<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 1-11799
AWARD SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2893462
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (Zip Code)
415-968-4433
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
Registrant had 6,507,754 shares of Common Stock, no par value, outstanding at
November 8, 1996.
1
<PAGE> 2
AWARD SOFTWARE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheet as of September 30,
1996 (Unaudited) and December 31, 1995 3
b) Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1996 and 1995 (Unaudited) 4
c) Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1996 and 1995 (Unaudited) 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
Award Software International(R) and SMSAccess are trademarks of registrant.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AWARD SOFTWARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,217 $ 6,498
Accounts receivable, net 1,993 992
Receivable from related party 573 568
Receivable from GCH Systems, Inc. 220 282
Other current assets 1,585 216
-------- -------
Total current assets 17,588 8,556
Property and equipment, net 627 276
Other assets 324 251
-------- -------
$ 18,539 $ 9,083
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 682 $ 191
Accrued liabilities 2,032 1,723
-------- -------
Total current liabilities 2,714 1,914
Stockholders' equity
Common stock, 40,000,000 shares authorized; no par value;
5,257,754 and 4,586,283 shares issued and outstanding 13,184 6,215
Deferred stock compensation (199) (255)
Retained earnings 2,955 1,245
Cumulative translation adjustment (115) (36)
-------- -------
Total stockholders' equity 15,825 7,169
-------- -------
$ 18,539 $ 9,083
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AWARD SOFTWARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $3,000 $1,675 $8,049 $4,800
Engineering services 91 48 382 195
Related parties 304 535 1,118 1,300
------ ------ ------ ------
Total revenues 3,395 2,258 9,549 6,295
------ ------ ------ ------
Cost of revenues:
Software license fees 173 47 312 158
Engineering services 58 8 115 38
Related parties 27 44 262 125
------ ------ ------ ------
Total cost of revenues 258 99 689 321
------ ------ ------ ------
Gross profit 3,137 2,159 8,860 5,974
Operating expenses:
Research and development 1,144 674 3,010 1,948
Sales and marketing 707 757 1,965 1,794
General and administrative 451 371 1,497 1,223
------ ------ ------ ------
Total operating expenses 2,302 1,802 6,472 4,965
------ ------ ------ ------
Income from operations 835 357 2,388 1,009
Interest income, net 114 13 284 --
------ ------ ------ ------
Income before provision for income taxes 949 370 2,672 1,009
Provision for income taxes 341 150 961 408
------ ------ ------ ------
Net income $ 608 $ 220 $1,711 $ 601
------ ------ ------ ------
Net income per common share $ 0.10 $ 0.03 $ 0.28 $ 0.09
====== ====== ====== ======
Weighted average number of common and
common equivalent shares outstanding 6,039 6,400 6,059 6,595
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AWARD SOFTWARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,711 $ 601
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 160 103
Warrants issued for services 0 373
Deferred stock compensation 56 23
Changes in assets and liabilities:
Accounts receivable, net (964) (87)
Receivable from related party (5) (434)
Other current assets (1,394) (43)
Other assets (109) 79
Accounts payable 496 22
Accrued liabilities 310 417
-------- -------
Net cash provided by operating activities 261 1,054
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment,net (480) (75)
-------- -------
Net cash used in investing activities (480) (75)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuances 6,969 1,466
Payments from (to) GCH 62 (1,781)
Principal payments under note obligations 0 (33)
-------- -------
Net cash provided by (used in) financing activities 7,031 (348)
Effect of exchange rate changes on cash (93) 35
-------- -------
Net increase in cash and cash equivalents 6,719 666
Cash and cash equivalents at beginning of period 6,498 1,374
-------- -------
Cash and cash equivalents at end of period $ 13,217 $ 2,040
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
AWARD SOFTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Award
Software International, Inc. (the "Company") as of September 30, 1996 and for
the three and nine months ended September 30, 1996 and 1995 are unaudited. The
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, which in the opinion of management are
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. The condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1995 included in the Registration
Statement (Number 333-05107) on Form S-1, as amended as of October 25, 1996,
filed by the Company under the Securities Act of 1933, as amended.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year or any
future period.
2. NET INCOME PER SHARE
Net income 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
6
<PAGE> 7
method and the public offering price) issued within 12 months prior to the
Company's initial public offering filing and through the effective date of such
filing have been included in the calculation as if they were outstanding for all
periods presented.
3. INITIAL PUBLIC OFFERING
On October 25, 1996, the Company completed its initial public offering.
In this transaction, the Company sold an aggregate of 1,250,000 shares of common
stock at $8.00 per share, resulting in net proceeds to the Company of
approximately $8,325,000 after deducting the underwriting discount and offering
expenses.
