<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- -----------
Commission File Number: 0-26544
PREMENOS TECHNOLOGY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0367912
(State of incorporation) (IRS Employer
Identification No.)
1000 Burnett Avenue
Concord, California 94520
(Address of principal executive offices)
510-688-2700
(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 [ X ] No [ ]
The number of shares outstanding of the registrant's common stock as of August
1, 1997 was 11,775,559.
Page 1 of 12
<PAGE>
PREMENOS TECHNOLOGY CORP.
INDEX TO JUNE 30, 1997 FORM 10-Q
Page
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - Other Information
Items 1, 2, 3, 4, 5 and 6 10
SIGNATURE 11
Page 2 of 12
<PAGE>
<TABLE>
<CAPTION>
PART I
Item 1
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( in thousands )
June 30, December 31,
1997 1996
=========== ===========
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,171 $ 26,638
Short-term investments 24,705 29,844
Trade accounts receivable, net of allowances of
$325 and $348 in 1997 and 1996, respectively 7,600 9,440
Income taxes recoverable 405 551
Prepaid expenses and other assets 951 959
Deferred income taxes 2,582 2,516
--------- ---------
Total current assets 69,414 69,948
Property and equipment, net 6,796 6,700
Capitalized software development costs, net 5,780 6,037
Other long-term assets 774 1,005
--------- ---------
Total assets $ 82,764 $ 83,690
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,582 $ 4,747
Deferred revenue 7,198 7,017
Current portion of long-term debt 455 597
--------- ---------
Total current liabilities 11,235 12,361
Long-term debt 85 240
Deferred revenue 276 385
Deferred income taxes 1,406 1,406
--------- ---------
Total liabilities 13,002 14,392
--------- ---------
Minority interest in consolidated subsidiary 20 22
--------- ---------
Stockholders' equity:
Common stock 118 115
Additional paid-in capital 69,034 68,441
Retained earnings 590 720
--------- ---------
Total stockholders' equity 69,742 69,276
--------- ---------
Total liabilities and stockholders' equity $ 82,764 $ 83,690
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 12
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( unaudited )
( in thousands, except per share data )
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
====== ====== ====== ======
<S> <C> <C> <C> <C>
Revenues:
Software licenses $5,889 $5,179 $10,625 $9,103
Services 3,819 2,830 7,378 5,460
------ ------ ------- ------
Total revenues 9,708 8,009 18,003 14,563
------ ------ ------- ------
Cost of revenues:
Software licenses 1,248 754 2,437 1,461
Services 1,754 1,210 3,500 2,360
------ ------ ------- ------
Total cost of revenues 3,002 1,964 5,937 3,821
------ ------ ------- ------
Gross margin 6,706 6,045 12,066 10,742
------ ------ ------- ------
Operating expenses:
Product development 2,301 2,046 5,116 3,843
Sales and marketing 3,334 2,705 6,383 5,054
General and administrative 966 914 2,000 1,760
Acquisition-related costs -- 2,216 -- 2,216
------ ------ ------- ------
Total operating expenses 6,601 7,881 13,499 12,873
------ ------ ------- ------
Income (loss) from operations 105 (1,836) (1,433) (2,131)
Interest income 749 764 1,443 1,565
Interest expense (20) (50) (45) (94)
Other (13) -- (138) --
------ ------ ------- ------
Income (loss) before provision
(credit) for income taxes
and minority interest 821 (1,122) (173) (660)
Provision (credit) for income
taxes 292 456 (66) 641
Minority interest 3 1 (2) (1)
------ ------ ------- ------
Net income (loss) $ 526 $(1,579) $ (105) $(1,300)
====== ======= ======= =======
Net income (loss) per share $ 0.04 $ (0.15) $ (0.01) $ (0.12)
====== ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 11,871 10,789 11,689 10,684
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 12
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( unaudited )
( in thousands )
Six Months Ended
June 30,
------------------------
1997 1996
======== ========
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 2,952 $ 1,628
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired - (1,386)
Purchase of short-term investments (24,515) -
Proceeds from sale of short-term investments 30,000 51,855
Capitalized software development costs (771) (1,427)
Acquisition of property and equipment (1,422) (2,397)
-------- --------
Net cash provided by investing activities 3,292 46,645
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (296) (314)
Proceeds from exercise of options 98 687
Proceeds from employee stock purchase plan
stock issuance 540 -
Purchase of treasury stock (53) -
-------- --------
Net cash provided by financing activities 289 373
-------- --------
Increase in cash and cash equivalents 6,533 48,646
Cash and cash equivalents, beginning of period 26,638 11,495
-------- --------
Cash and cash equivalents, end of period $33,171 $60,141
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 12
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
( unaudited )
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, results of operations, and
cash flows. The results of operations for the three and six month periods
ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year. Certain information and footnote disclosures
normally contained in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the annual Consolidated Financial Statements contained in the
Company's December 31, 1996 Annual Report on Form 10-K.
