,000, $1,227,000 and $711,000, or approximately 9%, 13% and 12%
of the Company's revenues, respectively. Theodor L. Lieven, a director of the
Company, is the Chief Executive Officer of Vobis, which owns approximately 12%
of the Company's outstanding shares of Common Stock prior to the Offering. See
"Principal and Selling Shareholders."
In September 1995, Walden Capital Partners II, L.P. and Walden Technology
Ventures II, L.P. (collectively "Walden") purchased 72,917 and 10,416 shares,
respectively, of the Company's Common Stock at $6.00 per share and warrants (the
"Walden Warrants") at $0.02 per warrant share to purchase 35,000 and 5,000
shares, respectively, of the Company's Common Stock each with an exercise price
of $1.00 per share. William P. Tai, a director of the Company, is a general
partner of Walden Capital Partners II, L.P. and Walden Technology Ventures II,
L.P. In May 1995, the Company issued Mr. Tai options to purchase 25,000 shares
of Common Stock with an exercise price of $1.00 per share.
In September 1995, Venrock Associates and Venrock Associates II, L.P.
(collectively "Venrock") purchased 229,302 and 104,031 shares, respectively, of
Common Stock at a purchase price of $6.00 per share and warrants (the "Venrock
Warrants") at $0.02 per warrant share to purchase 57,325 and 26,008 shares,
respectively, of the Company's Common Stock each with an exercise price of $1.00
per share. Anthony Sun, a director of the Company, is a general partner of
Venrock Associates and Venrock Associates II, L.P. In October 1995, Mr. Sun
received options to purchase 32,105 shares of Common Stock with an exercise
price of $5.00.
The Company granted Vobis, Walden and Venrock the right to convert their shares
of Common Stock into shares of preferred stock of the Company in the event the
Company fails to effect a registration of its Common Stock under the Securities
Act on or before June 30, 1996. Such rights to convert have been waived until
December 31, 1996 and expire upon consummation of the Offering. In addition,
Vobis, Walden and Venrock are entitled to certain rights with respect to the
registration of their shares of Common Stock under the Securities Act. See
"Description of Capital Stock -- Registration Rights."
In connection with Vobis' investment, the Company entered into a voting
agreement with Vobis, Walden, Venrock and the Company's Chief Executive Officer
pursuant to which such shareholders agreed not to reduce the number of directors
on the Board of Directors below five and to elect a person designated by Vobis
to the Company's Board of Directors. Presently, Mr. Lieven is Vobis' designee to
the Company's Board of Directors. This agreement will terminate upon the earlier
of (i) January 12, 1999, (ii) a change of control of the Company, (iii) the date
upon which Vobis owns less than 8% of the Company's outstanding shares of Common
Stock on a fully diluted basis, or (iv) completion of a Qualified Public
Offering.
The Vobis, Walden and Venrock Warrants contain a net exercise provision and
expire upon the earlier of (i) September 30, 2000 or (ii) completion of a
Qualified Public Offering. The holders of these warrants are entitled to certain
rights with respect to the registration of the shares of Common Stock issuable
upon exercise thereof under the Securities Act. See "Description of Capital
Stock -- Registration Rights." Under the Investors' Rights Agreement, Vobis,
Walden and Venrock have the right to purchase equity securities of the Company
in respect of certain future issuances thereof, which right terminates upon a
Qualified Public Offering.
REPURCHASES
In July 1995 and August 1995, the Company repurchased 149,963 shares and 112,503
shares, respectively, of Common Stock for an aggregate amount of $899,778 and
$675,027, or $6.00 per share, from certain relatives of George C. Huang,
Chairman of the Board, President and Chief Executive Officer of the Company. In
January 1996 and February 1996, the Company repurchased 55,163 shares and 2,500
shares, respectively, of Common Stock for an aggregate amount of $551,650 and
$25,000, or $10.00 per share, from certain relatives of Dr. Huang. Dr. Huang
disclaims beneficial ownership of any of such shares held by his relatives.
39
<PAGE> 40
In July 1995 and August 1995, the Company repurchased 33,493 shares of Common
Stock owned by GCH for an aggregate amount of $200,958, or $6.00 per share,
which shares were acquired by GCH from several of its existing shareholders,
including Dr. Huang and Mr. Lin, who transferred 14,110 and 2,604 shares,
respectively.
In July 1995 and August 1995, the Company repurchased 139,963 shares and 152,503
shares, respectively, of Common Stock for an aggregate amount of $839,781 and
$915,027, or $6.00 per share, from certain relatives of Lyon T. Lin, General
Manager, Taiwan; President, Award Software Hong Kong Limited, Taiwan Branch. In
January 1996, the Company repurchased 24,391 shares of Common Stock for an
aggregate amount of $243,925, or $10.00 per share, from certain relatives of Mr.
Lin. Mr. Lin disclaims beneficial ownership of any of such shares held by his
relatives.
In January 1996, the Company repurchased 123,549 shares of the Company's Common
Stock for an aggregate amount of $1,235,495, or $10.00 per share, from Intra
Electronics Co., Ltd. ("Intra Electronics"), an affiliate of FVCC, TVCC and
Cheng Ming Lee. Dr. Lee, a director of the Company, was a director of Intra
Electronics at the time of repurchase. Dr. Lee disclaims beneficial ownership of
any such shares held by Intra Electronics.
The aforementioned repurchases were made in order to minimize the dilution to
the Company's remaining shareholders resulting from the financing activities
described above.
SELLING SHAREHOLDERS
Certain of the Selling Shareholders who are relatives of Dr. Huang intend to
sell 45,000 shares of Common Stock in the Offering. Dr. Huang disclaims
beneficial ownership of any of such shares held by his relatives.
Certain of the Selling Shareholders who are relatives of Mr. Lin intend to sell
45,000 shares of Common Stock in the Offering. Mr. Lin disclaims beneficial
ownership of any of such shares held by his relatives.
MISCELLANEOUS
In July 1993, GCH purchased all of the issued and outstanding shares of the
Company's Common Stock, after which the Company was operated as a wholly owned
subsidiary until December 1994. On December 31, 1994, GCH effected a spin-off of
the Company by distributing all of the outstanding shares of Common Stock of the
Company to the existing shareholders of GCH on a pro rata basis. Dr. George C.
Huang, the Chairman of the Board, Chief Executive Officer, President and
director of the Company, is a director, executive officer and shareholder of
GCH. Masami Maeda, a director of the Company, is a director and shareholder of
GCH. Dr. Lee, a director of the Company, is a shareholder of GCH and President
and Chief Executive Officer of TVCC and FVCC, each of which is a shareholder of
GCH and the Company. The Company subleases its headquarters facilities from GCH.
In 1993, 1994, 1995 and for the six months ended June 30, 1996, the Company made
lease payments to GCH of $123,000, $221,000, $273,000 and $223,000,
respectively. From time to time in the past, the Company and GCH have made
non-interest bearing inter-company cash advances to each other for working
capital purposes. In 1993, 1994, 1995 and for the six months ended June 30,
1996, GCH, and its affiliates, advanced to (or borrowed from) the Company a
maximum amount of $723,000/$(19,000), $1,104,000/$(263,000),
$616,000/$(1,474,000) and $0/$(272,000), respectively, with an outstanding
balance of $816,000, $413,000, $(282,000) and $(246,000) at the end of such
periods, respectively.
The Company leases its office space in Taipei, Taiwan, from Sun Corporation of
which Mr. Maeda, a director of the Company, is President, Chief Executive
Officer, director and majority shareholder, and GSS, an affiliate of Dr. George
C. Huang, Dr. Cheng Ming Lee, Masami Maeda and Lyon T. Lin. In 1993, 1994, 1995
and as of June 30, 1996, the Company made lease payments to Sun Corporation of
$20,000, $15,000, $59,000 and $33,000, respectively. During the six months ended
June 30, 1996, the Company made lease payments to GSS of $51,000. Sun
Corporation intends to sell 47,500 shares of Common Stock as a Selling
Shareholder in the Offering.
In June 1995, the Company issued to Dr. Cheng Ming Lee warrants to purchase
20,000 shares of Common Stock with an exercise price of $1.00 per share in
consideration of certain marketing services performed for the Company.
In December 1994, the Company authorized the issuance of, and issued to TVCC and
FVCC, each an affiliate of Dr. Cheng Ming Lee, warrants to purchase 30,000 and
50,000 shares of Common Stock with an exercise price of $1.00 per share in
consideration of certain marketing services performed for the Company. TVCC and
FVCC intend to sell 25,000 and 75,000 shares of Common Stock, respectively, as
Selling Shareholders in the Offering.
