UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-26544
PREMENOS TECHNOLOGY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0367912
(State of incorporation) (I.R.S. Employer Identification No.)
1000 Burnett Avenue
Concord, California 94520
(Address of principal executive offices)
510-688-2700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 3, 1997 was $50,288,000 (based upon the closing price
for shares of the Registrant's common stock as reported by the NASDAQ National
Market System). Shares of common stock held by each officer, director and
holder of 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the registrant's common stock as of March
3, 1997 was 11,679,314.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement to be issued in
conjunction with registrant's annual stockholders' meeting to be held on May
29, 1997.
The index to exhibits is located on page 42.
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1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 4A. Executive Officers of the Registrant 13
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Consolidated Financial Statements 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 42
Signatures 45
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P A R T I
ITEM 1. BUSINESS
Overview
Company Product Overview
Premenos develops, markets and supports a broad range of electronic commerce
software products and services that enable businesses to engage in secure and
reliable business-to-business electronic transactions and communications. The
Company is a leading provider of electronic data interchange ("EDI")
translation software and the market leader for EDI software in the mid-range
computer market. By using the Company's software and services, businesses are
able to transfer electronic information over proprietary networks or the
Internet and other TCP/IP networks. The Company's products and services are
designed to provide for the timely, accurate, cost-effective and secure
electronic exchange of information between a business and its trading partners,
including suppliers, customers and financial institutions. Currently, the
Company's software applications enable businesses to electronically execute
over 150 types of business transactions, including essential commercial
functions such as purchasing, invoicing, shipping and notification.
Within electronic commerce, the Company has developed software products and
services for businesses conducting EDI transactions and communications. The
Company's EDI/400 product has been for the past six years and is currently the
leading EDI translation software product in the mid-range computer market.
EDI/400 operates on the IBM AS/400, which is the predominant computer in the
mid-range computer market.
The Company's EDI/Open software is an EDI translator for the client-server
market. EDI/Open is written in the C language and supports IBM RISC
System/6000, Hewlett Packard HP 9000, Sun SPARC and Windows NT platforms.
EDI/Open incorporates a true client-server architecture - a graphical client
running on a variety of workstations, connected directly or remotely to a UNIX
or NT server. EDI/Open also supports parallel translation across multiple
central processing units.
The Company's Templar software and services enable businesses to engage in
secure and verifiable electronic commerce transactions over the Internet and
other TCP/IP networks at significantly reduced costs as compared with
traditional proprietary networks. Templar is an integrated solution designed to
overcome concerns associated with the use of open networks by providing
businesses with the ability to transmit secure, digitally-signed documents,
including EDI documents. In addition to security, Templar automatically
enables an electronic document recipient to authenticate the sender of the
document and a sender to verify receipt of a document by the intended recipient
and offers both parties the ability to verify document integrity. Furthermore,
Templar enables automated tracking and auditing of business transactions.
In 1996, the Company acquired Don Valley Technology Corporation ("Don Valley"),
a forms-based EDI software maker. As a result, the Company has added the
PowerDox and WebDox electronic commerce programs to its product offering mix.
PowerDox is a structured electronic commerce trading system that enables large,
"hub" companies to trade easily with small, "spoke" trading partners who have
been reluctant to implement full-scale EDI. It consists of PowerDox Central,
software that resides on a server at the hub location, and PowerDox Remote,
client software that is installed at a spoke trading partner. WebDox operates
in the same way as PowerDox, but enables transmission of electronic forms over
the World Wide Web instead of a closed communications medium.
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Overview (Continued)
Also in 1996, the Company acquired Prime Factors, Inc. ("Prime Factors"), an
encryption software maker. The Prime Factors products include a comprehensive
range of encryption products that enable banks and other businesses to secure
financial and other information transmitted over internal and external
networks. The Prime Factors products, including Descrypt/EDI+, Psypher/EDI+,
Fdesmac+, PIN Management System and others operate on computer platforms
ranging from PCs to UNIX and AS/400 machines to MVS mainframes.
In addition to its software products, the Company provides extensive technical
support, consulting services and education services to aid customers in the
implementation and administration of electronic commerce solutions.
Electronic Commerce and EDI
Electronic commerce involves the automation of business transactions through
the use of telecommunications and computers to exchange and process commercial
information and transactional documents electronically. Electronic commerce
includes EDI, e-mail, electronic funds transfer, electronic forms, bulletin
boards and electronic catalogue services. Within electronic commerce, EDI is a
key element and is fundamental to business-to-business transactions. EDI is the
automated, computer-to-computer exchange of structured business data between a
company and its trading partners. EDI facilitates uniform communications with
different trading partners, including customers, suppliers, common carriers,
and banks or other financial institutions.
Advances in data communications have fostered the use of EDI in the
transmission and processing of business-to-business transaction documents,
including purchase orders, invoices, shipping schedules and other documents.
Because EDI communication is in the form of a standards-based business
document, it can be readily processed by the recipient's computer system in an
automated manner, thus achieving greater levels of speed, accuracy and
efficiency at substantial cost savings as compared with paper-based methods of
business communications.
The increasing adoption of EDI as a more efficient and cost-effective means of
conducting business-to-business transactions is due primarily to the increasing
need of businesses to communicate with each other in a time-sensitive manner.
Through the use of EDI, a business can conduct a large number of transactions
contemporaneously with a large number of trading partners across different
industries.
EDI communications typically consist of standard commercial documents necessary
to conduct business. The standards for the more than 150 EDI document types are
administered and promulgated by industry, national and international
organizations such as the American National Standards Institute ("ANSI"), the
United Nations EDI for Administration Commerce and Trade ("UN/EDIFACT")
Organization, or the International Standards Organization ("ISO"). The boards
of these organizations are comprised of industry participants, including the
Company and its competitors.
Growth in the use of EDI has traditionally been driven by large businesses or
"hubs" that are the center of trading relationships within certain industries,
such as retail, consumer products and manufacturing. Typically, EDI services
provide the communications infrastructure that ties together a hub and its
trading partners or "spokes." After a hub implements EDI, it will often
encourage its spokes to participate in order to maximize ordering process
efficiency.
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Overview (Continued)
Currently, businesses utilizing EDI translation software and conducting EDI
transactions with their trading partners generally use proprietary value-added
networks ("VANs") such as those operated by Advantis, GE Information Services,
Sterling and others as the communications link. VANs provide security and
reliability by transmitting, controlling, logging and archiving all messages
through a central electronic clearinghouse and by providing extensive customer
support. VANs, however, are currently quite costly compared with the Internet
and other TCP/IP networks.
Electronic Commerce and the Internet
The Internet is a collection of interconnected public and private networks that
allows any computer on the network to communicate with any other computer on
the network through an open communications protocol known as TCP/IP. Although
the Internet affords a lower cost, more robust and widely available medium for
electronic commerce than the proprietary VANs generally in current use, there
are significant actual and perceived concerns relating to the use of the
Internet for commercial transactions. These concerns include the absence of
security, inability to confirm message integrity, vulnerability of messages to
interception and fabrication, lack of user support, service or centralized
"help desk" support and difficulties in obtaining reliable assurance of receipt
of messages sent or the authenticity of messages received. These difficulties
inherent in the Internet are magnified if the Internet is used to execute
commercial transactions such as EDI purchase orders, shipping instructions and
other operative commercial documents as opposed to informational electronic
mail. These commercial drawbacks of the Internet are heightened still further
if messages are intended for direct computer processing, as are typical EDI
messages.
To solve the current problems with using the Internet and other TCP/IP networks
for conducting business-to-business electronic transactions and communications,
the Company has developed and released its Templar product. Templar provides a
solution designed to replicate in software the desirable elements of an EDI VAN
at a substantially lower cost. In addition, by incorporating encryption
technology, Templar provides a viable alternative to the traditional VAN
because it allows a party to verify the identity of the sender of a
communication and to verify the integrity of the communication received, and
allows a sender of a communication to verify the receipt of the communication,
in unaltered form, by the intended recipient. The Company anticipates that the
opportunity for cost savings, achieved principally through flat-rate,
volume-independent and time-of-day independent pricing and higher speed access,
will be an incentive for business users to conduct electronic commerce
transactions over the Internet and other TCP/IP networks with the assistance of
Templar.
Strategy
The Company's objective is to be a leading provider of software and services
that enable businesses to conduct secure and reliable electronic commerce
transactions over proprietary networks or the Internet and other TCP/IP
networks. The Company has been for the past six years and is currently the
leading provider of EDI software and services for the mid-range computer
market, operating on the IBM AS/400, the predominant computer in the mid-range
computer market. The Company intends to maintain this leadership by continuing
to develop and enhance its mid-range EDI product offerings. The Company
believes maintaining its EDI mid-range leadership position is essential both to
increase sales of its EDI products and to gain market acceptance of Templar.
As part of this strategy, the Company intends to continue to release upgraded
versions of existing products with additional functions and features and to
develop complementary products, such as network communications modules and
forms-based and encryption products. In addition, the Company intends to
explore new avenues for growth by considering acquisitions of businesses and
products that complement or enhance the Company's current offerings.
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Strategy (Continued)
Premenos intends to leverage its leadership position in the mid-range EDI
market to replace customer dependence on high-cost proprietary networks with
the Templar open systems software solution. Premenos intends to utilize its
detailed knowledge of EDI to replicate in software the functionality of
proprietary networks. Premenos intends to promote open system architectures
through standards groups, product positioning and solutions for
interconnectivity, while continuing to maintain compatibility with significant
proprietary systems. EDI market penetration typically is driven by a hub
organization with the market influence to persuade its trading partners to use
EDI as a condition of transacting business with the hub. Adoption of EDI by
hubs and adoption of the Company's EDI products by hubs and their trading
partners has been a significant factor in the Company's EDI market penetration.
The Company believes that sales of Templar are currently primarily driven by
hubs influencing other hubs. The Company believes that its PowerDox and WebDox
products will be driven by hubs influencing small to medium sized trading
partners. For all its products, the Company intends to continue fostering
relationships with hub organizations. The Company intends to build sales
through expanding its direct sales force, including a greater emphasis on field
sales, and through increased emphasis on third party distribution channels, and
also plans to pursue relationships and alliances with providers of
complementary and related products and services.
Products
EDI Translators
Premenos currently offers two products within the EDI translator category,
EDI/400 and EDI/Open. The most significant portion of the Company's revenues
to date have been derived from its EDI/400 product and related services.
EDI/400. EDI/400, the Company's leading product, was released in 1988.
EDI/400 has been for the past six years and is currently the leading EDI
software product for the mid-range computer market, operating on the IBM AS/400
computer. The AS/400 is the leading mid-range platform installed worldwide for
use as either the main computer for a small or mid-size business or as a
departmental or dedicated processor in a larger business.
The primary function of EDI/400 is to translate a business' internal formats,
or way of doing business, to the major EDI standards, and from the major EDI
standards to a business' internal formats. EDI/400 then processes those
standards in a manner that enables them to be transmitted over standard
communications networks. EDI/400 is based on a table-driven design that
currently supports all of the recognized EDI standards promulgated by both ANSI
and UN/EDIFACT. The Company updates its software products as new standards are
promulgated or as existing standards change. In addition, EDI/400 contains
ancillary functions to manage the EDI process for the host computer in the
areas of mailboxing, audit trails, network communications, compliance and
similar functions. Since the Company's EDI/400 product is based on EDI
standards, it cannot communicate a business document unless it is one of the
recognized EDI standard documents, nor can it communicate free-form messages
such as e-mail. The Company also offers a graphical user interface module for
the EDI/400 product.
EDI/400 is generally made available on a single-computer license basis for a
one-time license fee generally ranging from $7,500 to $55,000, depending on the
model computer on which the product is authorized to operate, plus additional
fees for any optional features included. The Company also offers
multiple-computer licenses and enterprise licenses in appropriate
circumstances.
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Products (Continued)
EDI/Open. Premenos' EDI/Open is an EDI translation and message management
product designed to operate on UNIX-based computer systems such as the IBM RISC
System/6000, the Hewlett Packard HP 9000 and Sun SPARC platforms. EDI/Open is
also available for the Windows NT platform. EDI/Open was released in current
form in May 1995. EDI/Open is generally made available on a single-computer
license basis for a one-time license fee based upon the aggregate number of
different types of documents the licensee intends to use to transact business
with each of its trading partners. These fees generally range from $10,000 to
$60,000 depending on the number of document types and trading partner
relationships authorized, plus additional fees for any optional features
included.
EDI/Open is a more flexible and a more complex product than EDI/400. Unlike
EDI/400, which is primarily table-driven, EDI/Open is based on a set of
syntactical or language-based rules which can be linked or altered to define a
much larger set of possible interrelationships of business transactions than
can be practically described in a table-based system. EDI/Open includes the
standard graphical user interface support for each platform. EDI/Open
supports Oracle and Sybase databases.
Templar
Templar allows business customers to engage in electronic commerce
transactions over the Internet and other TCP/IP networks by facilitating the
exchange of secure, digitally-signed electronic documents, including EDI
documents. Templar was made available for general release in June 1995.
Commercial sales to date have not been material to the Company's revenues.
Templar supplies security for message transmissions by utilizing public key
cryptography techniques licensed from RSA and by implementing security and
confidentiality features at the software application level. Templar generates
a digital signature for each outbound message that verifies the identity of the
sender and automatically detects any alteration of the message upon receipt.
Templar automatically tracks message traffic and message integrity and
authenticity and provides user-configurable management reports. Templar also
maintains transmission records for audit trails.
Templar is a software product designed to combine the desirable elements of an
EDI VAN at a substantially lower cost with strong customer support and service.
Templar's advantages over traditional VAN services include open architecture,
speed, and reduced costs. Templar currently supports SMTP/MIME, the standard
message protocol used for the Internet and other TCP/IP networks. The Company
anticipates, however, that future releases of Templar will be expanded to
support other mail protocols.