Note 2. Treasury Stock
In March 1997, the Company's Board of Directors approved the repurchase of up
to one million shares of the Company's common stock. During the second
quarter of 1997, the Company repurchased 7,500 shares of its common stock at
$7.06 per share. The repurchased shares were reissued under the Company's
Employee Stock Purchase Plan.
Note 3. Recently Issued Accounting Pronouncements
In March 1997, Statement of Financial Accounting Standards No. 129 "Disclosure
of Information about Capital Structure" was issued and is effective for the
Company's year ending December 31, 1997. In June 1997, Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" were issued and are also effective for the
year ending December 31, 1998. The Company has not determined the impact of
the implementation of the pronouncements.
Note 4. Incentive Stock Program
On May 29, 1997, the shareholders approved an amendment to the 1995 Incentive
Stock Program (the "Program") to increase the shares reserved for issuance
thereunder by 2,000,000 shares, bringing the total number of shares issuable
under the Program to 4,630,000.
Page 6 of 12
<PAGE>
Item 2
PREMENOS TECHNOLOGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's operating results during the period
included in the accompanying condensed consolidated financial statements.
RESULTS OF OPERATIONS
Revenues
Total revenues for the second quarter of 1997 were $9.7 million compared to
$8.0 million in the second quarter of 1996, representing an increase of 21%.
Total revenues in the first six months of 1997 were $18.0 million compared to
$14.6 million in the same six month period of 1996, representing an increase
of 24%.
Software Licenses. Revenues from license fees and royalties increased to $5.9
million in the second quarter of 1997 from $5.2 million in the second quarter
of 1996, representing an increase of 14%. For the first six months of 1997
and 1996, license fees and royalties grew to $10.6 million from $9.1 million,
an increase of 17%. The increases in 1997 over 1996 were largely due to
increased acceptance of the Company's EDI/Open translator product for open
systems and revenues derived through the Company's network of distributors,
combined with increasing revenues from sales of the Company's Templar product
and revenues derived from licensing of the Company's encryption products
developed by the Company's Prime Factors' subsidiary.
Services. Revenues from services were $3.8 million and $2.8 million for the
second quarters of 1997 and 1996, respectively, representing an increase of
35%. Services revenues include product support revenues of $3.0 million and
$2.4 million for the second quarters of 1997 and 1996, respectively,
representing an increase of 24%. Revenues from services also grew 35%, to
$7.4 million from $5.5 million, for the six months ended June 30, 1997
compared to the same six month period in 1996. Product support revenues for
the first six months of 1997 and 1996 were $5.8 million and $4.6 million,
respectively, representing an increase of 27%. Professional services revenues
have grown for the 1997 periods, in comparison to the 1996 periods, reflecting
increased software integration, implementation and other consulting services.
Product support revenues have increased also as a result of the growth in the
Company's installed base of products.