40
<PAGE> 41
In October 1994, the Company issued Synnex Information Technologies, Inc., a
California corporation ("Synnex") a warrant (the "Synnex Warrant") to purchase
up to 200,000 shares of Common Stock with an exercise price of $1.00 per share.
In July 1996 Synnex exercised the Synnex Warrant with respect to 77,500 shares,
which shares it intends to sell in the Offering as a Selling Shareholder. The
Synnex Warrant expires on March 31, 1998. The holder of the Synnex Warrant is
entitled to certain rights with respect to the registration of the shares of
Common Stock issuable upon exercise thereof under the Securities Act. See
"Description of Capital Stock -- Registration Rights."
The Company believes that the foregoing transactions were in its best interests.
As a matter of policy, all future transactions between the Company and any of
its officers, directors or principal shareholders will be approved by a majority
of the independent and disinterested members of the Board of Directors, will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes of the Company.
41
<PAGE> 42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1996 and as
adjusted to reflect the sale of the Common Stock being offered hereby (assuming
no exercise of the Underwriters' over-allotment option) by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, (iv) all directors and executive officers
of the Company as a group and (v) the Selling Shareholders.
<TABLE>
<CAPTION>
------------------------------------------------------------------
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING(1) NUMBER OF AFTER OFFERING(1)(2)
--------------------- SHARES BEING -------------------------
BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT(2)
--------- ------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Vobis Microcomputer AG (3)............... 1,122,315 19.5% -- 1,122,315 16.0%
Theodor L. Lieven
Carlo-Schmid-Str. 12
D-52146 Wurselen Germany
George C. Huang (4)...................... 527,568 10.0 -- 527,568 8.1
Award Software International, Inc.
777 East Middlefield Road
Mountain View, CA 94043
Sun Corporation.......................... 472,297 9.0 47,500 424,797 6.5
Masami Maeda
250 Asahi, Kochino-Cho
Konan City, Aichi 483 Japan
Venrock Associates (5)................... 416,666 7.8 -- 416,666 6.3
Anthony Sun
30 Rockfeller Plaza, #5508
New York, NY 10112
Taiwan Venture Capital Corporation....... 375,285 7.1 25,000 350,285 5.4
Cheng Ming Lee
6th Floor, No. 143, Sec. 2,
Ming-Shen E. Rd.
Taipei, Taiwan
Fidelity Venture Capital Corporation..... 318,445 6.1 75,000 243,445 3.7
Cheng Ming Lee
6th Floor, No. 143, Sec. 2,
Ming-Shen E. Rd.
Taipei, Taiwan
John Miao(6)............................. 286,750 5.5 10,000 176,750 2.7
39 Alley
669 Tun Hua S. Rd.
Taipei, Taiwan
Theodor L. Lieven (7).................... 1,122,315 19.5 -- 1,122,315 16.0
Cheng Ming Lee (8)....................... 731,429 13.9 -- 631,429 9.7
Masami Maeda (9)......................... 488,703 9.3 -- 441,203 6.8
Anthony Sun (5).......................... 416,666 7.8 -- 416,666 6.3
Lyon T. Lin (10)......................... 137,018 2.6 -- 137,018 2.1
William P. Tai (11)...................... 131,666 2.5 -- 131,666 2.0
David S. Lee (12)........................ 73,500 1.4 -- 73,500 1.1
Reza Afghan(13).......................... 25,468 * -- 25,468 *
Ann P. Shen (14)......................... 25,351 * -- 25,351 *
Kevin J. Berry(15)....................... 10,833 * -- 10,833 *
Maurice W. Bizzarri(16).................. 8,750 * -- 8,750 *
All directors and executive officers as a
group (12 persons)(17)................. 3,699,267 60.8 -- 3,551,767 48.4
OTHER SELLING SHAREHOLDERS
HanTech Venture Capital Corporation...... 250,000 4.8 100,000 150,000 2.3
Chailease Venture Capital Co., Ltd....... 250,000 4.8 95,000 155,000 2.4
and affiliated entities (18)
Synnex Information Technologies, 200,000 3.7 77,500 122,500 1.8
Inc.(19)...............................
Hsiang Kang Yeh & Chao-Tung Yeh(20)...... 141,889 2.7 5,500 136,389 2.1
John Chao-Piao Huang (21)................ 109,415 2.1 7,500 101,915 1.6
Pin-Wei Chen & Grace Chen (22)........... 105,864 2.0 6,000 99,864 1.5
James R. McGowan......................... 73,439 1.4 15,000 58,439 *
Edina S. Huang(23)....................... 43,000 * 25,810 17,190 *
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
------------------------------------------------------------------
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING(1) NUMBER OF AFTER OFFERING(1)(2)
--------------------- SHARES BEING -------------------------
OTHER SELLING SHAREHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT(2)
--------- ------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Spencer Lin(24).......................... 40,158 * 25,000 15,158 *
Southern Orient Capital 29,920 * 29,920 -- --
Corporation(25)........................
Allen Chen............................... 14,617 * 3,500 11,117 *
Leon Chen................................ 14,617 * 3,500 11,117 *
Tzu-mu Lin............................... 14,320 * 5,000 9,320 *
Gerard Kuang Chang Yeh................... 12,500 * 1,500 11,000 *
Chuan Lan Yeh............................ 10,500 * 10,500 -- --
Joyce Cin-Cheng Huang.................... 9,685 * 1,500 8,185 *
Chih Hong Ho............................. 9,550 * 4,600 4,950 *
Hung Auyeung............................. 8,753 * 3,800 4,953 *
Cornelia Schumann(26).................... 7,583 * 3,800 3,783 *
Ai-Jen Shih.............................. 5,570 * 5,570 -- --
J. Lee Murphy............................ 5,000 * 5,000 -- --
Sherry Hsin Ju Yeh....................... 5,000 * 5,000 -- --
Jeffrey Flink(27)........................ 4,875 * 2,000 2,875 *
</TABLE>
- ------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Percentage of beneficial ownership is
based on 5,257,754 shares of Common Stock outstanding as of August 31, 1996 and
6,507,754 shares of Common Stock outstanding after completion of the Offering.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 277,500 shares of Common Stock of the Company.
(3) Includes (i) 272,394 shares issuable pursuant to a warrant exercisable
within 60 days of August 31, 1996 and (ii) 238,719 shares (assuming exercise of
the Underwriters' over-allotment option) issuable pursuant to the Catch-up Right
exercisable within 30 days after the Offering. Mr. Lieven, a director of the
Company, is the Chief Executive Officer of Vobis Microcomputer AG. See "Certain
Transactions." Mr. Lieven disclaims beneficial ownership of shares held by such
entity.
(4) Includes (i) 13,609 shares held by Margaret Huang and (ii) 14,727 shares
held by Dwight Huang, Dr. Huang's wife and son, respectively. Also includes
26,250 and 8,750 shares issuable pursuant to options exercisable within 60 days
of August 31, 1996 by Dr. Huang and his wife, respectively. Dr. Huang disclaims
beneficial ownership of shares held by his wife and son.
(5) Includes (i) 229,302 shares held by Venrock Associates, (ii) 104,031 shares
held by Venrock Associates II, L.P. and (iii) 57,325 shares and 26,008 shares
issuable pursuant to warrants exercisable within 60 days of August 31, 1996 by
Venrock Associates and Venrock Associates II, L.P., respectively. Mr. Sun, a
director of the Company, is a general partner of Venrock Associates. Mr. Sun
disclaims beneficial ownership of shares held by such entities, except to the
extent of his pecuniary interest therein.
(6) Includes (i) 250,000 shares held by HanTech Venture Capital Corporation
("HanTech") and (ii) 9,550 shares held by Min Chun Chang, Mr. Miao's wife. Mr.
Miao is deemed to have voting power over the shares held by HanTech. He
disclaims beneficial ownership over the shares held by HanTech and his wife.
(7) Includes (i) 611,202 shares held by Vobis Microcomputer AG, (ii) 272,394
shares issuable pursuant to a warrant held by Vobis exercisable within 60 days
of August 31, 1996 and (iii) 238,719 shares (assuming exercise of the
Underwriters' over-allotment option) issuable pursuant to the Catch-up Right
exercisable within 30 days after the Offering. See "Certain Transactions." Mr.
Lieven disclaims beneficial ownership of shares held by such entity.
(8) Includes (i) 375,285 shares held by TVCC, (ii) 318,445 shares held by FVCC,
and (iii) 14,211 shares held by Hwaxing Capital Corporation. Dr. Lee, a director
of the Company, is deemed to have voting power over the shares held by such
entities; however, he disclaims beneficial ownership of the shares.
(9) Includes (i) 472,297 shares held by Sun Corporation and (ii) 16,406 shares
issuable pursuant to options exercisable within 60 days of August 31, 1996. Mr.