Premenos has positioned Templar as a relatively low-cost, flat-rate alternative
to current electronic commerce solutions. The price for the Templar server
software product for the UNIX platform currently ranges from $7,000 to $25,000,
depending upon the number of users. Windows 95 and Windows 3.1 versions of the
Templar product are priced at approximately $500 per copy.
Premenos has developed an export version of Templar so that it may export
Templar in compliance with current U.S. export control laws and regulations
applicable to the export of encryption technology. The export version uses more
limited cryptographic techniques than those incorporated in the domestic
version of the Templar product. In the export version of Templar, the
algorithms of cryptographic keys are shorter and can be arithmetically
decrypted in a shorter period of time than the domestic version's algorithm.
The Company is also working with various U.S. Government agencies in an attempt
to permit the domestic version of Templar to be freely exportable in compliance
with export regulations.
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Products (Continued)
PowerDox and WebDox
In addition to traditional EDI software products, the Company also offers
forms-based electronic commerce products. Forms-based products are typically
marketed to larger companies who seek the benefits of traditional EDI, but
often have hundreds or thousands of smaller trading partners who are unable or
unwilling to invest in the infrastructure required to support EDI. The
Company's products, PowerDox and WebDox, originated with Don Valley, which the
Company purchased in May 1996.
PowerDox is a structured electronic commerce trading system that enables large,
"hub" companies to trade easily with small, "spoke" trading partners who have
been reluctant to implement full-scale EDI. It consists of PowerDox Central,
software that resides on a server at the hub location and PowerDox Remote,
client software that is installed at a spoke trading partner. For each sale of
PowerDox Central, the Company or its customers create a series of custom forms,
analogous to the forms promulgated by the various EDI standards bodies. These
forms are tailored to meet the needs of the hub when trading with the spokes in
its trading community. WebDox operates in the same way as PowerDox, but
enables transmission of electronic forms over the World Wide Web instead of a
VAN or other communications medium. List price for PowerDox Central is
approximately $40,000, list price for WebDox Central is approximately $25,000
and list price for PowerDox and WebDox Remote is approximately $300.
Encryption Products
The Company's encryption product, other than Templar, were acquired when the
Company purchased Prime Factors in July 1996. These products include a broad
range of encryption software products that enable banks and other businesses to
secure financial and other information transmitted over internal and external
networks. The Company's customers include money center banks, large
corporations and government agencies interested in securing data transmitted
internally and externally. The encryption products, including Descrypt+,
Descrypt/EDI+, Psypher/EDI+, Fdesmac+, PIN Management System and others operate
on computer platforms ranging from PCs to UNIX and AS/400, DEC and Tandem
machines to MVS mainframes
Descrypt+ is a generalized encryption product for multiple platforms and
applications. Descrypt/EDI+ is a complete encryption system for EDI-formatted
data using the ANSI X12.58 and X12.42 standards. Psypher/EDI+ is an encryption
and authentication product for generalized file security needs. Fdesmac+
offers ANSI X9.9 authentication security for financial applications. The PIN
Management System handles all security and security-related functions for a
card issuer to become a member of ATM sharing credit and debit card networks.
Pricing for the encryption products ranges from $3,000 for certain PC products
to $36,000 for mainframe products.
Marketing, Sales and Distribution
The Company markets its products through two principal channels:
Direct Sales. Approximately 80% of the Company's sales are generated by the
Company's direct sales force. The direct sales force utilizes a combined
approach of telephone selling, cultivation of relationships with key hub
customers and personal presentations for significant volume sales. Hub
customers--those with the market ability to influence their trading partners-
provide access to their customers and suppliers which the Company then targets
for sales calls. Approximately 36 employees of the Company are involved in
direct sales.
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Marketing, Sales and Distribution (Continued)
Distributors and Co-Marketers. The Company has entered into distribution and
co-marketing agreements with a number of software marketing and distribution
companies, value-added resellers and hardware and network vendors worldwide. In
addition, the Company fosters relationships with software vendors that bundle
or embed the Company's products with their own products, or which resell the
Company's products in particular trading communities. Distributors typically
sublicense the Company's software to end-user customers and pay the Company a
royalty, while co-marketers typically forward leads to the Company in exchange
for a percentage referral fee if the sale is completed. The Company's largest
distributor is JD Edwards & Company, which accounts for approximately 10% of
the Company's revenues. IBM and various IBM affiliates worldwide collectively
account for approximately 6% of the Company's revenues. Under the Company's
distribution arrangement with IBM, the Company has arrangements with, and
receives various royalties from, affiliates of IBM with respect to EDI product
sales outside the United States. Some of these arrangements are not subject to
currently effective written agreements and thus may be terminable at any time
by either party. Within the United States, the Company is obligated to pay IBM
certain fees not to exceed 7% of product license fees received by the Company
with respect to EDI translator sales. The Company's product distribution
arrangements with IBM in the United States are terminable by either the Company
or IBM on six months notice.
Customer Support
Premenos' products are supported by a service and support staff with expertise
in electronic commerce products and open systems and open networks. Telephone
support is provided 6 a.m. to 6 p.m. Pacific Time and pager support is
available on a 24 hour-per-day, 365 day-per-year basis. Through its support
center in Paris, France and its main center in Concord, California, the Company
generally offers support for international customers via toll-free support
numbers.
Customers with maintenance contracts receive telephone support service,
software updates and bug fixes. The Company allows its customers and end-users
to access support services by telephone, electronic mail, and World Wide Web
access through the Internet.
Product Development
The Company maintains a product development division which engages in research
and development activities with a view towards planning and developing new
products in EDI, business communications and electronic commerce areas. Until
1996, Premenos' development of new products had been accomplished primarily
with in-house development personnel and resources. In 1996, the Company
acquired additional products as a result of its acquisitions of Don Valley
Technology Corporation and Prime Factors, Inc. In addition, the Company has
incorporated into its products certain software licensed to it by other
software developers, where appropriate, to reduce product development time.
During the fiscal years ended December 31, 1996, 1995 and 1994, product
development expenditures, including amounts capitalized, were approximately
$11.6 million, $8.8 million and $5.8 million, respectively. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Competition
EDI Products. The EDI market is intensely competitive and subject to rapid
technological change and evolving industry standards. The Company primarily
competes in the mid-range IBM AS/400-based segment of the market as well as in
the UNIX and Windows NT segments of the market. Its principal competitor is
Sterling Commerce which is substantially larger than the Company and which
operates the COMMERCE:Network VAN. The Company also competes with a number of
other companies, some of which have greater financial, marketing, manufacturing
and technological resources than the Company. The Company believes that its
long-term success will depend in part on its ability to be a leader in offering
products for new emerging industry standards, to maintain superior customer
support, and to offer a broad line of integrated products. The Company
believes that its success will also depend on its ability to offer products
that support any communications network the customer may choose (including
VANs, TCP/IP and other open networks and direct connections).
The Company believes that the principal competitive factors in the EDI market
in which the Company competes are customer service and support, ease of use of
the products, reliability, integration with existing customer applications,
product performance, functionality and price. The Company believes that it
competes favorably, although there can be no assurance that new or established
competitors will not offer products superior to or lower in price than those of
the Company.
Templar. Products that compete with Templar are beginning to be offered by EDI
companies, operators of VANs and telecommunications companies. Moreover, the
Company anticipates that there will be intense competition, possibly including
significant price competition and product bundling competition from providers
of alternate modes of electronic commerce such as the VAN operators. The
Company's licensing arrangements with RSA are non-exclusive and RSA has
licensed public key functionality similar to that incorporated in Templar to
competitors of the Company. At the present time, competitors such as Harbinger
and GE Information Services market products which offer gateways to the
Internet through their VANs, but no other company has a business point to
business point solution like Templar.
Because Templar utilizes a new mode of conducting electronic commerce
transactions, the Company could be at a competitive disadvantage as compared
with companies, such as VANs, offering more traditional and proven modes of
conducting electronic commerce. The market is just beginning to accept the
concept of doing business to business transactions over the Internet. The
Company also anticipates that the Internet electronic commerce market will be a
focus of rapidly emerging and shifting business and technological alliances
which may dramatically affect the utility of Templar and the ability of the
Company to compete. For example, the emergence of a strong central
certification authority affiliated with a competitive product could have a
severe adverse impact on market acceptance of Templar. Similarly, the bundling
of a competitive product with a fundamental business service, such as financial
services, telephone or communications services or personal computer operating
systems could have a serious adverse effect on market acceptance of Templar.
Moreover, it is impossible to predict the competitive, and related business,
financial and marketing risks and opportunities that may emerge and affect the
competitive viability of Templar.
PowerDox and WebDox; Encryption Products. Products and services offered by
Sterling Commerce, Harbinger, GE Information Services and others compete in the
same business to business electronic commerce markets addressed by the PowerDox
and WebDox products. These products and services are alternative solutions,
however, and are not products similar to PowerDox and WebDox. The Company's
encryption products compete principally with products offered by Sterling
Commerce.
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Intellectual Property
Proprietary Technology. The Company relies on a combination of trade secret,
copyright, patent, and trademark laws and contractual restrictions to establish
and protect proprietary rights in its technology. The Company has entered into
confidentiality and invention assignment agreements with its employees and,
when obtainable, enters into non-disclosure agreements with its suppliers,
distributors and others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or that the Company's competitors will not independently
develop non-infringing technologies that are substantially similar to or
superior to the Company's technology. The laws of certain foreign countries in
which the Company's products are or may be developed, manufactured, licensed
or distributed may not protect the Company's products or intellectual property
rights to the same extent as do the laws of the United States and thus make the
possibility of piracy of the Company's technology and products more likely.
The Company believes that, because of the rapid pace of technological change in
the software and electronic commerce markets, legal protection for its products
is a less significant factor in the Company's success than the knowledge,
ability and experience of the Company's employees, the frequency of product
enhancements and the quality of support services provided by the Company.
The Company owns a number of registered and unregistered trademarks. In
addition, the Company uses the trademark EDI/400 in connection with its
principal EDI product pursuant to a license agreement with IBM that IBM may
have the right to terminate on 60 days prior written notice. The Company has
not received any indication from IBM that it intends to terminate the
agreement. The Company is the owner of a U.S. patent and has applied for
foreign patents relating to technology utilized in the Company's EDI/Open
product, and the Company has applied for a U.S. patent and foreign patents
relating to technology utilized in the Company's Templar product. The Company's
policy is to apply for U.S. and foreign patents with respect to its technology
and seek copyright registration of its technology or trademark registration of
its marks from time to time when management determines that it is competitively
advantageous and cost effective to do so.
The software and electronic commerce industries are characterized by the
existence of a large number of patents and litigation based on allegations of
patent infringement is not uncommon. From time to time, third parties may
assert exclusive patent, copyright, trademark and other intellectual property
rights to technologies that are important to the Company. There are currently
no pending material claims that the Company's products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that the Company will not receive communications from
third parties in the future asserting that the Company's products infringe or
may infringe the proprietary rights of third parties.
In its distribution agreements and certain of its customer or other agreements,
the Company agrees to indemnify certain parties, which may include customers of
parties with which the Company has contracted, for any expenses of liabilities
resulting from claimed infringements of patents, trademarks or copyrights or
certain other intellectual property rights of third parties. In the event of
litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to pay money
damages, to discontinue the use and sale of infringing products, to expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. There can be no assurance that licenses from third parties
would be available on reasonable commercial terms, if at all. In the event of
a successful claim against the Company and the failure of the Company to
develop or license a substitute technology, the Company's business and
operating results would be materially adversely affected.
-11-
<PAGE>
Intellectual Property (Continued)
Third Party Technology. Premenos incorporates in its products certain software
licensed to it by other software developers. These include the public key
cryptography software licensed by RSA used by the Company in connection with
Templar as well as certain database software used in its Templar and EDI/Open
products and certain graphical interface software used in its EDI products and
Templar.
The Company licensed the public key encryption technology pursuant to a license
agreement with RSA (the "RSA License"). The RSA License has an initial term of
five years. The RSA License grants to the Company the non-exclusive,
non-transferable, non-assignable limited license to incorporate certain
functionality within RSA's public key encryption technology into a Premenos
product solely to create a Bundled Product, as defined in the RSA License, to
reproduce and sublicense the Bundled Product, and to use or authorize end-users
to use the Bundled Product in conjunction with a service bureau or internal
network or to provide electronic communications, messaging and similar services
to third parties. A Bundled Product is defined as a Premenos product which
represents a significant functional and value enhancement to the RSA technology
designed to facilitate the secure exchange of electronic information such as
EDI documents over open networks. The RSA license contains a number of
restrictions regarding sublicensing of the Bundled Product to act as a
certification authority, as well as other restrictions regarding end-user use,
territory and distribution channels. Premenos is prohibited from selling the
Bundled Product or any product with comparable functionality which does not
incorporate the RSA encryption technology, except in certain circumstances, in
which event the Company is required to pay the otherwise applicable royalty fee
to RSA.
The Company also incorporates database software licensed from Sybase, Inc. into
its Templar and certain versions of its EDI/Open products, and incorporates
graphical software licensed from third parties into the EDI products and
Templar. Although Premenos seeks and generally receives assurances from
third-party software vendors as to such third party's intellectual property
rights and the non-infringement by such software of other parties' rights,
Premenos' right to use such software could be impaired by third party claims.
In addition, certain agreements pursuant to which Premenos uses such software
may be terminated in accordance with their terms in certain circumstances.
If Premenos were deprived of the right to use software incorporated in its
products for any reason, there could be serious disruption to Premenos'
business.
Employees
As of March 15, 1997, Premenos employed 254 persons, including approximately 83
in product development and research and development, 40 in customer support, 44
in domestic sales, 2 in international sales, 21 in marketing, 21 in finance and
administration and 43 in various other capacities, including consulting
services, education services and operations. Of the Company's 254 employees,
253 are full time and 1 is part time. The Company also retains consultants
from time to time to assist it with particular software development projects
for limited periods of time.