Cost of Revenues
Cost of revenues for the second quarters of 1997 and 1996 were $3.0 million
and $2.0 million, representing 31% and 25% of total revenues, respectively.
For the first six months of 1997 and 1996, cost of revenues were $5.9 million
and $3.8 million, representing 33% and 26% of total revenues, respectively.
Cost of licenses includes royalties paid to third parties for licensed
software incorporated into the Company's products, amortization of capitalized
software development costs and costs associated with product packaging,
documentation and software duplication. Cost of licenses were $1.2 million
and $754,000 for the second quarters of 1997 and 1996, representing 21% and
15% of software license revenues, respectively. For the first six months of
1997 and 1996, cost of licenses were $2.4 million and $1.5 million,
representing 23% and 16% of software licenses revenues, respectively. The
increases in cost of licenses from 1996 to 1997 are attributable to several
factors including increased amortization of capitalized software costs
relating to the Company's EDI translator and Templar products and to its two
acquisitions in 1996, and increased costs relating to the sublicensing from
third parties of technologies embedded in the Company's broadening range of
product offerings.
Cost of services for the second quarters of 1997 and 1996 were $1.8 million
and $1.2 million, representing 46% and 43% of services revenues, respectively.
For the first six months of 1997 and 1996, cost of services were $3.5 million
Page 7 of 12
<PAGE>
and $2.4 million, representing 47% and 43% of services revenues, respectively.
The increase in costs are due to the Company's increasing revenues from
professional services which carry higher relative costs than the Company's
traditional product support services revenue.
Operating Expenses
Product Development. Product development expenditures consist primarily of
personnel and equipment costs required to conduct the Company's research and
development efforts, including project engineers, product documentation,
internal testing and development, standards and quality assurance. Product
development expenses, net of capitalized software development expenditures,
were $2.3 million and $2.0 million for the second quarters of 1997 and 1996,
representing 24% and 26% of total revenues, respectively. For the first six
months of 1997 and 1996, product development expenses, net of capitalized
software development expenditures, were $5.1 million and $3.8 million,
representing 28% and 26% of total revenues, respectively. The Company
capitalized software development expenditures of $382,000 and $758,000 in the
second quarters of 1997 and 1996, respectively, in accordance with Statement
of Financial Accounting Standards No. 86. The amounts capitalized represented
14% and 27% of gross development expenditures of $2.7 million and $2.8 million
for the second quarters of 1997 and 1996, respectively. For the first six
months of 1997 and 1996, the Company capitalized $771,000 and $1.4 million, or
13% and 27%, of gross development expenditures of $5.9 million and $5.3
million, respectively. The Company believes that research and development
expenditures are essential to maintaining its competitive position and expects
these costs to continue to constitute a significant percentage of revenues.
Product development expense and the capitalization rate may fluctuate from
period to period depending in part upon the number and status of software
development projects in process.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales personnel, costs of marketing personnel, and
outside marketing and promotional expenses. Sales and marketing expenses for
the second quarters of 1997 and 1996 increased to $3.3 million from $2.7
million, representing 34% of total revenues for both periods. For the first
six months of 1997 and 1996, sales and marketing expenses increased to $6.4
million from $5.1 million, representing 35% of total revenues for both
periods. The Company continues to place significant emphasis on direct sales
through building its own sales force. In addition, the Company is continuing
to pursue marketing its products through indirect channels, both domestically
and internationally, in order to increase revenues and market share while
reducing distribution costs.
General and Administrative. General and administrative expenses for the
second quarters of 1997 and 1996 were $1.0 million and $914,000, representing
10% and 11% of total revenues, respectively. For the first six months of 1997
and 1996, general and administrative expenses were $2.0 million and $1.8
million, representing 11% and 12% of total revenues, respectively.
Acquisition-Related Costs
Included in acquisition-related costs for the three and six month periods
ended June 30, 1996 were charges for purchased in-process product development
arising from the acquisition of Don Valley Technology Corporation and costs
related to the exchange of stock options and stock in Premenos Corp., the
Company's principal operating subsidiary, with certain minority shareholders
of Premenos Corp.