Maeda, a director of the Company, is President, Chief Executive Officer and a
majority shareholder of Sun Corporation.
(10) Includes (i) 6,500 shares held by Anne Lin (ii) 10,000 shares held by
Christine and Eric Lin, Mr. Lin's wife and children respectively, and (iii)
21,875 and 3,281 shares issuable pursuant to options exercisable within 60 days
of August 31, 1996, by Mr. Lin and his wife, respectively. Mr. Lin disclaims
beneficial ownership of shares held by his wife and children.
(11) Includes (i) 72,917 shares held by Walden Capital Partners II, L.P., (ii)
10,416 shares held by Walden Technology Ventures II, L.P. and (iii) 35,000 and
5,000 shares issuable pursuant to warrants exercisable within 60 days of August
31, 1996 by Walden Capital Partners II, L.P. and Walden Technology Ventures II,
L.P. Also includes 8,333 shares issuable pursuant to options exercisable within
60 days of August 31, 1996. Mr. Tai, a director of the Company, is a general
partner of The Walden Group. Mr. Tai disclaims beneficial ownership of shares
held by such entities, except to the extent of his pecuniary interest therein.
43
<PAGE> 44
(12) Includes 73,500 shares issuable pursuant to options exercisable within 60
days of August 31, 1996.
(13) Includes 5,468 shares issuable pursuant to options exercisable within 60
days of August 31, 1996.
(14) Includes 11,396 shares issuable pursuant to options exercisable within 60
days of August 31, 1996.
(15) Includes 10,833 shares issuable pursuant to options exercisable within 60
days of August 31, 1996.
(16) Includes 8,750 shares issuable pursuant to options exercisable within 60
days of August 31, 1996.
(17) Includes 194,842, 395,727 and 238,719 shares issuable pursuant to options,
warrants and other rights to purchase shares deemed to be held by executive
officers and directors exercisable within 60 days of August 31, 1996.
(18) Includes (i) 83,250 shares held by ChinaTrust Venture Capital Co., Ltd.
("ChinaTrust") and (ii) 83,250 shares held by Koos Venture Capital Co., Ltd.
("Koos"), of which 27,500 shares are being sold in the Offering by each of
ChinaTrust and Koos.
(19) Includes 122,500 shares issuable pursuant to a warrant exercisable within
60 days of August 31, 1996. David S. Lee, a director of the Company, is a
director of Synnex Information Technologies, Inc. Mr. Lee disclaims beneficial
ownership of shares held by such entity.
(20) Includes 8,848 shares held by Hsiang Kang Yeh individually. Mr. Yeh is a
director of GCH and the brother-in-law of both Dr. Huang and Lyon Lin. Both Dr.
Huang and Lyon Lin disclaim beneficial ownership of such shares.
(21) Includes 1,750 shares issuable pursuant to options exercisable within 60
days of August 31, 1996. Mr. Huang is the brother of Dr. Huang. Dr. Huang
disclaims beneficial ownership of such shares.
(22) Includes (i) 6,792 shares held by Grace Chen, Mr. Chen's wife and (ii)
2,187 and 11,000 shares issuable pursuant to options exercisable within 60 days
of August 31, 1996 by Mr. Chen and his wife, respectively. Pin-Wei Chen is the
former Secretary and, until May 5, 1995, a director of the Company. Mr. Chen is
the brother-in-law of both Dr. Huang and Lyon Lin. Both Dr. Huang and Lyon Lin
disclaim beneficial ownership of such shares.
(23) Edina S. Huang is the daughter of Dr. Huang. Dr. Huang disclaims beneficial
ownership of such shares.
(24) Spencer Lin is the brother of Lyon Lin and brother-in-law of Dr. Huang.
Both Lyon Lin and Dr. Huang disclaim beneficial ownership of such shares.
(25) Dr. Cheng Ming Lee, a director of the Company, is a former director of
Southern Orient Capital Corporation.
(26) Cornelia Schumann is the former General Manager, Munich, who resigned
effective March 1996.
(27) Jeffrey Flink is a former employee of the Company, who resigned effective
April 1996.
44
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws is a summary
that will be in effect at the time of the Offering and is qualified in its
entirety by the provisions of the Certificate of Incorporation and Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this Prospectus is a part.
Upon the closing of the Offering the authorized capital stock of the Company
will consist of 40,000,000 shares of Common Stock, without par value ("Common
Stock"), and 5,000,000 shares of Preferred Stock, without par value ("Preferred
Stock").
COMMON STOCK
As of August 31, 1996, there were 5,257,754 shares of Common Stock outstanding
held by 105 holders of record. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
shareholders. The holders of Common Stock are not entitled to cumulative voting
rights with respect to the election of directors, and as a consequence, minority
shareholders will not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any shares of Preferred
Stock issued by the Company in the future, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividend Policy." In the event of
a liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
the Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by shareholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
The Company has outstanding warrants to purchase 518,227 shares of Common Stock
as of August 31, 1996. For a description of such warrants see "Certain
Transactions."
REGISTRATION RIGHTS
After the Offering, the holders of 1,831,587 (which includes the right to
purchase up to 238,719 shares of Common Stock by Vobis, assuming exercise of the
Underwriters' over-allotment option) shares of Common Stock and warrants to
purchase 518,227 shares of Common Stock will be entitled to certain rights with
respect to the registration of such shares under the Securities Act, pursuant to
the Investors' Rights Agreement among such holders and the Company, dated
January 12, 1996 (the "Investors' Rights Agreement"). Under the terms of the
Investors' Rights Agreement, if the Company proposes to register any of its
securities under the Securities Act either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled, subject to certain
limitations, to include shares therein. The holders may also require the Company
to file a registration statement under the Securities Act with respect to their
shares, subject to certain limitations. Further, the holders may require the
Company to register their shares on Form S-3 when use of such form becomes
available to the Company. The Company is required to bear all registration
expenses in connection with all subsequent registrations, except that any Form
S-3 registration expenses incurred after the first two registrations shall be
borne by the selling shareholders on a pro rata basis in proportion to the
number of
45
<PAGE> 46
shares sold by each. The selling shareholders in each subsequent registration
are required to bear all selling expenses on a pro rata basis in proportion to
the number of shares sold by each. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
CERTAIN ANTI-TAKEOVER CHARTER PROVISIONS
The Company's Bylaws (i) provide that a majority of the members of the Board of
Directors in office, although less than a quorum, may elect directors to fill
vacancies created either by resignation, death, disqualification, removal or by
an increase in the size of the Board of Directors and (ii) require advance
notice by a shareholder of a proposal or director nomination that such
shareholder desires to present at the annual meeting. In addition, the Company's
Amended and Restated Articles of Incorporation (i) prohibit shareholder actions
by written consent, (ii) eliminate automatically on and after the Company
becomes a "listed corporation" as defined in Section 301.5 of the California
Corporations Code the ability of the shareholders to cumulate votes in the
election of directors and (iii) provide that the Bylaws of the Company may only
be amended by the Board of Directors or holders of two-thirds of the Company's
outstanding voting stock. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
First National Bank of Boston has been appointed as the transfer agent and
registrar for the Company's Common Stock. Its telephone number is (617)
575-2900.
46
<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 6,507,754
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options and warrants. Of these shares,
1,850,000 shares sold in the Offering will be freely tradable without
restrictions or further registration under the Securities Act of 1933, as
amended (the "Securities Act"). The remaining 4,657,754 shares of Common Stock
held by existing shareholders are "restricted securities" as the term is defined
in Rule 144 under the Securities Act (the "Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 or Regulation
S promulgated under the Securities Act. As a result of contractual restrictions
and the provisions of Rule 144 and 701 or Regulation S, additional shares will
be available for sale in the public market as follows: (i) 45,462 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus, (ii)
no Restricted Shares and 363,145 shares of Common Stock issuable upon exercise
of currently outstanding options will be eligible for sale beginning 90 days
after the date of this Prospectus and (iii) 4,452,292 Restricted Shares, 50,918
additional shares of Common Stock issuable upon exercise of currently
outstanding options and 518,227 shares of Common Stock issuable upon exercise of
currently outstanding warrants will be eligible for sale beginning 180 days
after the date of this Prospectus upon expiration of lock-up agreements. The
Restricted Shares will be eligible for sale from time to time after completion
of the Offering.
The Company, directors, all executive officers and certain shareholders of the
Company and certain holders of options to acquire Common Stock have agreed with
the representatives of the Underwriters for a period of 180 days after the
effective date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of J.P. Morgan Securities Inc.