-12-
<PAGE>
ITEM 2. PROPERTIES
Premenos' executive offices, marketing operations and primary computer,
research and development, sales, and customer support facilities are located
in Concord, California, where the Company currently leases approximately
53,700 square feet under leases expiring in 1998, subject to three-year
renewal options. In addition, the Company and its subsidiaries lease several
sales, support and development facilities throughout North America and Europe
under leases that expire on dates ranging through 2000. The Company believes
that it will be able to meet future requirements for facilities on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
There are currently no material pending legal proceedings to which the Company
is a party, and the Company is not aware of any material threatened
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and certain information about them as of
March 3, 1997, are as follows:
</TABLE>
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Lew Jenkins 49 Chairman of the Board and Director
Timothy A. Dreisbach 47 President, Chief Executive Officer
and Director
H. Ward Wolff 48 Senior Vice President of Finance and
Administration and Chief Financial Officer
Richard A. Ludlow 35 Senior Vice President of Sales
Beverly J. Ulbrich 35 Senior Vice President of Marketing
Gerry Diamond 50 Senior Vice President of Emerging Markets
</TABLE>
Lew Jenkins has been Chairman of the Board and a Director of the Company since
its organization in July 1995. Mr. Jenkins has also been Chairman and a
Director of Premenos Corp. since its organization in October 1989. Mr. Jenkins
was also the Chief Executive Officer of Premenos Corp. until August 1991.
Mr. Jenkins has been a member of the Board of Directors of Apparel Computer
Systems, Inc. (ACS), a predecessor to certain of the operations of Premenos
Corp., since he founded ACS in 1978. Mr. Jenkins was the President of ACS from
1978 through 1988, when he was named Chairman and Chief Executive Officer of
ACS. Mr. Jenkins was also the President of, and a member of the Board of
Directors of, ACS Network, Inc. (ACS Network), the general partner of
Apparelnet Investors, which was a predecessor to certain operations of Premenos
Corp., from its organization in 1987 through its reorganization into Premenos
Corp. in 1989.
-13-
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Timothy A. Dreisbach has been President and Chief Executive Officer and a
Director of the Company since January 1997. From April 1992 until December
1996 he was Senior Vice President of North American Field Operations for Boole
& Babbage, Inc. Previously, Mr. Dreisbach was employed by Legent Corporation,
from 1989 until 1991 as Vice President and General Manager of the Systems
Productivity Division. From 1986 until 1989, he was Vice President of Sales of
Duquesne Systems, Inc., a predecessor to Legent Corporation. Mr. Dreisbach has
a B.A. degree in mathematics from Dartmouth College and an M.S. degree in
computer science from the University of California at Los Angeles.
H. Ward Wolff has been Senior Vice President of Finance and Administration and
Chief Financial Officer of the Company and of Premenos Corp. since July 1996.
Previously, he was Vice President of Finance and Administration and Chief
Financial Officer of the Company since its organization in July 1995. Mr. Wolff
was also been Vice President of Finance and Administration and Chief Financial
Officer of Premenos Corp. since joining Premenos Corp. in July 1992. From 1985
until joining Premenos Corp., Mr. Wolff served as an Executive Director of
Russell Reynolds Associates, an international management recruiting firm.
Beginning in 1974, Mr. Wolff held a number of positions with Price Waterhouse
as a certified public accountant, including Senior Audit Manager. Mr. Wolff has
a B.A. degree in economics from the University of California, Berkeley, and an
M.B.A. from Harvard Business School.
Richard A. Ludlow has been Senior Vice President of Sales since July 1996. Mr.
Ludlow served as Vice President of Sales from November 1994 until July 1996.
From February 1991 until November 1994, he was Director of Sales. Prior to
joining the Company, Mr. Ludlow held various sales and management positions
with Capital Analysts, Inc., Engineered Air Systems and ACS Network.
Beverly J. Ulbrich has been Senior Vice President of Marketing since July 1996.
From February 1995 until July 1996, Ms. Ulbrich served as Senior Director,
Marketing and Business Development in the Interactive Services Group for Sun
Microsystems, Inc. Also at Sun, Ms. Ulbrich was Director, Technology
Integration from April 1994 until February 1995, Director, Commercial Markets
and Product Strategy from January 1993 to March 1994, and Product Line Manager
for System Management and Commercial Software from August 1992 to December
1992. Prior to August 1992 she held various marketing and sales positions with
Sun. Prior to joining Sun, she held various software engineering positions
with AT&T. Ms. Ulbrich holds a B.A. degree in math/computer sciences from
Rutgers University and an M.B.A. from Santa Clara University.
Gerry Diamond has been Senior Vice President, Emerging Markets since June
1996. Mr. Diamond was founder and President of Don Valley Technology
Corporation from January 1994 until its acquisition by the Company in May
1996. Mr. Diamond was previously an electronic commerce consultant to the
European Commission in Brussels and to a number of multinational corporations
from October 1990 until December 1993. Mr. Diamond holds a B.S. degree in
genetics from McGill University.
-14-
<PAGE>
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter market and
the NASDAQ National Market System under the symbol PRMO since the Company's
initial public offering on September 20, 1995.
The closing price of the Company's common stock as reported by the NASDAQ
National Market System on March 3, 1997 was $7.625 per share. The price per
share in the following table sets forth the low and high closing prices in the
NASDAQ National Market System for the quarter indicated:
<TABLE>
<CAPTION>
Low High
------ ------
<S> <C> <C>
First quarter ended March 31, 1996 15.750 23.625
Second quarter ended June 30, 1996 16.000 24.500
Third quarter ended September 30, 1996 9.250 21.250
Fourth quarter ended December 31, 1996 7.625 21.625
</TABLE>
Premenos has not paid dividends and does not plan to pay dividends on its
common stock in the foreseeable future. The Company presently intends to
reinvest earnings to fund future growth.
At December 31, 1996, there were approximately 60 stockholders of record of the
Company. The Company is unable to estimate the total number of stockholders
represented by these record holders as many of such shares are held by brokers
and other institutions on behalf of stockholders.
-15-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the more detailed consolidated financial statements presented
in Item 8 of this Form 10-K. The selected consolidated financial data as of
December 31, 1992 and for the year then ended have been derived from the
unaudited consolidated financial statements of the Company. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position at the end of, and the results of
operations for, the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Software licenses $21,674 $17,783 $13,311 $ 9,007 $ 7,841
Services 11,797 7,736 6,694 4,059 2,516
------- ------- ------- ------- -------
Total revenues 33,471 25,519 20,005 13,066 10,357
------- ------- ------- ------- -------
Cost of revenues:
Software licenses 3,916 3,361 2,340 1,811 1,371
Services 5,386 3,382 2,592 1,725 1,515
------- ------- ------- ------- -------
Total cost of revenues 9,302 6,743 4,932 3,536 2,886
------- ------- ------- ------- -------
Gross margin 24,169 18,776 15,073 9,530 7,471
------- ------- ------- ------- -------
Operating expenses:
Product development 8,925 7,049 4,702 3,577 3,179
Sales and marketing 11,625 8,495 5,804 4,202 2,789
General and administrative 3,880 2,249 1,695 1,441 1,502
Acquisition-related costs 4,700 - - - -
------- ------- ------- ------- -------
Total operating expenses 29,130 17,793 12,201 9,220 7,470
------- ------- ------- ------- -------
Income (loss) from operations (4,961) 983 2,872 310 1
Other income (expense), net 2,819 732 (102) (91) (74)
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes and
minority interest (2,142) 1,715 2,770 219 (73)
Provision for income taxes 850 238 645 5 3
Minority interest 4 (20) 310 71 (3)
------- ------- ------- ------- -------
Net income (loss) $(2,996) $ 1,497 $ 1,815 $ 143 $ (73)
======= ======= ======= ======= =======
Net income (loss) per share $ (0.27) $ 0.16 $ 0.28 $ 0.03 $ (0.01)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $26,638 $11,495 $ 3,167 $ 491 $ 903
Working capital (deficit) 57,587 61,603 1,841 (102) 427
Total assets 83,690 79,463 13,404 7,900 5,730
Long-term debt, less
current portion 240 769 730 445 482
Minority interest 22 18 492 176 104
Total stockholders' equity 69,276 65,686 3,318 1,413 1,080
</TABLE>
-16-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports a broad range of electronic commerce
software products and services that enable businesses to engage in secure and
reliable business-to-business electronic transactions and communications. The
Company was incorporated in July 1995 for the purpose of acquiring all of the
issued and outstanding Common Stock of Premenos Holdings, Inc. and, indirectly,
substantially all of the issued and outstanding Common Stock of, and the
business of, Premenos Corp. All of the business activities described herein are
conducted by subsidiaries of Premenos Technology Corp., namely Premenos Corp.
(and its wholly-owned subsidiaries, Premenos Europa S.A., Premenos U.K. Ltd.
and Premenos S.A.), Premenos Canada Corp. and Prime Factors, Inc.
The Company derives its revenues primarily from the licensing of computer
software programs, sales of software support services, consulting and education
services. Software license revenues are generated from licensing to end-users
and royalties from third-party distributors. Service revenues are generated
primarily from software support, consulting and education services. To date,
the most significant portion of the Company's software licenses and services
revenues have been derived from its EDI/400 product. The Company expects that
revenues from EDI/400 will continue to account for a majority of its revenues
through 1997. As a result, if product sales, support renewals or pricing levels
of EDI/400 were to decline materially, whether as a result of technological
change, competition or any other factors, the Company's business, results of
operations and financial condition would be adversely affected.
In order to expand its product offerings and address a significant market
opportunity, the Company introduced its Templar product in 1995. Templar allows
business customers to engage in electronic commerce transactions over the
Internet and other TCP/IP networks by facilitating the exchange of secure,
digitally-signed electronic documents, including EDI documents. The Company
began developing Templar in 1993 and has committed substantial resources to its
development.
During 1996, the Company acquired Don Valley Technology Corporation ("Don
Valley"), a developer of forms-based electronic commerce software, and Prime
Factors, Inc., a developer of encryption software. In May, the Company
acquired all of the common stock of Don Valley, a Canadian corporation based in
Toronto, Ontario, Canada, for 57,657 shares of newly issued common stock and
approximately $1.1 million in cash. In July, the Company acquired Prime
Factors, a U.S. corporation based in Eugene, Oregon, for 46,931 shares of newly
issued common stock and approximately $3.0 million in cash. Both transactions
have been accounted for as purchases. Accordingly, the results of operations
of both Don Valley and Prime Factors have been included in the Company's
consolidated financial statements from their respective acquisition dates of
May 14, 1996 and July 19, 1996.
The Company has experienced significant quarterly fluctuations in revenues and
operating results and expects these fluctuations to continue in the future. The
Company believes that these fluctuations have been attributable to the
budgeting and purchasing practices of its customers, the length of the customer
product evaluation process for the Company's products, the timing of customer
system conversions and the Company's sales commission practices, which are
based partly on quarterly and annual incentives. In addition, in 1996 the
Company experienced significant fluctuations in reported operating results
relating to acquisition related costs. Future revenues and operating results
may fluctuate as a result of these and other factors, including the demand for
the Company's products and services, the timing and cost of new product
introductions and enhancements, changes in the mix of products and services
sold and in the mix of sales by distribution channels, the size and timing of
customer orders, changes in pricing policies by the Company or its competitors,
timing of any acquisitions and associated costs, competitive conditions in the
industry and general domestic and international economic and political
conditions.
-17-
<PAGE>
Overview (Continued)
The Company's revenues and results of operations may also be affected by
seasonal factors which may include higher revenues in the Company's fourth
fiscal quarter and lower revenues in the other fiscal quarters. Consequently,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in the Company's consolidated statements of operations for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses 64.8% 69.7% 66.5%
Services 35.2 30.3 33.5
Total revenues 100.0 100.0 100.0
Cost of revenues:
Software licenses 11.7 13.2 11.7
Services 16.1 13.3 13.0
----- ----- -----
Total cost of revenues 27.8 26.5 24.7
----- ----- -----
Gross margin 72.2 73.5 75.3
Operating expenses:
Product development 26.7 27.6 23.5
Sales and marketing 34.7 33.3 29.0
General and administrative 11.6 8.8 8.5
Acquisition-related costs 14.0 - -
----- ----- -----
Total operating expenses 87.0 69.7 61.0
----- ----- -----
Income (loss) from operations (14.8) 3.8 14.3
Other income (expense), net 8.4 2.9 (0.5)
----- ----- -----
Income (loss) before provision for
income taxes and minority interest (6.4) 6.7 13.8
Provision for income taxes 2.5 0.9 3.2
Minority interest 0.0 (0.1) 1.5
----- ----- -----
Net income (loss) (8.9)% 5.9% 9.1%
===== ===== =====
</TABLE>
Revenues
Total revenues were $33.5 million, $25.5 million and $20.0 million in 1996,
1995 and 1994, respectively, representing increases of 31% from 1995 to 1996
and 28% from 1994 to 1995. Included in 1994 software licenses and services
revenues is a total of $1.7 million related to one major, non-recurring
contract. International revenues were $2.9 million, $2.6 million and $1.7
million in 1996, 1995 and 1994, respectively.
Software Licenses. Revenues from license fees and royalties increased to $21.7
million in 1996 from $17.8 million in 1995 and $13.3 million in 1994,
representing increases of 22% and 34%, respectively. The increase in 1996 over
1995 was largely due to revenues derived through the Company's network of
distributors and increased acceptance of the Company's EDI/Open translator
product for open systems, combined with improved revenues from sales of the
Company's Templar product and revenues derived from licensing of the Prime
Factors' products. The increase in 1995 over 1994 was primarily due to
generally increasing market acceptance of EDI technology and the Company's
products, along with hardware system upgrades of existing customers.
-18-
<PAGE>
Results of Operations (Continued)
Services. Revenues from services increased to $11.8 million in 1996 from $7.7
million in 1995 and $6.7 million in 1994, representing increases of 52% and
16%, respectively. Product support, consulting and education services revenues
each increased in 1996 over the corresponding prior year levels. The Company's
product support revenues continue to constitute the largest portion of services
revenues, and grew 47% in 1996 and 34% in 1995. Product support revenues were
$9.9 million, $6.7 million and $5.0 million in 1996, 1995 and 1994,
respectively, and as a percentage of total Company revenues were 29%, 26% and
25%, respectively. The growth in services revenues reflects the continued
increase in the Company's installed base of products under support contracts
and increased revenues from education and software integration services.