Other Income (Expense), Net
Other income (expense) consists of interest income, interest expense and other
non-operating expenses. Net other income was $716,000 and $714,000 for the
second quarters of 1997 and 1996, representing 7% and 9% of total revenues,
respectively. For the first six months of 1997 and 1996, net other income was
$1.3 million and $1.5 million, respectively. The decrease in net other income
for the six month period comparison is primarily due to the charges of
$125,000 in the first quarter of 1997 related to the Company's equity
investment in Trailblazer Systems, Inc.
Provision (Credit) for Income Taxes
The Company's provision (credit) for income taxes for the three and six month
periods ended June 30, 1997 were $292,000 and $(66,000), representing
effective income tax rates of 36% and 38%, respectively. The provision for
Page 8 of 12
<PAGE>
income taxes for the three and six month periods ended June 30, 1996 were
$456,000 and $641,000, representing effective income tax rates of 41% and 42%,
respectively, excluding the non-deductible acquisition-related costs. The
reductions in effective income tax rates for the three and six month periods
ending June 30, 1997, in comparison to the same periods in 1996, are primarily
due to the timing of and changes in federal tax law relating to research and
experimentation credits.
Minority Interest
Minority interest of $3,000 and $1,000 for the second quarters of 1997 and
1996, respectively, represents the minority stockholders' proportionate share
of the net income of the Company's subsidiary, Premenos Corp. For the first
six months of 1997 and 1996, the minority shareholders' proportionate share of
reported net losses was $(2,000) and $(1,000), respectively.
Net Income (Loss)
Net income (loss) for the second quarters of 1997 and 1996 were $526,000 and
$(1,579,000), representing 5.4% and (19.7)% of total revenues, respectively,
and earnings (loss) per share of $0.04 and $(0.15), respectively. Excluding
the acquisition-related costs, net income for the second quarter of 1996 would
have been $637,000, or $.05 per share. For the first six months of 1997 and
1996, net losses were $(105,000) and $(1,300,000), respectively, and loss per
share was $(0.01) and $(0.12), respectively. Excluding the acquisition-
related costs, net income for the six months ended June 30, 1996 would have
been $916,000, or $0.08 per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital in excess of $58 million.
Cash and short-term investments totaled $57.9 million, representing
approximately 70% of total assets.
Cash flows from operating activities were $3.0 million and $1.6 million for
the six months ended June 30, 1997 and 1996, respectively. For the six months
ended June 30, 1997, cash provided by operating activities resulted primarily
from depreciation and amortization, and from changes in operating assets and
liabilities. For the same period in 1996, cash provided by operating
activities resulted from depreciation, amortization and other noncash charges,
reduced by net losses and by investments in the Company's working capital.
Cash provided by investing activities was $3.3 million and $46.6 million for
the first six months of 1997 and 1996, respectively. For both periods, cash
was provided as a result of the conversion of the investment portfolio between
short-term investments and cash and cash equivalents. In addition, cash used
in investing activities for both the 1997 and 1996 periods includes the
acquisition of property and equipment and the capitalization of software
development costs, and in 1996 also included cash paid of $1.4 million
relating to the acquisition of Don Valley Technology Corporation.
Cash provided by financing activities was $289,000 and $373,000 for the first
six months of 1997 and 1996, respectively. Cash provided by financing
activities resulted from the exercise of options in both periods, and from
employee stock purchase plan stock issuances during the period ended June 30,
1997. Cash used in financing activities for both the 1997 and 1996 periods
included principal payments on long-term debt, and in the 1997 period included
purchases of treasury shares.
The Company's principal commitments consist of leases on its office facilities
and obligations under its bank term loan facilities and capital leases. The
Company currently has no material commitments for capital expenditures. In
March 1997, the Company's Board of Directors approved the repurchase of up to
one million shares of the Company's common stock on the open market from time
to time. The Company has repurchased 7,500 shares to date under this program.