However, J.P. Morgan Securities Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. In addition, the Company has agreed that during the Lock-Up Period,
the Company will not, without the prior written consent of J.P. Morgan
Securities Inc., subject to certain exceptions, issue, sell, contract to sell,
or otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in the Offering, the issuance of Common Stock upon the
exercise of outstanding options, the Company's sale of shares in the Offering,
and the Company's issuance of options and shares under existing employee stock
option and stock purchase plans.
As of August 31, 1996 there were 955,655 shares of Common Stock subject to
outstanding options. The Company intends to file registration statements under
the Securities Act to register shares of Common Stock reserved for issuance
under the Option Plan and the Purchase Plan, thus permitting the sale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. Such registration statements will become effective immediately
upon filing. Upon effectiveness of such registration statements, holders of
vested options to purchase approximately 315,655 shares will be entitled to
exercise such options and immediately sell such shares. Holders of all of these
option shares have also entered into agreements not to offer to sell, contract
to sell, or otherwise sell, dispose, loan, pledge or grant any rights with
respect to any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock owned as of the date of this Prospectus or thereafter
acquired directly by such holders or with respect to which they have or
hereafter acquire the power of disposition, during the Lock-Up Period without
the prior written consent of J.P. Morgan Securities Inc.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this Prospectus, an Affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of then outstanding shares of
the Company's Common Stock (approximately 65,100 shares immediately after the
Offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or person whose shares are
aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned Restricted Shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
47
<PAGE> 48
In general, under Regulation S as currently in effect, a person who purchased
equity securities pursuant to Regulation S and has owned such equity securities
for at least one year, assuming no other restrictions on resale, will be able to
sell such securities in the United States on the date public trading begins in
the U.S. market in which the Company's Common Stock is traded.
An employee, officer or director of or consultant to the Company who purchased
or was awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits Affiliates and non-Affiliates
to sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. In addition, non-Affiliates may sell Rule 701 shares without
complying with the public information, volume and notice provisions of Rule 144.
Prior to the Offering, there has been no public market for the Company's Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or will continue after the Offering or that the market price
of the Common Stock will not decline below the initial public offering price.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. As described
herein, only a limited number of shares will be available for sale shortly after
the Offering because of certain contractual and legal restrictions on resale.
Sales of substantial amounts of Common Stock of the Company in the public market
after the restrictions lapse could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future.
48
<PAGE> 49
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc., Prudential Securities Incorporated and Needham & Company, Inc.
are acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement
among the Company, the Selling Shareholders and the Representatives (the
"Underwriting Agreement"), to purchase from the Company and Selling
Shareholders, and the Company and the Selling Shareholders have agreed to sell
to the Underwriters, the respective numbers of shares of Common Stock set forth
opposite their names:
<TABLE>
<CAPTION>
----------------
Underwriters NUMBER OF SHARES
----------------
<S> <C>
J.P. Morgan Securities Inc. ...................................................... 610,000
Prudential Securities Incorporated................................................ 366,000
Needham & Company, Inc............................................................ 244,000
Bear, Stearns & Co. Inc. ......................................................... 45,000
Alex. Brown & Sons Incorporated................................................... 45,000
Cowen & Company................................................................... 45,000
Hambrecht & Quist Incorporated.................................................... 45,000
Montgomery Securities............................................................. 45,000
Robertson, Stephens & Company LLC................................................. 45,000
Wasserstein Pacific Securities, Inc. ............................................. 45,000
Adams, Harkness & Hill, Inc. ..................................................... 45,000
Cathay Financial, LLC. ........................................................... 45,000
Josephthal Lyon & Ross Inc. ...................................................... 45,000
Kaufman Bros. L.P. ............................................................... 45,000
Vector Securities Int'l, Inc. .................................................... 45,000
Wessels, Arnold & Henderson, L.L.C. .............................................. 45,000
Wheat First Butcher Singer........................................................ 45,000
---------
Total.................................................................... 1,850,000
=========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by the
over-allotment option granted to the Underwriters, must be purchased if any are
purchased.
The Representatives have advised the Company and the Selling Shareholders that
the several Underwriters propose to offer the Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and may offer the Common Stock to selected dealers at such price less
a concession not to exceed $0.34 per share. The Underwriters may allow, and such
dealers may reallow, a concession to other dealers not in excess of $0.10 per
share. After the public offering of the Common Stock, the public offering price
and other selling terms may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to 277,500 additional shares
of Common Stock from the Company at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of Common Stock offered hereby.
Vobis has the option to purchase up to 238,719 shares of Common Stock (assuming
exercise of the Underwriters' over-allotment option) within 30 days of the
closing of the Offering in a private placement at the initial public offering
per share price. If this option is exercised, the sale of these shares by the
Company will not be registered in the Offering or covered by the Underwriting
Agreement, and the Underwriters will not receive any fee in connection with the
sale of such shares. No assurance can be given that these shares will be
purchased by Vobis.
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price will be determined by negotiations among the
Company, the Selling Shareholders and the Representatives. The factors to be
considered in determining the initial offering price include the prevailing
market conditions, the market valuations of certain publicly traded companies,
revenue and earnings of the Company and comparable companies in recent periods,
49
<PAGE> 50
estimates of the business potential and prospects of the Company, the experience
of the Company's management and the position of the Company in its industry.
The Representatives have informed the Company and the Selling Shareholders that
the Underwriters will not confirm, without customer authorization, sales to
their customer accounts as to which they have discretionary trading power.
The Company, all directors and executive officers and certain shareholders have
agreed not to offer, sell or otherwise dispose of, any Common Stock or any
securities convertible into Common Stock or register for sale under the
Securities Act any Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representatives. See "Shares
Eligible for Future Sale."
The Company and certain of the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Cooley Godward LLP, Palo Alto, California. Certain legal
matters will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and for
the six-month periods ended July 1, 1993 and December 31, 1993 and for each of
the two years in the period ended December 31, 1995, included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating to
the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A copy
of the Registration Statement may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. In addition, the Commission maintains a web site
on the World Wide Web that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The address of the web site is: http://www.sec.gov.
50
<PAGE> 51
AWARD SOFTWARE INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants............................... F-2
Consolidated Balance Sheet............................................................ F-3
Consolidated Statement of Operations.................................................. F-4
Consolidated Statement of Shareholders' Equity........................................ F-5
Consolidated Statement of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Award Software International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Award
Software International, Inc. and its subsidiary at December 31, 1994 and 1995,
and the results of their operations and their cash flows for the six month
periods ended July 1, 1993 and December 31, 1993, and the years ended December
31, 1994 and 1995 in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
May 29, 1996 except for Note 11
which is as of August 21, 1996
F-2
<PAGE> 53
AWARD SOFTWARE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------------------------
<S> <C> <C> <C>
DECEMBER 31,
1994 JUNE 30,
----------- 1996
Dollars in thousands, except share data 1995 -----------
-----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,374 $ 6,498 $ 10,934
Accounts receivable, net............................... 953 992 1,725
Accounts receivable from related parties............... 75 568 382
Receivable from GCH Systems, Inc....................... -- 282 246
Other current assets................................... 195 216 836
----------- ----------- -----------
Total current assets............................ 2,597 8,556 14,123
Property and equipment, net.............................. 204 276 553
Other assets............................................. 318 251 243
----------- ----------- -----------
$ 3,119 $ 9,083 $ 14,919
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 138 $ 191 $ 515
Accrued liabilities.................................... 873 1,723 1,704
Payable to GCH Systems, Inc............................ 413 -- --