Cost of Revenues. Cost of revenues were $9.3 million, $6.7 million and $4.9
million, representing 27.8%, 26.5% and 24.7% of revenues in 1996, 1995 and
1994, 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 $3.9 million, $3.4 million and
$2.3 million in 1996, 1995 and 1994, respectively. As a percentage of revenues
from licenses, costs of licenses revenues were 18.1%, 18.9% and 17.6% in 1996,
1995 and 1994, respectively. The increase from 1994 to 1995 reflects a
broadening of the Company's product offerings and related costs of sublicensing
embedded technologies from third parties. The decrease from 1995 to 1996 is
primarily due to reduced third party fees resulting from renegotiation of the
Company's agreement with IBM.
Cost of services consists primarily of the personnel costs related to providing
product support, training and contract services. Cost of services were $5.4
million, $3.4 million and $2.6 million in 1996, 1995 and 1994, respectively. As
a percentage of services revenues, costs of services were 45.7%, 43.7% and
38.7% in 1996, 1995 and 1994, respectively. The increased costs in 1996 and
1995 reflect the Company's increasing emphasis on providing software
integration and consulting services to its customers.
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 costs, were $8.9
million, $7.0 million and $4.7 million in 1996, 1995 and 1994, representing
26.7%, 27.6% and 23.5% of revenues, respectively. The Company capitalized
software development costs of $2.7 million, $1.8 million and $1.1 million in
1996, 1995 and 1994, respectively, in accordance with Statement of Financial
Accounting Standards No. 86. The increases in the amounts capitalized reflect
the fact that the Company incurred greater expenses on products that had
reached technological feasibility. The amounts capitalized represented 23%,
20% and 19%, respectively, in 1996, 1995 and 1994, of gross product development
expenditures which were $11.6 million, $8.8 million and $5.8 million,
respectively. The increase from 1995 to 1996 also reflects continuing
development of technologies acquired in connection with the Don Valley
Technology Corporation acquisition and the Prime Factors, Inc. acquisition.
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.
-19-
<PAGE>
Results of Operations (Continued)
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales and marketing personnel and outside marketing
and promotional expenses. Sales and marketing expenses increased to $11.6
million in 1996 from $8.5 million in 1995 and $5.8 million in 1994, and
increased to 34.7% of revenues in 1996 from 33.3% in 1995 and 29.0% of revenues
in 1994. 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 market share while reducing
distribution costs.
General and Administrative. General and administrative expenses increased to
$3.9 million in 1996 from $2.2 million in 1995 and $1.7 million in 1994,
representing 11.6%, 8.8% and 8.5% of revenues, respectively, in 1996, 1995 and
1994. These increases are due primarily to increases in personnel and
infrastructure in support of the Company's revenue growth and, in 1996,
requirements related to being a publicly traded company and increased mergers
and acquisitions activity.
Acquisition-Related Costs. During 1996, approximately $4.5 million of in-
process product development was expensed in connection with the Company's
acquisitions of Don Valley and Prime Factors.
Also during 1996, the Company granted options to acquire 9,006 shares of
Premenos Technology Corp. common stock in exchange for options to acquire 6,848
shares of Premenos Corp. common stock and issued 920 shares of Premenos
Technology Corp. common stock in exchange for 700 shares of Premenos Corp.
common stock held by minority shareholders. These transactions resulted in a
charge of $232,000 in 1996.
Other Income (Expense), Net. Other income (expense) consists of interest
income, interest expense and other non-operating expenses. Net other income was
$2.8 million in 1996 and $732,000 in 1995 due to interest earned on the
proceeds from the Company's initial public offering of stock in September 1995,
while net other expense was $102,000 in 1994. Net other income as a percentage
of revenues in 1996 and 1995 was 8.4% and 2.9%, respectively, while net other
expense as a percentage of revenues was 0.5% in 1994.
Provision for Income Taxes. The Company's provision for income taxes in 1996,
1995 and 1994 were $850,000, $238,000 and $645,000, respectively. These
represent effective income tax rates of 33% (excluding the non-deductible
acquisition-related costs), 14% and 23%, respectively, in 1996, 1995 and 1994.
The Company realized tax benefits of approximately $2.9 million and $557,000 as
a result of employee stock option exercises during 1996 and 1995, respectively.
These tax benefits were credited directly to stockholders' equity and,
accordingly, were not reflected in the income tax provisions. The Company's
tax rate has been affected each year by the utilization of research and
experimentation credits and, in 1995 and 1994, by changes in the valuation
allowance provided against the Company's deferred tax assets.
Minority Interest. Minority interest of $4,000, $(20,000) and $310,000 in
1996, 1995 and 1994, respectively, represents the minority stockholders'
proportionate share of net income (loss) of Premenos Corp.
Net Income (Loss) Net income (loss) for 1996, 1995 and 1994 were $(3.0)
million, $1.5 million and $1.8 million, respectively. Excluding the
acquisition-related costs, net income for 1996 was $1.7 million, or 5.1% of
total revenues.
-20-
<PAGE>
Quarterly Results of Operations
The Company's quarterly results have historically been subject to fluctuations
and, as a result, the operating results for any quarter are not necessarily
indicative of results for any future period. Operating income has fluctuated
significantly from quarter to quarter as the result of quarterly revenue
fluctuations and one-time costs relating to acquisitions.
The following tables present the Company's quarterly operating results for 1996
and 1995. The information for each of these quarters has been prepared on the
same basis as the audited consolidated financial statements appearing in Item 8
of this Form 10-K. In the opinion of management all necessary adjustments
(consisting only of normal recurring adjustments) have been included to present
fairly the unaudited quarterly results when read in conjunction with the
audited consolidated financial statements.
<TABLE>
<CAPTION>
Three Month Period Ended
- ---------------------------------------------------------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
1996 1996 1996 1996 1995 1995 1995 1995
( in thousands, except per share data )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses $7,585 $4,986 $5,179 $3,924 $6,498 $4,606 $4,107 $2,572
Services 3,304 3,033 2,830 2,630 2,187 1,903 1,830 1,816
------ ------ ------ ------ ------ ------ ------ ------
Total revenues 10,889 8,019 8,009 6,554 8,685 6,509 5,937 4,388
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licenses 1,426 1,029 754 707 1,081 851 793 636
Services 1,641 1,385 1,210 1,150 929 902 817 734
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues 3,067 2,414 1,964 1,857 2,010 1,753 1,610 1,370
------ ------ ------ ------ ------ ------ ------ ------
Gross margin 7,822 5,605 6,045 4,697 6,675 4,756 4,327 3,018
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Product development 2,889 2,193 2,046 1,797 2,119 1,866 1,644 1,420
Sales and marketing 3,804 2,767 2,705 2,349 2,497 2,236 2,023 1,739
General and
administrative 1,198 922 914 846 847 449 555 398
Acquisition-related
costs - 2,484 2,216 - - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses 7,891 8,366 7,881 4,992 5,463 4,551 4,222 3,557
------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
from operations (69) (2,761) (1,836) (295) 1,212 205 105 (539)
Other income (expense),
net 678 670 714 757 794 (1) (26) (35)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
provision (credit)
for income taxes
and minority interest 609 (2,091) (1,122) 462 2,006 204 79 (574)
Provision (credit) for
income taxes 70 139 456 185 512 60 (102) (232)
Minority interest 3 2 1 (2) 2 1 27 (50)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) $536 $(2,232)$(1,579) $279 $1,492 $143 $154 $(292)
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss)
per share $0.05 $(0.20) ($0.15) $0.02 $0.13 $0.02 $0.02 $(0.05)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
-21-
<PAGE>
Quarterly Results of Operations (Continued)
<TABLE>
<CAPTION>
Three Month Period Ended
- ---------------------------------------------------------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
1996 1996 1996 1996 1995 1995 1995 1995
( in thousands, except per share data )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of Revenues:
Revenues:
Software licenses 69.7% 62.2% 64.7% 59.9% 74.8% 70.8% 69.2% 58.6%
Services 30.3 37.8 35.3 40.1 25.2 29.2 30.8 41.4
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Software licenses 13.1 12.8 9.4 10.8 12.4 13.1 13.3 14.5
Services 15.1 17.3 15.1 17.5 10.7 13.8 13.8 16.7
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 28.2 30.1 24.5 28.3 23.1 26.9 27.1 31.2
----- ----- ----- ----- ----- ----- ----- -----
Gross margin 71.8 69.9 75.5 71.7 76.9 73.1 72.9 68.8
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Product development 26.5 27.3 25.5 27.5 24.4 28.7 27.7 32.4
Sales and marketing 34.9 34.5 33.8 35.8 28.7 34.4 34.1 39.6
General and
administrative 11.0 11.5 11.4 12.9 9.8 6.9 9.3 9.1
Acquisition-related
costs - 31.0 27.7 - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 72.4 104.3 98.4 76.2 52.9 70.0 71.1 81.1
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations (0.6) (34.4) (22.9) (4.5) 14.0 3.1 1.8 (12.3)
Other income (expense),
net 6.2 8.3 8.9 11.6 9.1 (0.0) (0.4) (0.8)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision (credit)
for income taxes
and minority interest 5.6 (26.1) (14.0) 7.1 23.1 3.1 1.4 (13.1)
Provision (credit)
for income taxes 0.6 1.7 5.7 2.8 5.9 0.9 (1.7) (5.3)
Minority interest 0.0 0.0 0.0 (0.0) 0.0 0.0 0.5 (1.1)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 5.0% (27.8)% (19.7)% 4.3% 17.2% 2.2% 2.6% (6.7)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company does not typically carry a material backlog of unfilled orders as
software products are generally shipped within a short period after receipt of
the order. Quarterly revenues and operating results therefore depend primarily
on the volume, value and timing of orders received during the quarter, which
are difficult to forecast. The Company has often recognized a substantial
portion of its license revenues in the last month of each quarter. In
addition, the fourth quarter has historically been stronger for sales than the
other quarters, in part because of customer purchasing patterns, and in part
because of the Company's sales practices and incentive structure. Because a
substantial portion of the Company's revenues may not be generated until the
end of each quarter, the Company may not be able to reduce spending in response
to sales shortfalls or delays. A significant portion of the Company's
operating expenses is relatively fixed, since personnel levels and other
expenses are based upon anticipated revenues. These and other factors can
cause significant variations in operating results from quarter to quarter. The
Company believes that quarter to quarter comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital in excess of $57 million.
Cash and short-term investments totaled $56.5 million, representing
approximately 67% of total assets. In September 1995, the Company completed
its initial public offering of stock whereby it sold 3,645,000 shares of its
common stock at a price per share of $18. The Company received net proceeds of
approximately $59.7 million.
-22-
<PAGE>
Liquidity and Capital Resources (Continued)
Cash flows from operating activities were $3.8 million, $3.6 million and $4.6
million during 1996, 1995 and 1994, respectively. For 1996, the Company's net
loss and changes in operating assets and liabilities was more than offset by
noncash charges (acquisition-related charges, depreciation and amortization and
deferred income tax expense). For 1995 and 1994, cash provided by operating
activities resulted primarily from net income, depreciation and amortization,
and changes in operating assets and liabilities.
Cash provided by investing activities was $10.2 million in 1996, and cash used
in investing activities was $54.7 million in 1995 and $1.9 million in 1994. In
1996, cash was provided through sales of short-term investments. Uses of cash
consisted primarily of acquisition of subsidiaries in 1996, net purchases of
short-term investments in 1996 and 1995, and software development costs and
purchases of property and equipment in all years presented.
Cash provided by financing activities was $1.1 million in 1996, $59.4 million
in 1995, and $3,000 in 1994. Cash from financing activities resulted primarily
from exercise of options and employee stock purchase plan stock issuances in
1996, receipt of proceeds from the initial public offering of common stock in
1995 and bank borrowings in 1994. Cash used in financing activities for all
years presented related to capital lease and debt payments.
The Company's principal commitments consist of leases on its office facilities
and obligations under its bank credit facility 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 not repurchased any 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.
Forward Looking Statements
This report and other reports and statements filed by the Company from time to
time with the Securities and Exchange Commission (collectively, the "Filings")
contain or may contain forward-looking statements and information that are
based upon beliefs of, and information currently available to, the Company's
management, as well as estimates and assumptions made by the Company's
management.
When used in Filings, the words "anticipate," "believe," "estimate," "expect,"
"future," "intend," "plan" and similar expressions, as they relate to the
Company or the Company's management, identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties and assumptions relating to the
Company's operations and results of operations, competitive factors and
pricing pressures, shifts in market demand, the performance and needs of the
industries which constitute the customers of the Company, the costs of product
development and other risks and uncertainties, including, in addition to any
uncertainties specifically identified in the text surrounding such statements,
uncertainties with respect to uneven patterns of quarterly operating results,
management of growth, the competitive environment, hiring and retention of
employees, pricing, shifting popularity of operating systems, new product
introductions, relative product profitability, alternate distribution
channels, uncertainty of emerging markets, risks associated with potential
future acquisitions, enforcement of intellectual property rights, possible
volatility of the stock price and general industry growth and economic
conditions. Should one or more of these risks or uncertainties materialize,
or should the underlying assumptions prove incorrect, actual results may
differ significantly from those anticipated, believed, estimated, expected,
intended or planned.