7
<PAGE> 8
AWARD SOFTWARE INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company designs, develops and markets system management software
for the global computing market. The following is a discussion of the financial
condition and results of operations of the Company as of September 30, 1996 and
for the three and nine months ended September 30, 1996 and 1995, respectively,
and should be read in conjunction with the accompanying Quarterly Condensed
Consolidated Financial Statements and Notes thereto and the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1995 included in the Company's Registration Statement (Number 333-05107) on
Form S-1 and is qualified in its entirety by reference thereto.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statement of operations information as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Software license fees 88.3% 74.2% 84.3% 76.3%
Engineering services 2.7 2.1 4.0 3.1
Related parties 9.0 23.7 11.7 20.6
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Software license fees 5.1 2.1 3.3 2.5
Engineering services 1.7 0.4 1.2 0.6
Related parties 0.8 1.9 2.7 2.0
------ ------ ------ ------
Total cost of revenues 7.6 4.4 7.2 5.1
------ ------ ------ ------
Gross profit 92.4 95.6 92.8 94.9
Operating expenses:
Research and development 33.7 29.9 31.5 31.0
Sales and marketing 20.8 33.5 20.6 28.5
General and administrative 13.3 16.4 15.7 19.4
------ ------ ------ ------
Total operating expenses 67.8 79.8 67.8 78.9
------ ------ ------ ------
Income from operations 24.6 15.8 25.0 16.0
Interest income, net 3.4 0.6 3.0 --
------ ------ ------ ------
Income before provision for income taxes 28.0 16.4 28.0 16.0
Provision for income taxes 10.1 6.6 10.1 6.5
------ ------ ------ ------
Net income 17.9% 9.8% 17.9% 9.5%
====== ====== ====== ======
</TABLE>
8
<PAGE> 9
Comparison of Three and Nine Month Periods Ended September 30, 1996 and 1995
Revenues. The Company's revenues consist of software license fees and
engineering services revenues. Revenues increased by $1.1 million (50%) and $3.3
million (52%) for the three and nine month periods ended September 30, 1996,
respectively, from the same periods of the prior year. Software license fees
increased by $1.3 million (79%) and $3.2 million (68%) for the three and nine
month periods ended September 30, 1996, respectively, from the same periods of
the prior year primarily due to higher unit shipments to the Company's existing
Taiwanese motherboard customers, and to a lesser degree to existing U.S.
customers partially offset by a decrease in software license fees from a
European customer. Engineering services revenues increased by $43,000 (90%) and
$187,000 (96%) for the three and nine month periods ended September 30, 1996,
respectively, from the same periods of the prior year primarily due to higher
engineering services revenues from customers in the U.S. Related parties
revenues decreased by $231,000 (43%) and $182,000 (14%) for the three and nine
month periods ended September 30, 1996, respectively, from the same periods of
the prior year primarily due to lower software license fees and engineering
services revenues from related parties.
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 as a
percent of revenues increased to 8% and 7% of revenues for the three and nine
month periods ended September 30, 1996, respectively, as compared to 4% and 5%
of revenues for the same periods of the prior year. The increase in cost of
revenues as a percent of revenues for the three month period ended September 30,
1996 was primarily due to higher cost of software license fees and cost of
engineering services revenues offset by a decrease from cost of engineering
services revenues associated with a related party product development effort.
Research and Development. Research and development expenses consists
primarily of engineering personnel and related expenses and equipment costs.
Research and development expenses increased by $470,000 (70%) and $1.1 million
(55%) for the
9
<PAGE> 10
three and nine month periods ended September 30, 1996, respectively, from the
same periods of the prior year primarily due to the hiring of engineering
personnel and related expenses and outside consultants to develop new software
products, such as mobile 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 decreased by $50,000 (7%) and increased by $171,000 (10%) for
the three month and nine month periods ended September 30, 1996, respectively,
from the same periods of the prior year. The decrease for the three month period
ended September 30, 1996 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
for the three month period ended September 30, 1995. This decrease was partially
offset by the hiring of sales and marketing personnel and related expenses and
higher sales commissions for increased revenues. The increase for the nine month
period ended September 30, 1996 was primarily due to the hiring of sales and
marketing personnel and related expenses and higher sales commissions for
increased revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel and related expenses, professional services and
facilities costs. General and administrative expenses increased by $80,000 (22%)
and $274,000 (22%) for the three and nine month periods ended September 30,
1996, respectively, from the same periods of the prior year primarily due to
higher professional services fees and a one-time employee severance cost of
$90,000 in the Company's European operations. In addition, 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 during the second half of 1995.