----------- ----------- -----------
Total current liabilities....................... 1,424 1,914 2,219
----------- ----------- -----------
Commitments (Note 10)
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized; no par
value; no shares issued or outstanding............... -- -- --
Common stock, 40,000,000 shares authorized; no par
value; 3,841,801, 4,586,283 and 4,966,710 shares
issued and outstanding............................... 1,627 6,215 10,697
Deferred stock compensation............................ -- (255) (218)
Retained earnings...................................... 80 1,245 2,348
Cumulative translation adjustment...................... (12) (36) (127)
----------- ----------- -----------
Total shareholders' equity...................... 1,695 7,169 12,700
----------- ----------- -----------
$ 3,119 $ 9,083 $ 14,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE> 54
AWARD SOFTWARE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
PREDECESSOR THE COMPANY
----------- -----------------------------------------------------------------------
SIX MONTHS
SIX MONTHS ENDED
ENDED DECEMBER SIX MONTHS ENDED
JULY 1, 31, YEAR ENDED DECEMBER 31, JUNE 30,
1993 1993 1994 1995 1995 1996
Dollars in thousands, except ----------- ----------- ---------- ------- --------- -------
per share data (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.......... $ 1,763 $ 1,903 $ 5,585 $ 6,989 $ 3,125 $ 5,049
Engineering services........... 47 107 161 239 147 291
Related parties................ -- 50 972 1,902 765 814
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........... 1,810 2,060 6,718 9,130 4,037 6,154
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Software license fees.......... 85 84 467 387 111 139
Engineering services........... 6 21 28 43 30 57
Related parties................ -- 12 96 206 81 235
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues... 91 117 591 636 222 431
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 1,719 1,943 6,127 8,494 3,815 5,723
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development....... 887 2,071 1,601 2,751 1,274 1,866
Sales and marketing............ 845 647 1,537 2,282 1,037 1,258
General and administrative 615 350 932 1,600 852 1,046
----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 2,347 3,068 4,070 6,633 3,163 4,170
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.... (628) (1,125) 2,057 1,861 652 1,553
Interest expense................. (27) (54) (19) (9) (6) (4)
Interest and other income........ -- 1 4 105 (7) 174
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... (655) (1,178) 2,042 1,957 639 1,723
Provision for income taxes....... -- -- 784 792 258 620
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (655) $ (1,178) $ 1,258 $ 1,165 $ 381 $ 1,103
============ ============ ============ ============ ============ ============
Net income (loss) per share...... $ (0.19) $ 0.20 $ 0.18 $ 0.06 $ 0.18
============ ============ ============ ============ ============
Weighted average common and
common equivalent shares in
thousands...................... 6,345 6,345 6,538 6,693 6,068
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE> 55
AWARD SOFTWARE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
--------------------------
RETAINED
SHARES DEFERRED EARNINGS CUMULATIVE TOTAL
----------- STOCK (ACCUMULATED TRANSLATION SHAREHOLDERS'
Dollars in thousands AMOUNT COMPENSATION DEFICIT) ADJUSTMENT EQUITY
----------- ----------- ----------- ----------- -----------
PREDECESSOR
Balance at December 31, 1992... 450,000.... $ 1 $ -- $ (359) $ (93) $ (451)
Cumulative translation
adjustment................. -- -- -- -- 7 7
Net loss..................... -- -- -- (655) -- (655)
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 1, 1993........ 450,000 $ 1 $ -- $ (1,014) $ (86) $ (1,099)
============ ============ ============ ============ ============ ============
THE COMPANY
Issuance of Common Stock..... 3,841,801 $ 725 $ -- $ -- $ -- $ 725
Cumulative translation
adjustment................. -- -- -- -- (15) (15)
Net loss..................... -- -- -- (1,178) -- (1,178)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1993... 3,841,801 725 -- (1,178) (15) (468)
Capital contribution......... -- 902 -- -- -- 902
Cumulative translation
adjustment................. -- -- -- -- 3 3
Net income................... -- -- -- 1,258 -- 1,258
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994... 3,841,801 1,627 -- 80 (12) 1,695
Issuance of Common Stock and
related warrants, net of
issuance costs of $165..... 1,166,669 6,837 -- -- -- 6,837
Repurchase of Common Stock... (499,687) (2,998) -- -- -- (2,998)
Exercise of Common Stock
options.................... 7,500 8 -- -- -- 8
Exercise of Common Stock
warrants................... 70,000 70 -- -- -- 70
Warrants issued for
services................... -- 374 -- -- -- 374
Deferred stock
compensation............... -- 297 (297) -- -- --
Amortization of deferred
stock compensation......... -- -- 42 -- -- 42
Cumulative translation
adjustment................. -- -- -- -- (24) (24)
Net income................... -- -- -- 1,165 -- 1,165
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995... 4,586,283 6,215 (255) 1,245 (36) 7,169
Issuance of Common Stock and
related warrants, net of
issuance costs of $79
(Unaudited)................ 570,011 6,921 -- -- -- 6,921
Repurchase of Common Stock
(Unaudited)................ (250,000) (2,500) -- -- -- (2,500)
Exercise of Common Stock
options (Unaudited)........ 30,416 31 -- -- -- 31
Exercise of Common Stock
warrants (Unaudited)....... 30,000 30 -- -- -- 30
Amortization of deferred
stock compensation......... -- -- 37 -- -- 37
Cumulative translation
adjustment (Unaudited)..... -- -- -- -- (91) (91)
Net income (Unaudited)....... -- -- -- 1,103 -- 1,103
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996
(Unaudited).................. 4,966,710 $ 10,697 $ (218) $ 2,348 $ (127) $ 12,700
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE> 56
AWARD SOFTWARE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
THE COMPANY
PREDECESSOR ------------------------------------------------------------------------
-----------
SIX MONTHS SIX MONTHS SIX MONTHS ENDED
ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30,
JULY 1, DECEMBER 31,
1993 1993 1994 1995 1995 1996
----------- ------------ ----------- ----------- ----------- -----------
Dollars in thousands (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ (655) $ (1,178) $ 1,258 $ 1,165 $ 381 $ 1,103
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Acquired in-process research
and development........... -- 1,092 -- -- -- --
Noncash charge for income
taxes..................... -- -- 902 -- -- --
Depreciation and
amortization.............. 39 135 269 132 81 116
Warrants issued for
services.................. -- -- -- 374 90 --
Deferred stock
compensation.............. -- -- -- 42 4 38
Changes in assets and
liabilities, net of
acquisition:
Accounts receivable,
net..................... 168 (213) (240) (40) 107 (697)
Accounts receivable from
related parties......... -- -- (75) (510) (116) 186
Other current assets...... (193) (8) (11) (5) 17 (645)
Other assets.............. (28) 67 (7) 24 77 (19)
Accounts payable.......... 309 (334) (131) 49 233 329
Accrued liabilities....... (71) 194 (44) 899 288 (17)
----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... (431) (245) 1,921 2,130 1,162 394
----------- ------------ ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Acquisition of predecessor
company, net of cash
acquired.................... -- (569) -- -- -- --
Purchase of property and
equipment................... (86) (4) (75) (147) (34) (370)
----------- ------------ ----------- ----------- ----------- -----------
Net cash used in investing
activities.................... (86) (573) (75) (147) (34) (370)
----------- ------------ ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Net proceeds from common stock
issuances................... -- 725 -- 3,917 -- 4,482
Advances from GCH............. 546 272 -- 651 (337) 36
Repayments to GCH............. -- -- (476) (1,346) (1,095) --
Payments under capital
leases...................... (4) (13) (24) -- -- --
Proceeds under note
obligations................. -- 120 -- -- -- --
Payments under note
obligations................. (29) (26) (281) (73) (33) --
----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... 513 1,078 (781) 3,149 (1,465) 4,518
----------- ------------ ----------- ----------- ----------- -----------
Effect of exchange rate changes
on cash....................... (4) 20 29 (8) 83 (106)
----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents.......... (8) 280 1,094 5,124 (254) 4,436
Cash and cash equivalents at
beginning of period........... 164 -- 280 1,374 1,374 6,498
----------- ------------ ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period..................... $ 156 $ 280 $ 1,374 $ 6,498 $ 1,120 $ 10,934
============ ============= ============ ============ ============ ============
Supplemental cash flow
information:
Cash paid for interest........ $ 27 $ 20 $ 3 $ 10 $ 5 $ 4
Cash paid for income taxes.... $ 37 $ 17 $ 41 $ 282 $ 53 $ 496
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE> 57
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- ORGANIZATION AND BUSINESS
The Company
Award Software International, Inc. ("Award" or the "Company") designs, develops
and markets system management software for the global computing market. System
management software is one of the fundamental layers in personal computer ("PC")
architecture and provides an essential interface between a PC's operating system
software and its hardware. The Company's principal system management software
products include a suite of Basic Input/Output System software ("BIOS"). Award's
customers include designers and manufacturers of motherboards, PC systems and
other microprocessor-based (or "embedded") devices. The Company was incorporated
in California, in 1983, and operates in one business segment through its
headquarters facility in Mountain View, California, a branch office in Munich,
Germany, and a wholly owned subsidiary in Hong Kong with a branch office in
Taipei, Taiwan.
GCH Acquisition
On July 2, 1993, GCH Systems, Inc. ("GCH"), an independent developer of
microcomputers and application specific integrated circuits, acquired 100
percent of Award's outstanding Common Stock for $1,905 consisting of $725 in
cash and the assumption of $1,180 in liabilities. The transaction was accounted
for as a purchase and established a new accounting basis for Award. The purchase
price was allocated to the tangible and identifiable intangible assets acquired
and liabilities assumed on the basis of their fair values at the acquisition
date. The purchase price exceeded the fair value of Award's net assets by
approximately $265, which was assigned to goodwill. In addition, $1,092 of the
purchase price was allocated to in-process research and development. Because
such in-process technology had not reached the stage of technological
feasibility and had no alternative future use, the amount was immediately
charged to operations.