-23-
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants 25
Consolidated Balance Sheets at December 31, 1996 and 1995 26
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 27
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 30
Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts 44
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-24-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Premenos Technology Corp.:
We have audited the consolidated financial statements and the financial
statement schedule of Premenos Technology Corp. and subsidiaries (the Company)
listed in the index on page 24 of this Form 10-K. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Premenos Technology Corp. and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule, referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
San Francisco, California
January 31, 1997, except for Paragraph 3 of Note 16
as to which the date is March 16, 1997
-25-
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( In thousands, except share data )
December 31,
------------------------
1996 1995
------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $26,638 $11,495
Short-term investments 29,844 51,722
Trade accounts receivable, net
of allowances of $348 and $404
in 1996 and 1995, respectively 9,440 7,182
Income taxes recoverable 551 80
Prepaid expenses and other assets 959 735
Restricted cash - 50
Deferred income taxes 2,516 1,376
------- -------
Total current assets 69,948 72,640
Property and equipment, net 6,700 3,526
Capitalized software development costs, net 6,037 3,054
Deposits and other long-term assets 1,005 243
------- -------
Total assets $83,690 $79,463
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 4,747 $ 4,698
Deferred revenue 7,017 5,658
Current portion of long-term debt 597 681
------- -------
Total current liabilities 12,361 11,037
Long-term debt 240 769
Deferred revenue 385 634
Deferred income taxes 1,406 1,319
------- -------
Total liabilities 14,392 13,759
------- -------
Minority interest in consolidated subsidiary 22 18
------- -------
Commitments (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued and outstanding - -
Common stock, $.01 par value; 25,000,000 shares
authorized; 11,512,886 and 10,541,949 shares
issued and outstanding for1996 and
1995, respectively 115 106
Additional paid-in capital 68,441 62,006
Deferred compensation - (137)
Retained earnings 720 3,711
------- -------
Total stockholders' equity 69,276 65,686
------- -------
Total liabilities and stockholders' equity $83,690 $79,463
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
( In thousands, except per share data )
Year Ended December 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software licenses $21,674 $17,783 $13,311
Services 11,797 7,736 6,694
------- ------- -------
Total revenues 33,471 25,519 20,005
------- ------- -------
Cost of revenues:
Software licenses 3,916 3,361 2,340
Services 5,386 3,382 2,592
------- ------- -------
Total cost of revenues 9,302 6,743 4,932
------- ------- -------
Gross margin 24,169 18,776 15,073
------- ------- -------
Operating expenses
Product development 8,925 7,049 4,702
Sales and marketing 11,625 8,495 5,804
General and administrative 3,880 2,249 1,695
Acquisition-related costs 4,700 - -
------- ------- -------
Total operating expenses 29,130 17,793 12,201
------- ------- -------
Income (loss) from operations (4,961) 983 2,872
Interest income 2,979 898 29
Interest expense (148) (166) (131)
Other (12) - -
------- ------- -------
Income (loss) before provision for income taxes
and minority interest (2,142) 1,715 2,770
Provision for income taxes 850 238 645
Minority interest 4 (20) 310
------- ------- -------
Net income (loss) $(2,996) $ 1,497 $ 1,815
======= ======= =======
Net income (loss) per share $ (0.27) $ 0.16 $ 0.28
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
( In thousands, except share data )
Additional Total
Common Stock Paid-In Deferred Retained Stockholders
Shares Amount Capital Comp Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 5,851,749 $ 59 $ 1,132 $ (177) $ 399 $ 1,413
Amortization of deferred
compensation related
to subsidiary stock
options issued - - - 90 - 90
Net income - - - - - -
--------- ------ ------- ------- ------- -------
Balance at
December 31, 1994 5,851,749 59 1,132 (87) 2,214 3,318
Issuance of subsidiary
stock options at
below fair value - - 175 - - 175
Deferred compensation
related to stock options - - - (175) - (175)
Issuance of common stock
in exchange for
subsidiary stock 967,564 10 444 - - 454
Exercise of stock options 77,636 1 24 - - 25
Issuance of common stock
in public offering, net 3,645,000 36 59,674 - - 59,710
Tax benefits from
stock plans - - 557 - - 557
Amortization of deferred
compensation related to
subsidiary stock
options issued - - - 125 - 125
Net income - - - - 1,497 1,497
--------- ------ ------- ------- ------- -------
Balance at
December 31, 1995 10,541,949 106 62,006 (137) 3,711 65,686
Cancellation of
stock options - - (97) 97 - -
Exercise of stock
options and warrants 820,671 8 958 - - 966
Sale of common stock
under the employee
stock purchase plan 44,758 - 684 - - 684
Issuance of common stock
and stock options in
exchange for subsidiary
stock and stock options 920 - 187 - - 187
Common stock issued in
connection with
acquisitions 104,588 1 1,849 - - 1,850
Tax benefits from
stock plans - - 2,854 - - 2,854
Amortization of deferred
compensation related to
subsidiary stock
options issued - - - 40 - 40
Foreign currency
translation adjustment - - - - 5 5
Net loss - - - - (2,996) (2,996)
---------- ------ ------- ------- ------- -------
Balance at
December 31, 1996 11,512,886 $ 115 $68,441 $ - $ 720 $69,276
========== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE>
<TABLE>
<CAPTION>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands )
Year Ended December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,996) $1,497 $1,815
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,258 1,636 1,000
Charge for purchased in-process
product development and
acquisition-related charges 4,655 - -
Amortization of discounts on investments (723) (709) -
Noncash compensation charges 40 125 90
Minority interest and other 16 (20) 310
Write-down of capitalized software
development costs - 72 -
Loss on sale of property and equipment - 40 -
Deferred income tax expense (benefit) 1,218 (198) 141
Changes in assets and liabilities,
net of business acquisitions:
Increase in trade accounts receivable, net (1,746) (2,352) (1,118)
Increase (decrease) in income taxes
recoverable and payable (471) (14) 492
Increase in prepaid expenses and other assets (212) (340) (172)
Increase in deposits and other
long-term assets (28) (105) (102)
Increase (decrease) in accounts payable
and accrued liabilities (28) 1,835 883
Increase in deferred revenue 866 2,168 1,262
------- ------- -------
Net cash provided by operating activities 3,849 3,635 4,601
------- ------- -------
Cash flows from investing activities:
Purchase of short-term investments (29,254) (51,013) -
Proceeds from maturities of cash investments 51,855 - -
Business acquisitions, net of cash acquired (4,787) - -
Capitalized software development costs (2,712) (1,765) (1,125)
Purchases of property and equipment (4,895) (1,934) (803)
Proceeds from disposal of property
and equipment - 14 -
------ ------- ------
Net cash provided by (used in)
investing activities 10,207 (54,698) (1,928)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (613) (624) (488)
Proceeds from bank borrowings - 200 485
Decrease in restricted cash 50 80 -
Proceeds from initial public offering of stock, net - 59,710 -
Proceeds from exercise of options 966 25 6
Proceeds from sale of common stock
under employee stock purchase plan 684 - -
------- ------- -------
Net cash provided by financing activities 1,087 59,391 3
------- ------- -------
Increase in cash and cash equivalents 15,143 8,328 2,676
Cash and cash equivalents, beginning of period 11,495 3,167 491
------- ------- -------
Cash and cash equivalents, end of period $26,638 $11,495 $ 3,167
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 147 $ 171 $ 131
======= ======= =======
Income taxes $ 152 $ 540 $ 3
======= ======= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Capital lease obligations for equipment $ - $ 631 $ 355
======= ======= =======
Conversion of minority interest to equity $ - $ 454 $ -
======= ======= =======
Acquisition of subsidiaries in exchange
for stock and assumption of liabilities $ 1,850 $ - $ -
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Premenos Technology Corp. and its subsidiaries (collectively, the Company)
develop and market electronic commerce software products that facilitate the
exchange and processing of commercial information and transaction documents,
electronically. The Company also offers consulting, education and support
services in support of its customers' use of its software products.
Premenos Technology Corp. was organized in 1995 for the purpose of effecting a
reorganization to consolidate the stockholdings of the Company into one entity.
This was effected by an exchange of shares of Premenos Technology Corp. common
stock and stock options for shares of common stock and stock options of its
subsidiaries.
Basis of Presentation
The consolidated financial statements of the Company include the accounts of
Premenos Technology Corp. and its direct and indirect subsidiaries. All
significant intercompany balances and transactions between the companies have
been eliminated.
The Company operates in one industry segment (the development and marketing of
computer software and related services) and markets its products and services
to customers in a broad range of industries, principally through a direct sales
force domestically, and through distributors internationally.
Use of 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 disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Revenue Recognition
Software Licenses
Revenues in this category consist of (i) fees from licenses of the Company's
software products and (ii) royalty fees from distributors of the Company's
software products. License revenue is recognized when an agreement has been
signed, the product has been shipped and there are no other significant
remaining obligations. Software royalties are recognized as reported. The
Company accrues sales returns and other allowances at the time of shipment.
Services
Service revenue consists primarily of product support, consulting and education
services. Product support agreements generally require the company to provide
technical support and updates of software products as they are released.
Product support revenue is recognized ratably over the contract period,
generally one year. Consulting and education services revenues are recognized
as the related services are performed. Deferred revenue results from services
billings for which revenue has not been recognized.
Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are stated at cost, which
approximates fair value, and consist primarily of money market funds and U.S.
Treasury bills. The Company includes in cash and cash equivalents all short-
term, highly liquid investments which mature within three months of their
purchase date. Investments maturing between three and twelve months from date
of purchase are classified as short-term investments.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. As of December 31, 1996, debt securities were classified as held-to-
maturity as the Company intended to hold, and had the ability to hold, these
securities to maturity. Held-to-maturity securities are stated at amortized
cost, which approximates fair market value.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and other
short-term obligations of the U.S. Government. The Company has placed its
temporary cash investments primarily with one financial institution.
-30-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
(Continued)
Property and Equipment
Property and equipment is stated at historical cost and depreciated using the
straight-line method over the estimated useful lives of the related assets over
periods varying from three to seven years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of
the improvements. Normal maintenance and repairs are charged to operations as
incurred. When assets are sold or retired, the cost and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in operations.
Capitalized Software Development Costs
The Company capitalizes certain costs for software products developed
internally in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Costs incurred in the design phase of software
development, such as development of product specifications and system design
for products and product updates, prior to establishing technological
feasibility, are expensed as product development in the period incurred. Once
the point of technological feasibility is reached, direct and indirect
programming and testing costs are capitalized and amortized ratably as the
related license revenue is recognized, but not less than the straight-line
basis over three years. The Company evaluates the estimated net realizable
value of each software product at each balance sheet date and records
writedowns to net realizable value for any products for which the net book
value is in excess of net realizable value.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Under SFAS No. 109, deferred income tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates in effect for the years in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense is the tax payable for the period
and the change during the period in deferred tax assets and liabilities.
Minority Interest in Consolidated Subsidiary
Minority interest in consolidated subsidiary represents the minority
stockholders' proportionate share of the equity of Premenos Corp. As of
December 31, 1996, Premenos Technology owned approximately 99.5% of Premenos
Corp.
-31-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
(Continued)
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based upon the weighted average
number of common shares outstanding and dilutive common stock equivalents
(options and warrants), using the treasury stock method. In 1995 and 1994, the
weighted average number of common shares outstanding is adjusted for the 1995
stock dividend. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalent shares issued during the 12
month period prior to the initial filing date of the initial public offering
have been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method. Accordingly, for purposes
of determining net income per common share for 1995 and 1994, net income has
been adjusted to eliminate minority interest related to the minority shares
exchanged. Adjusted net income (loss) and the weighted average number of
common and common stock equivalents used in the determination of net income
(loss) per share are:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Adjusted net income (loss) (in thousands) $ (2,996) $ 1,478 $ 2,125
========== ========= =========
Shares 10,937,016 8,982,811 7,515,592
========== ========= =========
</TABLE>
There is no difference between primary and fully diluted net income per common
share.
Initial Public Offering
On September 20, 1995, the Company completed an initial public offering of its
common stock at a price per share of $18 and received net proceeds of
approximately $59.7 million.
Recently Issued Accounting Pronouncements
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (FAS 128) was issued and is effective for the Company's
year ending December 31, 1997 financial statements. The Company expects that
the implementation of FAS 128 should not have a material effect on the earnings
per share calculation.
Reclassifications
Certain reclassifications have been made to the financial statements to conform
to the current period presentation with no effect on net income as previously
reported.
2. Acquisitions
In May 1996, the company acquired all the common stock of Don Valley Technology
Corporation ("Don Valley"), a developer of electronic commerce business-to-
business software products. The Company issued 57,657 shares of common stock
and approximately $1.1 million in cash in a transaction accounted for as a
purchase. Accordingly, the results of operations of Don Valley have been
included in the Company's financial statements from the acquisition date and
the fair market values of the acquired assets and liabilities were included in
the Company's financial statements as of the acquisition date. The purchase
price of $2.5 million was allocated based on the relative fair values of the
assets acquired. Approximately $2.0 million of the purchase price was
allocated to in-process product development. This amount was determined
through known valuation techniques in the high-technology software industry and
was immediately expensed in the period of acquisition because technological
feasibility had not been established and no alternative commercial use had been
identified. Additionally, $750,000 was allocated to capitalized software costs
and goodwill which are being amortized on a straight-line basis over three and
five-year periods, respectively. Proforma information is not presented,
because the results of Don Valley's operations are not material to the
Company's historical results.
-32-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (Continued)
In July 1996, the Company acquired all the common stock of Prime Factors, Inc.
("Prime Factors"), a software developer and reseller of financial systems
encryption software products. The Company issued 46,931 shares of common stock
and approximately $3.0 million in cash in a transaction accounted for as a
purchase. Accordingly, the results of operations of Prime Factors have been
included in the Company's financial statements from the acquisition date and
the fair market values of the acquired assets and liabilities were included in
the Company's financial statements as of the acquisition date. The purchase
price of $4.1 million was allocated based on the relative fair values of the
assets acquired. Approximately $2.5 million of the purchase price was
allocated to in-process product development. This amount was determined
through known valuation techniques in the high-technology software industry and
was immediately expensed in the period of acquisition because technological
feasibility had not been established and no alternative commercial use had been
identified. Additionally, $1.6 million was allocated to capitalized software
costs and goodwill which are being amortized on a straight-line basis over four
and six-year periods, respectively. Proforma information is not presented,
because the results of Prime Factors' operations are not material to the
Company's historical results.