The Company believes that its current cash and short-term investments and cash
flow from operations will be sufficient to meet its working capital and
capital expenditure requirements through the foreseeable future.
Page 9 of 12
<PAGE>
Part II
PREMENOS TECHNOLOGY CORP.
Other Information
Items 1, 2, and 3
The above items have been omitted as inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
1. The Annual Meeting of Stockholders of Premenos Technology Corp was held on
May 29, 1997. Present at the Annual Meeting in person or by proxy were
holders of 10,992,149 shares or 93.8% of the Common Stock entitled to vote.
2. David Hildes was elected to serve as a director until 2000 with a total of
8,701,699 affirmative votes, 71,404 votes against and no abstentions or broker
non-votes. Frank Wagner was elected to serve as a director until 2000 with
8,701,133 affirmative votes, 71,970 votes against and no abstentions or broker
non-votes. Previously elected directors whose terms expire in 1998 are
Timothy Dreisbach and William Studeman. Previously elected directors whose
terms expire in 1999 are Lew Jenkins and Stephan Mallenbaum.
3. Additional matters voted upon at the Annual Meeting include:
a) The proposal to increase the number of authorized shares for the Company's
1995 Incentive Stock Program was approved with 5,700,536 affirmative votes,
1,579,859 votes against, 6,152 abstentions and 1,486,556 broker non-votes. An
affirmative vote of a majority of the outstanding shares of Common Stock
represented at the Annual Meeting was required to approve the Amendment.
b) The appointment of Coopers & Lybrand, L.L.P. as independent public
accountants to audit the accounts of the Company and its subsidiaries for the
year ended December 31, 1997, was ratified with the votes as follows:
8,751,026 affirmative votes, 13,950 votes against and 8,172 abstentions and no
broker non-votes. An affirmative vote of a majority of the outstanding shares
of Common Stock represented at the Annual Meeting was required to ratify the
appointment of Coopers & Lybrand, L.L.P.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Statement of Computation of Earnings Per Common Share
27 - Financial Data Schedule (included with SEC electronic filing only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
Page 10 of 12
<PAGE>
PREMENOS TECHNOLOGY CORP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMENOS TECHNOLOGY CORP.
By:
/s/ H. Ward Wolff
- --------------------------------------
H. Ward Wolff
Senior Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
Date: August 14, 1997
Page 11 of 12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding 11,741,459 10,789,014 11,688,968 10,684,064
Shares issuable pursuant
to warrants and employee
stock option plan, less
shares assumed repur-
chased at the average
fair value during the
period (1) 129,674 - - -
----------- ---------- ---------- ----------
Number of shares for
computation of earnings
per share 11,871,133 10,789,014 11,688,968 10,684,064
=========== ========== ========== ==========
Net income (loss) $ 526,000 $(1,579,000) $(105,000) $(1,300,000)
========== ========== ========== ==========
Net income (loss)
share (2) $0.04 $ (0.15) $(0.01) $(0.12)
========== ========== ========== ==========
</TABLE>
(1) Excluded in loss periods as impact would be anti-dilutive.
(2) There is no difference between primary and fully diluted net income
(loss) per share.
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from Form
10Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 33,171
<SECURITIES> 24,705
<RECEIVABLES> 7,600
<ALLOWANCES> 325
<INVENTORY> 0
<CURRENT-ASSETS> 69,414
<PP&E> 12,722
<DEPRECIATION> 5,926
<TOTAL-ASSETS> 82,764
<CURRENT-LIABILITIES> 11,235
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 69,624
<TOTAL-LIABILITY-AND-EQUITY> 82,764
<SALES> 9,708
<TOTAL-REVENUES> 9,708
<CGS> 3,002
<TOTAL-COSTS> 6,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 821
<INCOME-TAX> 292
<INCOME-CONTINUING> 526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