From the acquisition date through December 30, 1994, Award operated as a wholly
owned subsidiary of GCH. On December 31, 1994, Award and GCH became separate
companies through a spin-off of 100 percent of Award's Common Stock on a pro
rata basis to GCH shareholders. Award and GCH have certain common members on
their Boards of Directors. Award and GCH, from time to time have made
non-interest bearing cash advances to each other for working capital purposes.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition
The Company's revenues are derived primarily from software license fees and also
from non-recurring engineering services. Software license fees are recognized
upon delivery of the product, fulfillment of acceptance terms, if any, and
satisfaction of any significant support obligations. The Company's normal sales
terms are net 30 days and return privileges are not offered or provided to any
customers. Payments received in advance of revenue recognition are recorded as
deferred revenue. Engineering services revenue generally consist of amounts
charged for customization of the software and are generally recognized as the
services are performed. Amounts received under engineering contracts that
require software delivery are deferred until delivery and customer acceptance
occur. Related parties revenues include software licenses and non-recurring
engineering services to holders of the Company's Common Stock and Common Stock
warrants.
The Company does not offer separate post contract customer support contracts,
and due to the nature of the Company's product offerings has not incurred any
significant post-sale warranty or support obligations. The costs of
insignificant support obligations, if material, are accrued at the time of
revenue recognition. Allowances for uncollectible amounts and warranties are
recorded in the same period as the related revenues based upon the Company's
historical experience.
F-7
<PAGE> 58
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist
principally of short-term time deposits and money-market deposit accounts that
are stated at cost, which approximates fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which range from three to five years.
Software Development Costs
Costs incurred in the research and development of new products and enhancements
to existing products are charged to expense as incurred until the technological
feasibility of the product or enhancement has been established. After
establishing technological feasibility through the development of a working
model, any additional costs incurred through the date the product is available
for general release, if any, are capitalized and amortized over the estimated
product life, generally three years, using the greater of the amounts determined
using the straight-line method or the ratio of current period products revenue
over total estimated product revenues. Capitalized software development costs
are included in other assets in the accompanying financial statements.
Amortization expense on capitalized software development costs totaled $0, $12,
$18, $18, $9 and $12 for the six month periods ended July 1, 1993 and December
31, 1993, the years ended December 31, 1994 and 1995, and the six months ended
June 30, 1995 and 1996, respectively.
Intangible Assets
Goodwill and a covenant not to compete resulting from the acquisition of Award's
Common Stock by GCH are included in other assets at December 31, 1995 and are
being amortized using the straight line method over five years and two years,
respectively.
Income Taxes
The provision for income taxes is calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, a current tax liability or
asset is recognized for the estimated taxes payable or refundable on tax returns
for the current period. A deferred tax liability or asset is recognized for the
estimated future tax effects attributable to temporary differences between the
carrying amount and tax bases of other assets and liabilities and for tax
carryforwards. The measurement of deferred tax assets is reduced, if necessary,
by the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
For the period from July 2, 1993 through December 31, 1994, Award was included
in GCH's consolidated federal and California state income tax returns. Under a
tax sharing arrangement with GCH, Award was allocated a proportionate share of
GCH's consolidated income tax liability. The provision for income taxes has been
calculated using the separate return methodology in accordance with SFAS No.
109. The difference between the allocated amount and the separate return
provision totaled $902 and has been reflected as a capital contribution.
Foreign Currency Translation
The Company has a subsidiary in Hong Kong and branch operations in Taiwan and
Germany. The functional currencies of these entities are the local currencies.
Accordingly, all assets and liabilities of these entities are translated at the
current exchange rate in effect at the balance sheet date and revenues and
expenses are translated at the average exchange rates in effect during the
reporting period. Gains and losses resulting from foreign currency translation
are recorded directly into a separate component of shareholders' equity. Foreign
currency transaction gains and losses were immaterial for all periods presented.
Net Income (Loss) per Share
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares, when dilutive, from stock options and
warrants (using the treasury stock method). Pursuant to a Securities and
Exchange Commission Staff Accounting Bulletin, common and common equivalent
shares (using the treasury stock method and the assumed public offering price)
issued within 12 months prior to the Company's initial public offering
F-8
<PAGE> 59
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
filing and through the effective date of such filing have been included in the
calculation as if they were outstanding for all periods presented.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans and also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. SFAS No. 123 defines a "fair value" based
method of accounting for an employee stock option or similar equity instrument
and encourages, but does not require, entities to adopt that method of
accounting for all of their employee stock compensation plans. SFAS No. 123 does
however require, entities to include pro forma disclosures of the difference, if
any, between compensation cost included in net income and the related cost
measured by the fair value method. The Company does not intend to adopt the
accounting provisions of the new standard and will adopt the disclosure
provisions in its financial statements for the year ending December 31, 1996.
Interim Financial Information (Unaudited)
The accompanying consolidated balance sheet as of June 30, 1996 and the
consolidated statements of operations and of cash flows for the six months ended
June 30, 1995 and 1996 and the consolidated statement of shareholders' equity
for the six months ended June 30, 1996, are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The financial and other data disclosed in these
notes to the consolidated financial statements for these periods are also
unaudited.
NOTE 3 -- CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of bank deposits and accounts
receivable. The Company places its cash and cash equivalents in checking and
market rate accounts with major financial institutions and has not incurred any
losses related to these investments.
The Company markets its products to original equipment manufacturers ("OEMs") in
the personal computer market, designers of motherboards and other
microprocessor-based or embedded systems manufacturers and, as a result,
maintains individually significant receivable balances from major customers
located throughout the world. The Company performs ongoing credit evaluations of
its customers' financial condition and maintains an allowance for uncollectible
accounts receivable based upon the expected collectibility of all accounts
receivable.
The following table summarizes the net accounts receivable from customers
located in the United States, Asia Pacific and Europe:
<TABLE>
<CAPTION>
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
United States................................................ $ 87 $ 20 $ 375
Asia Pacific................................................. 424 663 1,115
Europe....................................................... 442 309 235
----------- ----------- -----------
$ 953 $ 992 $ 1,725
========== ========== ==========
</TABLE>
All related party receivables are from United States customers. No individual
customer accounted for 10% or more of accounts receivable at December 31, 1994.
One customer accounted for 28.8% of accounts receivable at December 31, 1995.
One customer accounted for 12.8% of accounts receivable at June 30, 1996.
F-9
<PAGE> 60
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- NONCASH INVESTING AND FINANCING ACTIVITIES
On July 2, 1993, GCH acquired all of the capital stock of the Company for $725.
In connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
LIABILITIES
ASSUMED
-----------
Tangible assets, including cash of $156.............................................. $ 348
Goodwill............................................................................. 265
Covenant not to compete.............................................................. 200
In-process research and development.................................................. 1,092
Cash paid for common stock........................................................... (725)
-----------
Liabilities assumed.................................................................. $ 1,180
==========
</TABLE>
NOTE 5 -- BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
Accounts receivable:
Accounts receivable........................................ $ 991 $ 1,071 $ 1,814
Less: allowance for doubtful accounts...................... (38) (79) (89)
----------- ----------- -----------
$ 953 $ 992 $ 1,725
========== ========== ==========
Property and equipment:
Computer equipment......................................... $ 201 $ 310 $ 638
Office equipment........................................... 63 82 87
Furniture and fixtures..................................... 39 62 69
----------- ----------- -----------
303 454 794
Less accumulated depreciation.............................. (99) (178) (241)
----------- ----------- -----------
$ 204 $ 276 $ 553
========== ========== ==========
Other assets:
Goodwill................................................... $ 265 $ 265 $ 265
Covenant not to compete.................................... 200 200 200
Capitalized software....................................... 90 139 139
Other...................................................... 23 28 59
----------- ----------- -----------
578 632 663
Less accumulated amortization:
Goodwill................................................. (80) (133) (160)
Covenant not to compete.................................. (150) (200) (200)
Capitalized software..................................... (30) (48) (60)
----------- ----------- -----------
$ 318 $ 251 $ 243
========== ========== ==========
Accrued liabilities:
Salaries and benefits...................................... $ 232 $ 401 $ 360
Royalties.................................................. 325 476 205
Income taxes payable....................................... 53 542 682
Deferred revenue........................................... 62 54 171
Other...................................................... 201 250 286
----------- ----------- -----------
$ 873 $ 1,723 $ 1,704
========== ========== ==========
</TABLE>
F-10
<PAGE> 61
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- SHAREHOLDERS' EQUITY
The Company is authorized to issue 40,000,000 shares of Common Stock.