In November 1996, the Company entered into a purchase agreement to acquire 20%
of the common stock of Trailblazer Systems, Inc. ("Trailblazer"), a developer
of communications and other software for $25,000 in cash. The Company is also
obligated to pay an additional $375,000 upon the achievement of three agreed-
upon technical milestones by Trailblazer. This transaction has been accounted
for using the equity method of accounting for investments in common stock. In
January 1997, the Company paid $125,000 to Trailblazer upon its acceptance of
the first milestone. The remaining balance is expected to be paid during
fiscal 1997. In addition, the Company entered into a $100,000 secured
promissory note. Pursuant to the terms of the promissory note, Trailblazer
agrees to repay the principal portion of the note in November 1999, and the
related accrued interest at 6% per annum on a quarterly basis. The Company is
unable to determine the fair value of this note due to the early development
stage of Trailblazer.
3. Trade Accounts Receivable
The components of trade accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Customer trade receivables $ 7,895 $ 5,201
Royalties receivable 1,337 1,845
Prebilled maintenance 556 540
------- -------
9,788 7,586
Allowance for doubtful accounts (348) (404)
------- -------
Trade accounts receivable, net $ 9,440 $ 7,182
======= =======
</TABLE>
Maintenance contract renewals (prebilled maintenance) are billed one month in
advance of the start of the renewal period. These billings are reflected as
trade accounts receivable and deferred revenue in the consolidated balance
sheets.
The Company licenses software and performs services for its customers on
credit. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
potential credit losses.
-33-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Leasehold improvements $ 619 $ 370
Equipment and fixtures 9,792 4,827
Equipment and fixtures under capital leases 1,052 1,179
------- -------
11,463 6,376
Accumulated depreciation and amortization (4,763) (2,850)
------- -------
Property and equipment, net $ 6,700 $ 3,526
======= =======
</TABLE>
Depreciation and amortization expense of property and equipment at December 31,
1996, 1995 and 1994 was $1,803,000, $862,000 and $569,000, respectively. At
December 31, 1996 and 1995, accumulated amortization on equipment and fixtures
under capital leases was approximately $595,000 and $419,000, respectively.
5. Capitalized Software Development Costs
Net capitalized software development costs are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Capitalized software development costs $ 7,313 $ 4,600
Purchased technology 1,662 -
Accumulated amortization (2,938) (1,546)
------- -------
Capitalized software development costs, net $ 6,037 $ 3,054
======= =======
</TABLE>
Amortization of capitalized software development costs totaled $1,392,000,
$774,000 and $431,000, for the years ended December 31, 1996, 1995 and 1994,
respectively.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Trade accounts payable $ 1,421 $ 1,483
Accrued third party fees 523 606
Accrued compensation and related withholdings 1,738 2,067
Accrued sales tax 487 43
Other accrued liabilities 578 499
------- -------
$ 4,747 $ 4,698
======= =======
</TABLE>
-34-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Term facilities $ 377 $ 658
Capital lease obligations 460 792
------- -------
837 1,450
Current maturities (597) (681)
------- -------
Long-term debt $ 240 $ 769
======= =======
</TABLE>
In 1993, the Company entered into a Business Loan Agreement (Agreement) with a
bank. This Agreement, as amended, is comprised of term loan facilities (Term
Facilities). Any amounts outstanding under the Agreement are collateralized by
substantially all of the assets of the Company. The Agreement contains certain
standard covenants. The Company is also required to use the bank as its
primary depository.
At December 31, 1996, the total amount outstanding under the Term Facilities
was $377,000. The Term Facilities bear annual interest at the bank's reference
rate plus 1.5%-2% (9.75% - 10.25% at December 31, 1996) and are generally
repayable in monthly installments over two to three-year periods.
Principal maturities of the Term Facilities at December 31, 1996 are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1997 $ 277
1998 100
--------
Total principal amounts due 377
Current maturities (277)
--------
Long-term debt $ 100
========
</TABLE>
The carrying amounts of the term facilities approximate fair value due to the
variable nature of the interest rate.
8. Commitments
The Company has entered into noncancelable operating leases for office space
which expire in 1998, subject to renewal options. These leases provide that the
Company is responsible for certain tax, insurance and maintenance costs in
excess of the base year costs. The Company also leases equipment and fixtures
under capital and operating leases. Substantially all of the capital leases
are collateralized by the equipment associated with the leases. At December
31, 1996, the Company is obligated under these agreements to make the following
lease payments (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------- -------
<S> <C> <C>
Year ending December 31:
1997 $ 1,187 $ 364
1998 548 150
1999 98 -
2000 34 -
------- -------
Total minimum lease payments $ 1,867 514
=======
Less amount representing interest (54)
-------
Present value of net minimum lease payments 460
Less current portion of capital lease obligations (320)
-------
Long-term portion of capital lease obligations $ 140
=======
</TABLE>
Rental expense under all operating leases for the years ended December 31,
1996, 1995 and 1994, was approximately $1,225,000, $686,000 and $439,000,
respectively.
-35-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Equity
Capital Stock
The authorized capital stock of the Company consists of 25,000,000 shares of
common stock, par value $.01, and 1,000,000 shares of preferred stock, par
value $.01. The Company has the authority to issue preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
before issuance of these shares.
Warrants
In connection with the formation of the Company's subsidiary, Premenos Corp.,
warrants to purchase shares of Premenos Corp. Class B common stock were issued
to a director of Premenos Corp. In 1995, these warrants were exchanged for
warrants with similar terms to purchase 46,025 shares of Premenos Technology
Corp. common stock. Warrants totaling 39,450 remain outstanding and
exercisable at $3.80 per share at any time through December 31, 1999, and are
subject to certain antidilution provisions.
10. Stock Plans
1995 Employee Stock Purchase Plan
In August 1995, the Company established an Employee Stock Purchase Plan (the
ESPP) to provide employees of the Company with an opportunity to purchase
common stock through payroll deductions. Under the ESPP 600,000 shares of
common stock were reserved for issuance subject to certain antidilution
adjustments. At December 31, 1996, approximately 555,000 shares were available
for issuance and approximately $272,000 had been withheld from employees for
future purchases under this plan.
1995 Incentive Stock Program
The Company's 1995 Incentive Stock Program (the Incentive Program), was adopted
in July 1995. A total of 2,630,000 shares of the Company's common stock were
reserved for issuance under the Incentive Program. Grants under the Incentive
Program may be in the form of incentive stock options, non-qualified stock
options, stock appreciation rights or restricted stock grants. The exercise
price for an option granted under the Incentive Program shall generally be
equal to the fair market value of the common stock at the time such option is
granted, except that the exercise price for options granted to a holder of more
than 10% of the voting power of the Company shall equal at least 110% of the
fair market value. At December 31, 1996, approximately 445,000 options were
available for grant pursuant to the Incentive Program.
Premenos Corp. Incentive Program
Prior to the 1995 Incentive Stock Program, officers, directors, and employees
of the Company's subsidiary, Premenos Corp., were granted options to purchase
shares of Premenos Corp. Class B common stock pursuant to the Premenos Corp.
Incentive Program (Program). Stock options granted under this Program became
exercisable over time (generally over four years) or as specific performance
goals are met.
-36-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Plans (continued)
A summary of the activity under the incentive programs is set forth below:
<TABLE>
<CAPTION>
Weighted
Price Average
Per Aggregate Exercise
Shares Share Price Price
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 1,073,696 $ 1.14-1.52 $1,428,016 $ 1.33
Granted 268,918 1.52-2.09 454,305 1.69
Exercised (4,109) 1.52 (6,246) 1.52
Terminated (61,727) 1.14-1.52 (82,097) 1.33
---------- ---------- ---------- ------
Outstanding at December 31, 1994 1,276,778 0.01-2.09 1,793,978 1.41
Granted 270,553 2.28-27.25 2,795,165 10.33
Exercised (93,209) 0.01-2.28 (25,257) 0.27
Terminated (15,924) 1.14-2.28 (25,102) 1.58
---------- ----------- ---------- ------
Outstanding at December 31, 1995 1,438,198 1.14-27.25 4,538,784 3.16
Granted 927,120 10.00-23.63 13,037,930 14.06
Exercised (771,999) 0.01-18.00 (1,042,493) 1.35
Terminated (277,921) 0.01-27.25 (2,382,811) 8.57
---------- ----------- ---------- ------
Outstanding at December 31, 1996 1,315,398 $0.01-27.25 $14,151,409 $10.76
========= =========== =========== ======
Exercisable at December 31, 1996 401,228 $0.01-27.25 $ 2,005,320 $ 5.00
========= =========== =========== ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life (Years) Price at 12/31/96 Price
- --------------- ----------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - 2.28 355,111 5.72 $ 0.88 307,604 $ 0.75
10.00 - 13.00 446,692 9.60 10.51 4,015 10.28
16.50 - 27.25 513,595 9.01 17.81 89,609 19.33
--------- -------
0.01 - 27.25 1,315,398 8.32 $ 10.76 401,228 5.00
========= =======
</TABLE>
The following information concerning the Company's stock option and employee
stock purchase plans is provided in accordance with SFAS No. 123 "Accounting
for Stock-Based Compensation." The Company accounts for such plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995: dividend yield 0.0%,
volatility of .42, risk-free interest rate of 6.0%, and an expected life of
three years.
The weighted average fair value of those options granted in 1996 and 1995 was
$14.07 and $10.33, respectively.
The Company has also estimated the fair value for the purchase rights issued
pursuant to the Company's Employee Stock Purchase Plan under the Black-Scholes
valuation model using the following assumptions: dividend yield 0.0%,
volatility of .51, risk-free interest rate of 5.6%, and expected lives of .5
and .78 years, in 1996 and 1995, respectively.
-37-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Plans (continued)
The weighted average fair value of those purchase rights in 1996 and 1995 was
$5.47 and $6.09, respectively. The following proforma income information has
been prepared following the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net income (loss) - proforma (in thousands) $ (4,713) $ 1,015
Net income (loss) per share - proforma (0.43) 0.11
</TABLE>
11. Income Taxes
Income tax expense comprises the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current, federal and state $ (368) $ 436 $ 504
Deferred, federal and state 1,218 (198) 141
------ ----- -----
Income tax expense $ 850 $ 238 $ 645
====== ===== =====
</TABLE>
The Company's income taxes currently payable for federal and state purposes
have been reduced by the tax benefit derived from stock option transactions.
The benefit, which totaled $2.9 million in 1996 and $557,000 in 1995, was
credited directly to stockholders' equity.
The effective income tax rates differ from the statutory federal income tax
rates for the following reasons:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% 34.0% 34.0%
State taxes, net of federal income tax benefit 2.4 4.1 0.1
Tax benefit of research and experimentation
credits generated (7.6) (16.9) (11.6)
Change in valuation allowance on deferred
tax assets - (13.2) (3.1)
Items deductible for book but not for tax:
Acquisition-related costs 70.9 - -
Other non-deductible items 6.1 3.0 1.5
Other 1.9 2.9 2.4
---- ---- ----
39.7% 13.9% 23.3%
==== ==== ====
</TABLE>
Components of the Company's deferred income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
= ------- ------
<S> <C> <C>
Deferred income tax liabilities:
Capitalized software costs $(2,403) $(1,222)
Accumulated depreciation (128) (97)
------- -------
(2,531) (1,319)
------- -------
Deferred income tax assets:
Deferred revenue 135 35
Accrued liabilities 325 216
Accounts receivable allowance 56 162
Stock option compensation 106 243
Research and experimentation
credit carryforwards 1,341 704
Net operating loss carryforwards 1,678 16
------- -------
3,641 1,376
------- -------
Net deferred income tax asset (liability) $ 1,110 $ 57
======= =======
</TABLE>
-38-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (Continued)
At December 31, 1996, the Company has federal and state net operating loss
carryforwards of $4.1 million and $3.2 million, respectively. The federal
carryforwards expire in the year 2011 and the state carryforwards through the
year 2001. Additionally, at December 31, 1996, the Company has available
federal and state research and experimentation credit carryforwards of $887,000
and $454,000, respectively, which expire in the years 2004 through 2011. For
balance sheet presentation, $1.1 million of the research and experimentation
credit carryforward deferred tax asset is considered noncurrent, and is netted
against noncurrent deferred income taxes. Management believes future taxable
income will be sufficient to realize these deferred tax assets.
12. Distribution Agreements
The Company has various contractual agreements with a major hardware and
software vendor. Pursuant to certain of those agreements the vendor pays the
Company a specified percentage of the revenues associated with the licensing of
the Company's products. The Company has also provided this vendor product
development and other services pursuant to specific contracts. Revenues earned
from these agreements and contracts with the vendor were approximately $1.9
million, $1.6 million and $2.3 million for the years ended December 31, 1996,
1995 and 1994, respectively. Additionally, the Company is obligated to pay the
vendor a percentage of certain of its software licensing revenues.
In March 1995, the Company entered into a contractual agreement with a major
software vendor in which the vendor pays the Company a specified percentage of
the revenues associated with the licensing of the Company's products. Revenue
earned from this contract was approximately $3.2 million and $1.5 million for
the years ended December 31, 1996 and 1995, respectively.
The revenues associated with the distribution of the Company's products outside
of North America primarily through third party distributors amounted to
approximately $2.9 million, $2.6 million and $1.7 million for the years ended
1996, 1995 and 1994, respectively. These export sales are generated primarily
in Europe.
The Company has entered into licensing agreements with certain other software
vendors which enable the Company to embed the other vendors' products in its
software. In exchange for these rights, the Company is obligated to pay
royalty fees to the other vendors based on product sales.
13. Tax Advantage Savings and Retirement Plan
The Company has a 401(k) savings and retirement plan (the Plan) which covers
substantially all employees. All employees, ages 18 or older, are eligible to
participate in the Plan upon completion of six months of service. Employees may
contribute from 1% to 15% of their annual compensation to the Plan, limited to
a maximum annual amount as set periodically by the Internal Revenue Service.