10
<PAGE> 11
Amortization of deferred compensation expense of $19,000 and $57,000 is included
in general and administrative expense for the three and nine month periods ended
September 30, 1996, respectively.
Interest income, net. Interest income, net consists primarily of
interest expense associated with short-term borrowings and interest income on
cash and cash equivalents, net of expenses. Interest income, net increased by
$101,000 and $284,000 for the three and nine month periods ended September 30,
1996, respectively, from the same periods of the prior year primarily due to an
increase in interest income earned on higher cash balances.
Provision for Income Taxes. The Company's effective tax rate decreased
from 41% to 36% for the three months ended September 30, 1995 and September 30,
1996, respectively, and 40% to 36% for the nine months ended September 30, 1995
and September 30, 1996, respectively, primarily due to an increase in income
taxable in Taiwan at rates lower than the applicable statutory rates in the U.S.
and Germany.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents of
$13.2 million and working capital of $14.9 million. Net cash provided by
operating activities was $261,000 for the nine months ended September 30, 1996
and was primarily due to higher net income, accounts payable and accrued
liabilities partially offset by growth in accounts receivable and other current
assets. Net cash provided by operating activities was $1.1 million for the nine
months ended September 30, 1995 and primarily resulted from net income, warrants
issued for services and accrued liabilities partially offset by accounts
receivable from related parties.
Net cash used in investing activities was $480,000 and $75,000 for the
nine months ended September 30, 1996 and September 30, 1995, respectively, and
was primarily due to the purchase and upgrade of the Company's computer
hardware.
11
<PAGE> 12
Net cash provided by financing activities was $7.0 million for the nine
months ended September 30, 1996 and was primarily due to proceeds from private
equity sales. Net cash used in financing activities was $348,000 for the nine
months ended September 30, 1995 and was primarily due to advances and repayments
to GCH Systems, Inc., a related party.
On October 25, 1996, the Company completed its initial public offering
("IPO"). In this transaction, the Company sold an aggregate of 1,250,000 shares
of common stock at $8.00 per share, resulting in net proceeds to the Company of
approximately $8,325,000 after deducting the underwriting discount and offering
expenses.
The Company believes that its net proceeds from the IPO, 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.
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21A of the Securities Exchange Act of 1934, as amended, 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 in the
Company's Registration Statement (Number 333-05107) on Form S-1 filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed herewith:
Exhibit 11.1 Computation of Net Income Per Share
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three
month period for which this report is filed.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARD SOFTWARE INTERNATIONAL, INC.
November 13, 1996 By: /s/ George C. Huang
-------------------
George C. Huang
Chairman of the Board, President and Chief
Executive Officer
November 13, 1996 By: /s/ Kevin J. Berry
------------------
Kevin J. Berry
Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary
14
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description
Exhibit 11.1 Computation of Net Income Per Share
Exhibit 27.1 Financial Data Schedule
15
<PAGE> 1
EXHIBIT 11.1
AWARD SOFTWARE INTERNATIONAL INC.
COMPUTATION OF NET INCOME PER SHARE (1)
(In thousands except per share amount)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 608 $ 220 $1,711 $ 601
------ ------ ------ ------
Weighted average common and
common equivalent shares:
Common stock 3,092 3,420 3,092 3,701
Common stock equivalents from
stock options/warrants using
the treasury stock method 444 477 464 391
Shares of common stock issued
and options and warrants granted
in accordance with SAB No.83 2,503 2,503 2,503 2,503
------ ------ ------ ------
Weighted average common and
common equivalent shares 6,039 6,400 6,059 6,595
------ ------ ------ ------
Net income per share $ 0.10 $ 0.03 $ 0.28 $ 0.09
====== ====== ====== ======
</TABLE>
(1) Net income 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 public offering price)
issued by the Company within 12 months prior to the Company's initial
public offering filing and through the effective date of such filing have
been included in the calculation as if they were outstanding for all
periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,217
<SECURITIES> 0
<RECEIVABLES> 2,875
<ALLOWANCES> (89)
<INVENTORY> 0
<CURRENT-ASSETS> 17,588
<PP&E> 965
<DEPRECIATION> (338)
<TOTAL-ASSETS> 18,539
<CURRENT-LIABILITIES> 2,714
<BONDS> 0
0
0
<COMMON> 13,184
<OTHER-SE> 2,641
<TOTAL-LIABILITY-AND-EQUITY> 18,539
<SALES> 9,549
<TOTAL-REVENUES> 9,549
<CGS> 689
<TOTAL-COSTS> 689
<OTHER-EXPENSES> 6,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,672
<INCOME-TAX> 961
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,711
<EPS-PRIMARY> .28
<EPS-DILUTED> 0
</TABLE>