In connection with the issuance of Common Stock during 1995, the Company agreed
that, in the event that an initial public offering was not completed by June 30,
1996, 416,666 shares of Common Stock may be exchanged for convertible Preferred
Stock of the Company. The convertible Preferred Stock would have certain rights,
preferences and restrictions with respect to conversion, liquidation, voting,
dividends and redemption. In May 1996, the shareholders waived their conversion
rights with respect to these shares through December 31, 1996.
In October 1994, the Company granted 200,000 Common Stock warrants to a customer
under a software licensing agreement. The warrants were deemed to have a nominal
value on the date of grant. The warrants have an exercise price of $1.00 per
share and are exercisable any time up to March 31, 1998. During the period from
October 1994 through June 1995, the customer earned 45,500 of the Common Stock
warrants based on purchasing volumes. In July 1995, to solidify the Company's
long-term relationship with the customer, the Company vested the remaining
154,500 warrants to the customer and recorded the difference between the
estimated fair market value and the exercise price of the warrants of
approximately $283 as sales and marketing expense.
In December 1994, the Company granted 80,000 Common Stock warrants with an
exercise price of $1.00 per share to holders of approximately 16.1% of the
Company's Common Stock at December 31, 1995, in exchange for marketing services.
The warrants had a nominal value when granted and were exercised in November
1995.
In June 1995, the Company granted 20,000 Common Stock warrants with an exercise
price of $1.00 per share to a holder of approximately 0.4% of the Company's
Common Stock, respectively, at the time of grant in exchange for marketing
services. The warrants are exercisable at any time up to the later of (i) June
15, 1998 or (ii) the six month anniversary of the closing of an initial public
offering. The Company recorded the difference between the estimated fair market
value and the exercise price of the warrants of approximately $36 as sales and
marketing expense. The warrants were exercised in December 1995.
In connection with the issuance of shares of Common Stock in 1995, the Company
issued 123,333 Common Stock warrants with an exercise price of $1.00 per share
for $0.02 per share. The warrants are exercisable at any time up to the earlier
of (i) the closing of the Company's initial public offering of its Common Stock,
of which the aggregate offering price is at least $10,000 and the per share
price to the public is $13.60, or (ii) September 30, 2000. No proceeds were
separately allocated to the warrants.
NOTE 7 -- STOCK OPTIONS PLAN
During 1994, the Company adopted the 1995 Stock Option Plan (the "Plan"), under
which 1,250,000 shares of Common Stock are reserved for issuance to eligible
employees, directors and consultants upon exercise of the stock options. Stock
options are granted at prices determined by Board of Directors and generally may
not be less than 100% and 85%, for incentive and nonstatutory options,
respectively, of the estimated fair value of the related shares on the date of
grant. Options granted under the Plan are for periods not to exceed ten years,
are exercisable generally one year after date of grant and vest over a maximum
period of five years following the date of grant. For options expired or
canceled, the stock not purchased under such options shall revert to and again
become available for re-issuance under the plan. The Plan provides for an
unvested share repurchase option on behalf of the Company. In the event an
optionee ceases to be eligible under the Plan for any reason, shares acquired on
the exercise of an option which have not yet vested may be repurchased by the
Company at the optionee's original cost per share. At December 31, 1995, no
shares were subject to repurchase.
F-11
<PAGE> 62
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the stock option activity under the Plan for the years ended
December 31, 1994 and 1995 and the six month period ended June 30, 1996, is as
follows:
<TABLE>
<CAPTION>
---------------------------------------
<S> <C> <C> <C>
SHARES SUBJECT TO
OUTSTANDING OPTIONS
OPTIONS -------------------------
AVAILABLE FOR PRICE PER
GRANT SHARE
------------- ------------
NUMBER OF
SHARES
---------
Options authorized............................................ 1,250,000 -- --
Granted..................................................... (564,050) 564,050 $ 1.00
------------- --------- ------------
Balance at December 31, 1994.................................. 685,950 564,050 1.00
Granted..................................................... (191,105) 191,105 1.00-6.00
Exercised................................................... -- (7,500) 1.00
Canceled.................................................... 1,500 (1,500) 1.00
------------- --------- ------------
Balance at December 31, 1995.................................. 496,345 746,155 1.00-6.00
Granted (Unaudited)......................................... (273,000) 273,000 10.00-11.00
Exercised (Unaudited)....................................... -- (30,416) 1.00
Canceled (Unaudited)........................................ 47,459 (47,459) 1.00-10.00
------------- --------- ------------
Balance at June 30, 1996 (Unaudited).......................... 270,804 941,280 $1.00-$11.00
========== ======== ===========
</TABLE>
During 1995, the Company recorded $297 of deferred stock compensation for the
excess of the deemed fair market value over the exercise price at the date of
grant related to certain options granted in 1995. The compensation expense will
be recognized over the option vesting period of four years. Compensation expense
recognized in 1995 aggregated $42. The Company cancelled options to purchase
12,750 shares of Common Stock at exercise prices ranging from $1.00 to $6.00 per
share in July 1996 and granted options to purchase 39,500 shares of Common Stock
at an exercise price of $10.00 per share.
Options on 106,500 shares of common stock were exercisable at December 31, 1995.
NOTE 8 -- INCOME TAXES
Income (loss) before income taxes was subject to tax in the following
jurisdictions:
<TABLE>
<CAPTION>
--------------------------------------------------------------
<S> <C> <C> <C> <C>
THE COMPANY
---------------------------------------------
PREDECESSOR
----------- SIX MONTHS
SIX MONTHS ENDED
ENDED DECEMBER
JULY 1, 31, YEAR ENDED DECEMBER 31,
1993 1993 1995
----------- ----------- -----------
1994
-----------
United States............................. $ (427) $ (1,266) $ 1,638 $ 464
Foreign................................... (228) 88 404 1,493
----------- ----------- ----------- -----------
$ (655) $ (1,178) $ 2,042 $ 1,957
========== =========== ========== ==========
</TABLE>
F-12
<PAGE> 63
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
----------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31,
1994 1995
----------- -----------
Current:
Federal.............................................................. $ 674 $ 484
State................................................................ 185 46
Foreign.............................................................. 43 405
----------- -----------
Total current................................................. 902 935
----------- -----------
Deferred:
Federal.............................................................. (98) (133)
State................................................................ (20) (10)
Foreign.............................................................. -- --
----------- -----------
Total deferred................................................ (118) (143)
----------- -----------
$ 784 $ 792
========== ==========
</TABLE>
Significant components of the Company's deferred tax assets (liabilities) were
as follows:
<TABLE>
<CAPTION>
----------------------------
<S> <C> <C>
DECEMBER 31,
1994 1995
----------- -----------
Deferred tax liabilities:
Capitalized software............................................... $ (24) $ (17)
---- ----
Deferred tax assets:
Accrued liabilities................................................ 116 191
Depreciation....................................................... 20 19
Allowance for doubtful accounts.................................... 15 31
State tax deduction................................................ 63 7
Other.............................................................. 45 30
---- ----
259 278
---- ----
Net deferred tax assets.............................................. 235 261
Deferred tax assets valuation allowance.............................. (117) --
---- ----
$ 118 $ 261
==== ====
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it is
more likely than not, based on available evidence, that some portion or all of
the deferred tax assets will not be realized. Based on an evaluation of the
realizability of future tax benefits based on income earned in 1995, the Company
reversed all previously established valuation allowances during 1995.
F-13
<PAGE> 64
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
<S> <C> <C> <C> <C>
THE COMPANY
---------------------------------------------
PREDECESSOR
----------- SIX MONTHS
ENDED
SIX MONTHS DECEMBER
ENDED 31,
JULY 1, YEAR ENDED DECEMBER 31,
1993 1993 1995
----------- ----------- -----------
1994
-----------
Tax provision (benefit) at the U.S.
federal statutory rate of 34%........... $ (219) $ (398) $ 694 $ 666
Foreign income taxes at different
rates................................. -- -- (27) (77)
State and local taxes, net of federal
benefit............................... (40) (72) 123 117
Net operating loss carryforwards........ 259 470 -- --
Release of valuation allowance.......... -- -- (62) (117)
Nondeductible charges and accruals...... -- -- -- 166
Other................................... -- -- 56 37
----- ----- ---- -----
Provision for income taxes................ $ -- $ -- $ 784 $ 792
===== ===== ==== =====
Effective tax rates....................... -- -- 38% 40%
===== ===== ==== =====
</TABLE>
NOTE 9 -- REVENUES, GEOGRAPHIC INFORMATION AND EXPORT SALES
Revenues from customers representing 10% or more of consolidated revenues were
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
-----------
THE COMPANY
SIX MONTHS -----------------------------------------------------
ENDED YEAR ENDED SIX MONTHS
JULY 1, DECEMBER 31, ENDED
1993 SIX MONTHS 1995 JUNE 30,
----------- ENDED -----
DECEMBER 31, 1996
1994 -------------
1993 -----
------------ (UNAUDITED)
Customer A............................ -- -- 11.6% 13.9% 10.8%
Customer B -- Related party........... -- -- -- 13.4% 11.6%
Customer C............................ -- 34.2% 16.5% -- --
</TABLE>
The components of related parties revenues and costs of revenues are:
<TABLE>
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1993 DECEMBER 31, 1995 1996
------------ ------ ----
1994
---- 1995
----
(UNAUDITED)
Revenues
Software license fees.......................... $ -- $752 $1,084 $232 $273
Engineering services........................... 50 220 818 533 541
------------ ---- ------ ---- ----
Total related party revenues............ $ 50 $972 $1,902 $765 $814
=========== ==== ====== ==== ====
Cost of revenues
Software license fees.......................... $ -- $ 63 $ 60 $ 13 $ 8
Engineering services........................... 12 33 146 68 227
------------ ---- ------ ---- ----
Total related party cost of revenues.... $ 12 $ 96 $ 206 $ 81 $235
=========== ==== ====== ==== ====
</TABLE>
There were no related parties revenues for the period ended July 1, 1993.