The Plan requires the Company to match, on a monthly basis, 25% of employee
contributions to a maximum of 5% of their annual compensation. The Company's
contributions will generally vest over a seven-year period. The Company's
contributions were $91,000, $69,000 and $52,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
14. Related Party Transactions
One of the Company's directors is a partner of a law firm which provides
various legal services to the Company. In 1996, such legal services included
representation related to the acquisition of subsidiaries. Two other directors
of the Company have also provided training and consulting services to the
Company from time to time. Amounts incurred for all such services in 1996,
1995 and 1994 were approximately $879,000, $1,026,000 and $288,000,
respectively.
15. Fourth Quarter Adjustments
The Company's 1996 fourth quarter reflects a $200,000 increase to accrued
liabilities and approximately $300,000 in write-off of certain prepaid
royalties and capitalized software costs.
-39-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Subsequent Events
In January 1997, the Company granted stock options to acquire 319,000 shares of
common stock to directors and employees at exercise prices ranging from $9.38
to $10.00 per share, pursuant to the Company's Incentive Program. These
options are generally exercisable over four years. In addition, the Company
granted stock options to acquire 450,000 shares of common stock to an officer
at an exercise price of $9.38 per share, exercisable over five years.
In January 1997, the Company also completed a voluntary stock option repricing
program in which 594,000 stock options, originally issued with exercise prices
ranging from $10.00 to $27.25 per share, were reissued with an exercise price
of $9.38 per share. These options are generally exercisable over four years
and vesting restarts at the date of repricing.
On March 16, 1997, the Company's Board of Directors approved the repurchase of
up to one million shares of the Company's common stock.
-40-
<PAGE>
P A R T I I I
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and Section 16(b) compliance required by
this item is incorporated by reference from the Company's definitive proxy
statement ("Proxy Statement") for its annual stockholders' meeting to be held
on May 29, 1997, to be filed by the Company with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement. The information specified in Item 402(k) and (1) of
Regulation S-K and set forth in the Company's Proxy Statement is not
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
-41-
<PAGE>
P A R T I V
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements and Financial Statement Schedule - See
Index to Consolidated Financial Statements at Item 8 on page 24 of this
report. All other schedules are omitted because they were not required or
the required information is included in the Consolidated Financial
Statements or Notes thereto.
2. Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
9.1* Voting Agreement between Lew Jenkins and
David Hildes dated as of July 12, 1995.
10.1* Lease between Galaxy Orion Associates and Premenos Corp.
dated March 22, 1990 and amendments thereto dated
March 9, 1992 and June 8, 1995 concerning the lease of the
Company's principal executive offices located at 1000 Burnett
Avenue, Concord, California 94520.
10.2* Sublease between All Pacific Mortgage Company and Premenos Corp.
dated September 19, 1994 and an amendment thereto dated as of
April 24, 1995 concerning the sublease of approximately 4,841
square feet located at 1000 Burnett Avenue, Concord,
California 94520.
10.3* Lease between Citibank S.A. and Premenos Europa, S.A. dated
April 27, 1995 concerning the lease of the Company's
facilities at Citicenter, 19, rue le Parvis, 4th Floor, 92073
Paris la Defense, Cedex, France.
10.4* Warrant to Purchase Class B Common Stock of Premenos Corp.
granted by Premenos Corp. to TEBON Limited Partnership dated
May 12, 1994.
10.5* 1995 Incentive Stock Program dated July 12, 1995, as amended and
restated as of September 12, 1995 and as restated as of
December 13, 1995.
10.6* Compensation Agreement between Premenos Corp. and Lew Jenkins
dated as of July 12, 1995.
10.7* Special Bonus Agreement between Premenos Corp. and H. Ward Wolff
dated November 7, 1994.
10.8* Form of Indemnity Agreement between the Company and each of its
directors.
10.9* Loan Agreement between Silicon Valley Bank and Premenos Corp.
dated August 9, 1993 and Loan Modification Agreements dated
August 3, 1994, April 3, 1995 and June 1, 1995.
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.10*+ OEM Master License Agreement between RSA Data Security, Inc. and
Premenos Corp. dated July 1994 and amendments thereto dated
January 4, 1995 and June 30, 1995 concerning the Company's
use of certain software.
10.11* License Agreement between International Business Machines and
Premenos Corp. dated as of March 25, 1992 concerning the
Company's use of certain trademarks.
10.12*+ Value Added Remarketer Agreement between Sybase, Inc. and
Premenos Corp. dated as of June 22, 1994 and addenda thereto
dated of even date and as of May 22, 1995 concerning the use
of certain software.
10.13* License agreement between The Regents of the University of
California and Premenos Corp. made as of May 22, 1995
concerning the Company's use of TCL software.
10.14*+ Master Disk Agreement for the Commercial Application Partner
(CAP) Program between Premenos Corp. and Powersoft
Corporation dated as of May 31, 1995.
10.15* International Software Marketing Agreement between International
Business Machines and Premenos Corp. dated February 14, 1992
and related agreements including a Cooperative Marketing
Supplement dated of even date, a Product Remarketing
Supplement dated February 20, 1992, and amendments thereto
dated June 25, 1992, July 30, 1993, and May 19, 1994.
10.16*+ License Agreement between Intelligent Objects Corporation and
Premenos Corp. dated January 16, 1995 and accompanying
Developers Assistance Program Distribution License Agreement
concerning the Company's use of certain software programs.
10.17* Description of unexecuted written understanding between Neuron
Data and Premenos Corp. made as of March 31, 1994 concerning
Premenos Corp.'s use of certain software.
10.18* 1995 Employee Stock Purchase Plan.
10.19* Lease between Galaxy Orion Associates and Premenos Corp. dated
March 22, 1990 and amendments thereto dated March 9, 1992 and
June 8, 1995 concerning the lease of the Company's principal
executive offices located at 1000 Burnett Avenue, Suite 200,
Concord, California 94520.
10.20* Sublease between All Pacific Mortgage Company and Premenos Corp.
dated September 19, 1994 and an amendment thereto dated as of
April 24, 1995 concerning the sublease of approximately 4,841
square feet located at 1000 Burnett Avenue, Suite 130,
Concord, California 94520.
10.21 Executive Compensation Agreement between Premenos Corp. and
Timothy A. Dreisbach dated January 6, 1997.
11 Computation of earnings per common share.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
* Previously filed and incorporated herein by reference.
+ Confidential treatment approved.
(b) Reports on Form 8-K
None
-43-
<PAGE>
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES
SCHEDULE II
Valuation and Qualifying Accounts
</TABLE>
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expense Accounts Deductions Period
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1996 $403,944 $541,925 $ - $598,185 $347,684
1995 365,081 513,925 - 475,062 403,944
1994 344,682 602,445 - 582,046 365,081
Allowance for net deferred
tax assets:
1996 - - - - -
1995 226,963 - - 226,963 -
1994 462,289 - - 235,326 226,963
</TABLE>
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PREMENOS TECHNOLOGY CORP.
Dated: March 27, 1997 By /s/ LEW JENKINS
--------------------------
Lew Jenkins
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on March 27, 1997.
Signature Title
/s/ LEW JENKINS
- ------------------------------
Lew Jenkins Chairman of the Board and Director
/s/ DAVID HILDES
- ------------------------------
David Hildes Vice Chairman, Secretary and Director
/s/ TIMOTHY A. DREISBACH
- ------------------------------
Timothy A. Dreisbach President, Chief Executive Officer and
Director
/s/ H. WARD WOLFF
- ------------------------------
H. Ward Wolff Senior Vice President of Finance and
Administration (Principal Financial and
Accounting Officer)
/s/ FRANCIS R. WAGNER
- ------------------------------
Francis R. Wagner Director
/s/ STEPHAN J. MALLENBAUM
- ------------------------------
Stephan J. Mallenbaum Director
/s/ WILLIAM O. STUDEMAN
- ------------------------------
William O. Studeman Director
-45-
<PAGE>
EXHIBIT 10.21
EXECUTIVE COMPENSATION AGREEMENT
AGREEMENT, made as of January 6, 1997 by and between PREMENOS TECHNOLOGY
CORP., a Delaware corporation having its principal place of business at 1000
Burnett Avenue, Concord, California 94520 (the "Company"), and Timothy A.
Dreisbach (the "Executive").
WHEREAS, the Company desires to retain the Executive as its President and
Chief Executive Officer to advance the business and interests of the Company
on the terms and conditions set forth herein; and
WHEREAS, the Executive desires to provide his services to the Company in such
capacities, on and subject to the terms and conditions hereof; and
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Employment. Subject to all of the terms and conditions hereof, the
Company does hereby employ the Executive, effective as of January 6, 1997 (the
"Effective Date") as its President and Chief Executive Officer, and the
Executive does hereby accept such employment. The term of employment
contemplated hereby shall commence on the Effective Date and shall continue
until terminated by the Company or the Executive pursuant to the terms hereof.
The Company and the Executive acknowledge and agree that no fixed term of
employment is created hereby.
2. Duties of Executive. The Executive shall, during the term of employment
hereunder, perform the leadership, executive and administrative duties and
functions of the President and Chief Executive Officer of the Company, as such
duties and functions are defined by the Board of Directors of the Company from
time to time . The Executive shall work in conjunction with the Chairman of
the Company, and shall report to the Board of Directors of the Company. The
Company agrees to cause the Executive to be elected as a Class I director of
the Company at the next meeting of the Board of Directors of the Company and
agrees to use its best efforts to cause the Executive to be elected as a Class
I director at the next annual meeting of stockholders of the Company. The
Executive agrees to devote substantially all of his business time and effort
to the business and affairs of the Company (and, if requested by the Board of
Directors, any subsidiary or affiliate of the Company) and to perform his
duties faithfully, diligently and competently, and to use his best efforts to
promote the profit, benefit and advantage of the Company and, if applicable,
any subsidiaries or affiliates of the Company. The Executive agrees to accept
the payments to be made to him under this Agreement, and the stock options to
be issued to him under this Agreement, as full and complete compensation for
the services required to be performed by, and the covenants of, the Executive
under this Agreement.
3. Compensation.
3.1 Base Compensation. The Company agrees to pay the Executive an annual
base salary at the rate of $225,000 per annum (the "Base Compensation")
payable in substantially equal installments semi-monthly or in such other
manner as the Company may generally pay its employees. The company agrees to
review the Base Compensation of the Executive on or about January 1, 1998.
3.2 Benefits. The Executive shall be entitled to participate in any
health insurance, accident insurance, hospitalization insurance, life
insurance, dental insurance, vision insurance, 401(k), or any other similar
plan or benefit afforded by the Company to its senior executives generally, if
and to the extent that the Executive is eligible to participate in accordance
with the provisions of any such insurance, plan or benefit generally.
-1-
<PAGE>
Exhibit 10.21 - Executive Compensation Agreement (Continued)
3.3 Vacation. The Executive shall be entitled to three weeks paid
vacation per year, such vacations to be taken at times mutually agreeable to
the Executive and the Company.
4. Bonus.
4.1 Annual Bonus. In order to provide performance-based incentive
compensation to the Executive, the Company hereby agrees to pay the Executive,
in addition to the Base Compensation, a bonus after the end of each calendar
year during the Executive's employment hereunder except at the end of 1997,
provided that the Performance Goals, as defined below, have been met in the
reasonable discretion of the Board of Directors (or a subcommittee thereof)
and provided the Executive is employed by the Company on the last day of such
calendar year. The "Performance Goals" are certain objectives with respect to
each calendar year specified by the Board of Directors after consultation with
the Executive, and may consist of financial, business, strategic or other
criteria. Except for the Executive's 1997 bonus, the Company will endeavor to
specify the Performance Goals, the method of allocating the bonus amount among
the respective Performance Goals and target amount of such bonus with respect
to each calendar year at the last Board of Directors meeting during the prior
calendar year, or as soon as practical thereafter.
4.2 1997 Bonus Amount. If the Executive is employed by the Company on
December 31, 1997, the Company agrees to pay the Executive a bonus of no less
than $125,000. The Company agrees to consider in good faith a request by the
Executive for advances against such bonus amount.
4.3 Special Arrangement. If the Company is unable to provide an
arrangement satisfactory to the Executive to assist him in the exercise of
certain stock options granted to him by his previous employer, the Company
agrees to pay the Executive up to $75,000, to the extent required by Executive
to defray interest or other costs associated with obtaining financing to
exercise such options and hold the underlying stock.
5. Change of Control and Severance Arrangement.
5.1 Option Vesting in Event of Change of Control. In the event that this
Agreement or the Executive's employment hereunder shall terminate for any
reason, including, without limitation, a voluntary termination by the
Executive or the termination by the Company for Cause (as defined below) or
otherwise, within ninety days prior to or one hundred and eighty days after
the occurrence of a Change of Control (as defined below) all unvested options
granted pursuant to this Agreement, up to the number of options that, if the
Executive exercised them and immediately sold the underlying stock, would net
a dollar amount realizable to the Executive with a present value equal to 2.99
times the Executive's base salary plus bonus in the prior calendar year, shall
vest immediately in accordance with the provisions of Section 6.1. For
purposes hereof, the present value of amounts realizable to the Executive by
reason of accelerated vesting of options shall be calculated in accordance
with Section 280G of the Internal Revenue Code of 1986, as amended. For
purposes hereof, a "Change of Control" shall be deemed to have occurred if and
only if an entity, or one or more entities acting as a "Group" within the
meaning of Section 13(g) of the Securities Exchange Act of 1934 (the "Exchange
Act"), other than and excluding any Affiliated Entities, as defined below,
shall have the then-effective right to vote, or the then-effective right to
control the vote, of in excess of 50% of the voting power of the Company. For
purposes hereof an "Affiliated Entity" shall be deemed to mean any or all of
the following, in any combination, severally or collectively, and whether or
not acting as a "Group" within the meaning of Section 13 (g) of the Exchange
Act: (a) Lew Jenkins or his estate or heirs; (b) David Hildes or his estate
or heirs; or (c) the Executive or his estate or heirs.