F-14
<PAGE> 65
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's geographic operations:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED ASIA
STATES EUROPE PACIFIC ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
PREDECESSOR
Six months ended July 1, 1993
Revenues............................ $ 494 $ 741 $ 575 $ -- $ 1,810
Income (loss) from operations....... (400) 61 (289) -- (628)
Identifiable assets................. 696 321 485 (414) 1,088
-----------------------------------------------------------------
THE COMPANY
Six months ended December 31, 1993
Revenues from unaffiliated
customers........................ $ 404 $ 921 $ 685 $ -- $ 2,010
Revenue from related parties........ 50 -- -- -- 50
Income (loss) from operations....... (1,215) (36) 126 -- (1,125)
Identifiable assets................. 1,604 631 644 (1,072) 1,807
Year ended December 31, 1994
Revenues from unaffiliated
customers........................ $ 700 $2,273 $2,773 $ -- $ 5,746
Revenue from related parties........ 972 -- -- -- 972
Income from operations.............. 1,664 214 179 -- 2,057
Identifiable assets................. 2,166 1,100 1,891 (2,038) 3,119
Year ended December 31, 1995
Revenues from unaffiliated
customers........................ $ 1,017 $2,216 $3,995 $ -- $ 7,228
Revenue from related parties........ 1,902 -- -- -- 1,902
Income from operations.............. 393 59 1,409 -- 1,861
Identifiable assets................. 6,907 976 2,764 (1,564) 9,083
</TABLE>
Substantially all of the financial information for the Europe and Asia Pacific
geographic areas results from the Company's operations in Germany and Taiwan,
respectively.
Export sales from the United States to international customers were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE COMPANY
PREDECESSOR ---------------------------------------------------------
----------
SIX MONTHS
SIX MONTHS ENDED
ENDED DECEMBER 31,
JULY 1, YEAR ENDED DECEMBER 31,
1993 1993 1995 SIX MONTHS
---------- ------------ ---------- ENDED
JUNE 30,
1994
---------- 1996
----------
Europe, principally Germany...... $ -- $ 50 $ 622 $ 1,315 $ 894
Asia Pacific, principally
Japan.......................... 66 87 86 95 45
----- ----- ---- ----- ----
$ 66 $ 137 $ 708 $ 1,410 $ 939
===== ===== ==== ===== ====
</TABLE>
NOTE 10 -- COMMITMENTS
The Company leases its facilities in California, Taiwan and Germany. Future
minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, ----------
<S> <C>
1996........................................................................... $ 227
1997........................................................................... 87
1998........................................................................... 45
----------
Total.................................................................. $ 359
==========
</TABLE>
F-15
<PAGE> 66
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under an agreement that extends through 1996, the Company shares GCH office
facilities in Mountain View, California and is charged a pro rata portion based
on square footage occupied by the Company and GCH of actual rent and utilities
expense incurred. Management believes the allocation between the Company and GCH
of such expenses is reasonable.
Total rent expense, including amounts allocated from GCH, was $101, $123, $221,
$273 and $223 for the six month periods ended July 1, 1993 and December 31,
1993, the years ended December 31, 1994 and 1995, and the six months ended June
30, 1996, respectively.
NOTE 11 -- SUBSEQUENT EVENTS
Recapitalization and Reverse Stock Split
In May 1996, the Board of Directors approved an increase in the number of common
shares authorized to 40,000,000, authorized 5,000,000 shares of Preferred Stock
and approved a 1-for-2 reverse stock split of the Company's Common Stock,
subject to shareholders' approval, to be effected before the closing of the
Company's initial public offering. The reverse stock split was effected on
August 21, 1996. All references to the number of common shares and per share
amounts have been retroactively restated in the accompanying consolidated
financial statements to reflect the reverse stock split.
Equity Transactions
In January 1996, the Company issued 570,033 shares of Common Stock at a price of
$12.28 per share. In July 1996, the Company also sold 41,169 shares of Common
Stock to this shareholder at a price of $10.00 per share for aggregate proceeds
of $412. In connection with these issuances, the Company agreed that in the
event that an initial public offering is not completed by December 31, 1996, the
shares issued may be exchanged for the Company's convertible Preferred Stock.
The convertible Preferred Stock has certain rights, preferences and restrictions
with respect to conversion, liquidation, voting, cumulative dividends and
redemption.
In connection with the issuance and sale of the shares, the Company issued
272,394 Common Stock warrants with an exercise price of $12.28 per share for
$0.02 per warrant. The warrants are exercisable at any time up to the earlier of
(i) the closing of the Company's initial public offering of its Common Stock, of
which the aggregate offering price and per share price to the public are at
least $10,000 and $13.60 per share, respectively, or (ii) September 30, 2000. No
proceeds were separately allocated to the warrants.
During January and February 1996, the Company repurchased 250,000 shares of
common stock from existing shareholders at a price of $10.00 per share.
In June 1996, the Company entered into a joint technology development and
support agreement with Advanced Micro Devices, Inc. ("AMD") to support the
design and development of products related to AMD's K86 microprocessor. As part
of this relationship, in July 1996 the Company sold to AMD 160,000 shares of
Common Stock at a price of $12.50 per share for approximately $2,000 in cash.
In July 1996, the Company issued 77,500 shares of Common Stock upon the partial
exercise of a warrant held by a customer. The warrant had an exercise price of
$1.00 per share, resulting in proceeds totaling $78.
Employee Stock Purchase Plan
In May 1996, the Board of Directors adopted the Employee Stock Purchase Plan
(the "Purchase Plan"), which provides for the issuance of a maximum of 150,000
shares of Common Stock. Eligible employees may have up to 15% of their earnings
withheld, to be used to purchase shares of the Common Stock on specified dates
determined by the Board of Directors. The price of Common Stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value of
the Common Stock on the commencement date of each offering period or the
specified purchase date.
401(k) Plan
In January 1995, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to
F-16
<PAGE> 67
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduce their current compensation by up to the statutory prescribed limit and
have the amount of such reduction contributed to the 401(k) Plan. The Company
may make contributions to the 401(k) Plan on behalf of eligible employees. The
Company made no contributions to the 401(k) Plan in 1994 or 1995.
Technology License
In June 1996, the Company entered into a license agreement with an independent
party under which the Company has been granted a non-exclusive, non-transferable
right and license to web browser technology. Upon delivery of such technology,
the Company will be required to make a non-refundable, advanced royalty payment
of $300.
F-17
<PAGE> 68
APPENDIX -- DESCRIPTION OF GRAPHICS
OUTSIDE FRONT COVER
Graphic: Award logo.
Graphic caption: Award Software International(R), Inc.
INSIDE FRONT COVER
Graphic: Uses of Award's System Management Software. This graphic depicts a PC
motherboard which contains a non-volatile memory device bearing the Company's
logo. The PC motherboard is surrounded by four exemplary uses of the Company's
system management software: a personal digital assistant, a client-server tower,
a laptop computer and a symbolic depiction of the Internet/Intranet depicting
the Earth and the words "Internet" and "Intranet." Bordering the corners of the
page are the words "Desktop," "Embedded," "Mobile BIOS," "PCI," "DMI," "USB,"
"Hot Docking," "PC Card" and "SMSAccess Suite(TM)."
Graphic Caption: Award Software International(R), Inc.; SMSAccess Suite(TM),
USBAccess(TM) and support for USB are under development and not commercially
available.
BACK COVER
Graphic: Award logo.
Graphic caption: Award Software International(R), Inc.
<PAGE> 69
LOGO