-2-
<PAGE>
Exhibit 10.21 - Executive Compensation Agreement (Continued)
5.2 Severance Pay. In the event that the Company terminates the
employment of the Executive other than for Cause, in which event Section 5.3
shall apply, or if the Executive voluntarily terminates his employment within
90 days prior to or 180 days after a Change of Control, the Company shall,
notwithstanding such termination, in consideration of all of the undertakings
and covenants of the Executive contained herein, continue to pay to the
Executive the Base Compensation and the health benefits enjoyed by the
Executive on the date of termination for a period of twelve months from the
date of such termination; and, if such termination occurs within twelve months
of the Effective Date the Company shall pay to the Executive, in addition, the
bonus described in Section 4.2 that would have been payable at the end of
1997. However, in no event shall the continuation of such payments during
such post-termination period be deemed to be employment hereunder for purposes
of calculating any bonus due to the Executive, for purposes of determining the
vesting or exercise period of any stock options granted hereunder, or
otherwise.
5.3 Other Termination. In the event that the employment of the Executive
is terminated (a) by the Executive for any reason whatsoever, (b) by the death
of the Executive, (c) by the Company by reason of the medical or psychiatric
disability of the Executive to perform a material portion of his duties for
ninety consecutive calendar days or sixty-five business days in any twelve-
month period ("Disability"), (d) by the Company for Cause, as defined below,
or (e) under any other circumstances not expressly contemplated by Section 5.1
or 5.2 above, no severance or other post-termination payment shall be due or
payable by the Company to the Executive. For purposes hereof, "Cause" shall
mean: (a) the commission by the Executive of any felony; (b) the commission
by the Executive of any misdemeanor involving theft, fraud, dishonesty or
misrepresentation; (c) any material misappropriation, embezzlement or
conversion of the Company's or its affiliates' property by the Executive
(whether or not constituting a felony or misdemeanor); (d) willful failure by
the Executive to substantially perform the material duties or obligations of
the Executive under this Agreement; (e) the material failure by the Executive to
follow the reasonable policies or directives of the Board of Directors of
the Company; (f) the willful engagement by the Executive in bad faith conduct
or professionally inappropriate conduct which is materially detrimental to the
Company or its business reputation; (g) the voluntary filing of a bankruptcy
petition by the Executive or the adjudication of the Executive as a bankrupt; or
(h) the adjudication of the Executive as insane or incompetent.
6. Stock Options.
6.1 Non-Qualified Stock Options. The Company hereby agrees to issue to
the Executive, effective as of the Effective Date, a non-qualified stock
option (the "Non-Qualified Stock Option") to acquire 450,000 shares of Common
Stock of the Company. The Non-Qualified Stock Option shall become exercisable
to the extent of 20% of the shares subject to the option on each of the first
two annual anniversaries of the Effective Date, and thereafter to the extent
of 1/36th of the remaining shares subject to the option on the first day of
each month for 36 months; provided, however, that the Non-Qualified Stock
Option, to the extent not previously exercisable, shall become exercisable in
its entirety in the event that (a) there occurs a Change of Control, or (b)
the Company concludes a sale of substantially all of its assets other than in
a transaction which is intended primarily to effect a corporate reorganization
without material change in beneficial ownership of the material business of
the Company. The Non-Qualified Stock Option shall be effective for a term of
twelve years. The exercise price of the Non-Qualified Stock Option shall be
the number of shares subject to option times the Fair Market Value on the
Effective Date. "Fair Market Value" shall be equal to closing price of one
share of Common Stock of the Company on the Effective Date.
-3-
<PAGE>
Exhibit 10.21 - Executive Compensation Agreement (Continued)
6.2 Termination of Employment. Notwithstanding any term or provision
thereof or of any option granted hereunder or thereunder, the Non-Qualified
Stock Option shall expire, terminate and be deemed of no further force and
effect, ninety days after the employment of the Executive by the Company or a
successor entity following a Change of Control terminates for any reason or
under any circumstances whatsoever; except that if the termination of
employment was solely by reason of the death of the Executive then the Non-
Qualified Stock Option shall expire, terminate, and be deemed of no further
force and effect two years after the date of such termination of employment.
6.3 Recapitalization Adjustment. If any subdivision or combination of
shares of Common Stock of the Company or any stock dividend, capital
reorganization, recapitalization, consolidation or merger in which the Company
is the surviving corporation occurs after the grant of the Non-Qualified Stock
Option, the Board of Directors of the Company shall make such proportional
adjustments as it determines appropriate in the number of shares of Common
Stock subject to the Non-Qualified Stock Option.
7. Executive Covenants.
7.1 No Employee Solicitation. The Executive hereby agrees that during
the period of his employment hereunder, and for a period of three years from
the date of termination thereof for any reason, he shall not, directly or
indirectly, for his own account or jointly with another, or for or on behalf
of any entity, as principal, agent or otherwise, solicit or induce or in any
manner attempt to solicit or induce any person employed by the Company or any
of its affiliates to leave such employment, whether or not such employment is
pursuant to a written contract with the Company or otherwise.
7.2 Trade Secrets. The Executive expressly covenants and agrees that he
will not at any time, whether during or after his employment by the Company,
directly or indirectly, use or permit the use of any trade secrets,
confidential information, or proprietary information (including, without
limitation, customer relationships, technical information, software
techniques, business plans, strategic plans, marketing data, financial
information or similar items) of, or relating to, the company, or any
affiliate of the Company, in connection with any activity or business, whether
for his own account or otherwise (except solely the business of the Company,
if an to the extent that the Executive is then an employee of the Company) and
will not divulge such trade secrets, confidential information or proprietary
information to any person, firm, corporation or other entity whatsoever. The
obligations of this paragraph shall not apply to information that is disclosed
by the Executive to satisfy a legal demand by a competent court or
governmental body, provided, however, that in such circumstance the Executive
shall advise the Company prior to the disclosure so that the Company shall
have the opportunity to defend against the disclosure and provided further
that the Executive shall disclose only such information as is legally required
to be disclosed.
7.3 Ownership by Company. The Executive acknowledges and agrees that all
of his work product created, produced or conceived in connection with his
association with the Company shall be deemed work for hire and shall be deemed
owned exclusively by the Company. Without limiting the generality of the
foregoing, the Executive agrees that the Company shall have and possess all
proprietary rights, patent rights, copyright rights and trade secret rights as
may exist in such work product or as which are inherent therein or appurtenant
thereto. The Executive hereby waives any moral rights with respect to any
such work product. The Executive agrees to execute and deliver all documents
required by the Company to document or perfect the Company's proprietary and
ownership rights in and to the Executive's work product.
-4-
<PAGE>
Exhibit 10.21 - Executive Compensation Agreement (Continued)
7.4 Covenants Non-Exclusive. The Executive acknowledges and agrees that
the covenants contained in this Section 7 shall not be deemed exclusive of any
common law rights of the Company or any fiduciary obligation of the Executive
in connection with the relationships contemplated hereby; and that the Company
shall have any and all rights as may be provided by law in connection with the
relationships contemplated hereby. The Executive hereby agrees to execute, on
the Effective Date, the Company's standard Confidential Information and
Intellectual Property Non-Disclosure Agreement, in substantially the form
attached hereto as Exhibit A. In the event of a conflict between the
Confidential Information and Intellectual Property Non-Disclosure Agreement
and this Agreement, the terms of this Agreement shall control.
8. Termination. Notwithstanding any provision of this Agreement to the
contrary, the Executive's employment hereunder may be terminated at any time
by the Company, whether or not for Cause, by written notice to the Executive.
In the event that the Company shall terminate the Executive's employment
hereunder for Cause, the Company shall so specify in its notice of termination
and the Company shall state the nature of the Cause. The Executive
acknowledges that the possibility of termination of employment by the Company
at any time with or without cause is an integral part of the economic bargain
negotiated between the Company and the Executive, and has been considered by
the Company and the Executive in structuring the economic relationship between
the Executive and the Company. The Executive acknowledges that he has no
"protected interest" or legally enforceable expectations of continued
employment by the Company, or of employment by the Company for any particular
period of time. Upon any termination by the Company the Executive shall have
such rights as are specified herein, if any, to receive severance payments and
to exercise otherwise exercisable but then-unexercised stock option. No
termination of employment hereunder by the Company shall be deemed to relieve
the Executive of his obligations with respect to confidentiality, non-
solicitation and similar matters, as specified herein. The Executive may
terminate his employment hereunder at any time by written notice to the
Company; provided, however, that the Executive shall endeavor to provide such
reasonable advance notice to the Company as may be practical under the
circumstances. In the event of such termination by the Executive, the
Executive shall nonetheless have such rights with respect to severance
payments, if any, as are specified herein and such rights to exercise
otherwise exercisable, but then-unexercised, stock options as provided herein.
9. General.
9.1 Applicable Law. This document shall, in all respects, be governed by
the laws of the State of California.
9.2 Survival. The parties hereto agree that the covenants contained in
Section 7 hereof shall survive any termination of employment by the Executive
and any termination of this agreement.
9.3 Independent Representation. The Executive acknowledges that he has
had the opportunity to seek independent counsel and tax advice in connection
with the execution of this Agreement, and the Executive represents an warrants
to the Company (a) that he has sought such counsel and advice as he has deemed
appropriate in connection with the execution hereof and the transactions
contemplated hereby; and (b) that he has not relied on any representation of
the Company as to tax matters or as to the consequences of the execution
hereof.
-5-
<PAGE>
Exhibit 10.21 - Executive Compensation Agreement (Continued)
9.4 Notices. Any and all notices required or desired to be given
hereunder by any party shall be in writing and shall be validly given or made
to another party if delivered either personally, by telex, facsimile
transmission, same day delivery service, overnight delivery service, or if
deposited in the United States Mail, certified or registered, postage prepaid,
return receipt requested. In all instances, notice shall be sent to the
parties at the following addresses:
If to the Company: If to the Executive:
Premenos Technology Corp. Timothy A. Dreisbach
1000 Burnett Avenue 180 Green Oaks Drive
Concord, CA 94520 Atherton, CA 94027
Attention: General Counsel
Any party may change its address for the purpose of receiving notices by a
written notice given to the other party.
9.5 Waiver. No reliance upon or waiver of one or more provisions of this
Agreement shall constitute a waiver of any other provisions hereof.
9.6 Successors and Assigns. All of the terms and provisions contained herein
shall inure to the benefit of an shall be binding upon the parties hereto and
their respective heirs, personal representatives, successors and assigns.
However, no party shall voluntarily assign any rights hereunder, or delegate
any duties hereunder, except upon the prior written consent of the other.
9.7 Specific Performance. It is agreed that the rights granted to the
parties hereunder are of a special and unique kind and character and that, if
there is a breach by any party of any material provision of this document, the
other party would not have an adequate remedy at law. It is expressly agreed,
therefore, that the rights of the parties hereunder may be enforced by an
action for specific performance and other equitable relief.
9.8 Entire Agreement. This Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement, and any and all prior agreements, understandings or representations
are hereby terminated and canceled in their entirety. This Agreement may not
be modified, except by written instrument duly executed by each party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
PREMENOS TECHNOLOGY CORP. EXECUTIVE
By: /s/ Lew Jenkins /s/ Timothy A. Dreisbach
------------------------- --------------------------
Lew Jenkins, Chairman Timothy A. Dreisbach
-6-
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Weighted average number of common
shares outstanding 10,937,016 7,869,810 5,851,749
Shares issuable pursuant to warrants
and employee stock option plan,
less shares assumed repurchased at
the average fair value during
the period (1) - 1,113,001 554,216
Shares issuable pursuant to warrants
and stock options issued during the
12 month period prior to the filing
of the initial public offering
registration statement, less shares
assumed repurchased at the offering
price of $18 per share - - 142,063
Effect of August 1995 exchange offer
-additional common shares outstanding - - 967,564
---------- --------- ---------
Number of shares for computation of
earnings per share 10,937,016 8,982,811 7,515,592
========== ========= =========
Net income (loss) $(2,996,373) $1,497,316 $1,815,137
Minority interest (2) - (19,809) 309,968
---------- --------- ---------
Net income (loss) for computation
of net income (loss) per share $(2,996,373) $1,477,507 $2,125,105
=========== ========== ==========
Net income (loss) per share (3) $(0.27) $0.16 $0.28
===== ==== ====
</TABLE>
(1) Excluded in loss periods as impact would be anti-dilutive.
(2) To adjust net income for minority interest related to the
minority shares exchanged.
(3) There is no difference between primary and fully diluted net
income per share.
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
Premenos Corp., a Delaware corporation
Premenos Holdings, Inc., a California corporation
Premenos Europa, S.A., a Delaware corporation
Premenos U.K. Ltd., a company organized under the laws of the United Kingdom
Premenos S.A., a company organized under the laws of France
Premenos Canada Holding Corp., a company organized under the laws of Canada
Premenos Canada Corp., a company organized under the laws of Canada
Prime Factors, Inc., an Oregon corporation
EXHIBIT 23
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statements of
Premenos Technology Corp. on Form S-8 (File No. 33-97116 and 33-97114) of our
report dated January 31, 1997, except for Paragraph 3 of Note 16 as to which
the date is March 16, 1997, on our audits of the consolidated financial
statements and the financial statement schedule of Premenos Technology Corp.
and subsidiaries as of December 31, 1996 and 1995, and for the years ended
December 31, 1996, 1995 and 1994, which report is included in this Annual
Report on Form 10-K.
San Francisco, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from Form
10K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,638
<SECURITIES> 0
<RECEIVABLES> 9,440
<ALLOWANCES> 348
<INVENTORY> 0
<CURRENT-ASSETS> 69,948
<PP&E> 11,463
<DEPRECIATION> 4,763
<TOTAL-ASSETS> 83,690
<CURRENT-LIABILITIES> 12,361
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 69,161
<TOTAL-LIABILITY-AND-EQUITY> 83,690
<SALES> 33,471
<TOTAL-REVENUES> 33,471
<CGS> 9,302
<TOTAL-COSTS> 24,430
<OTHER-EXPENSES> 4,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148
<INCOME-PRETAX> (2,142)
<INCOME-TAX> 850
<INCOME-CONTINUING> (2,996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,996)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
