-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LR+hV3kPbeiZh9ZHLHG7FyvAYdG6jgfhnrWzEhgbuL92xdCvtKbnTKE7XPuMKeGi 0piLvNlJ09LHqwJWrW6ucw== 0001012870-98-001130.txt : 19980504 0001012870-98-001130.hdr.sgml : 19980504 ACCESSION NUMBER: 0001012870-98-001130 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AWARD SOFTWARE INTERNATIONAL INC CENTRAL INDEX KEY: 0001013920 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942893462 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-28904 FILM NUMBER: 98604889 BUSINESS ADDRESS: STREET 1: 777 E MIDDLEFIELD ROAD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4159684433 MAIL ADDRESS: STREET 1: 777 E MIDDLEFIELD ROAD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-K/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K/A WASHINGTON, DC 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 0-28904 AWARD SOFTWARE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2893462 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 777 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043-4023 (Address of principal executive offices, including zip code) (650) 237-6800 (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, NO PAR VALUE 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. [ ] Based on the closing sale price of $10.50 on March 17, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $42,880,551. On March 17, 1998, there were outstanding 6,963,862 shares of the Registrant's Common Stock. 1 TABLE OF CONTENTS PAGE ----- Part I............................................................. 3 Item 1 Business............................................... 3 Item 2 Properties............................................. 18 Item 3 Legal Proceedings...................................... 18 Item 4 Submission of Matters to a Vote of Security Holders.... 18 PART II............................................................ 19 Item 5 Market for the Registrant's Common Stock and Related Stock Matters.......................................... 19 Item 6 Selected Financial Data................................ 19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 21 Item 8 Financial Statements and Supplementary Data............ 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 45 PART III........................................................... 46 Item 10 Directors and Executive Officers of the Registrant..... 46 Item 11 Executive Compensation................................. 48 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................. 54 Item 13 Certain Relationships and Related Transactions......... 57 PART IV............................................................ 59 Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 59 2 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21A of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Business --Business Risks" and elsewhere in this Form 10-K and in other documents on file with the Securities and Exchange Commission. GENERAL Award Software International, Inc. ("Award," the "Company" or the "Registrant"), designs, develops and markets system enabling and management software for the global computing market. System enabling and management software is one of the fundamental layers in any microprocessor-based system (including personal computers) architecture and provides an essential interface between the system's operating system software and hardware. The Company's principal system enabling and management software products include a suite of Basic Input/Output System software ("BIOS"). Award's customers include designers and manufacturers of motherboards, personal computer ("PC") systems and other microprocessor-based (or "embedded") devices. The Company believes that its products and engineering services enable customers to rapidly develop new motherboard designs for state-of-the-art computer systems. The Company markets and licenses its products and services worldwide and has established itself as a leading provider of desktop system management software in Asia, which accounts for over 60% of worldwide desktop motherboard production. The BIOS, which is the software initially executed after the system is turned on, tests and initializes hardware components, initiates the operating system and then provides advanced interface functions. Award's desktop BIOS products enable a PC to support a number of key advanced technologies, including Plug and Play, Peripheral Component Interconnect ("PCI"), Desktop Management Interface ("DMI"), Universal Serial Bus ("USB") and Advanced Configuration and Power Interface ("ACPI"). The Company is currently developing further enhancements to its BIOS, including support for emerging standards such as IEEE-1394 and Intelligent I/O ("I2O"). IEEE-1394 is a high-speed data interface for PCs, peripherals and consumer electronic products. I2O is an intelligent input and output subsystem used primarily with data storage devices. The Company also provides BIOS upgrades to end-users of desktop PCs who wish to extend the life of their systems without replacing them entirely. In addition to the Company's proprietary suite of system enabling and management software products, Award offers PC Card software that enables PCs and other electronic devices to recognize, install, configure and operate peripheral devices, such as network and modem cards. The Company has recently embarked on a program to provide the leading PC technologies to manufacturers of embedded devices. Supporting systems using real time operating systems ("RTOS"), for example, the Company's products provide PC bus connectivity, PC software compatibility and PC hardware enabling. Certain vertical markets within the embedded systems arena, such as Internet appliance manufacturers, are also targeted with industry specific solutions. The Company currently licenses its products to more than 200 customers worldwide, including Compaq Computer Corporation ("Compaq"), LG Electronics Inc. ("LG Electronics"), Micron Electronics, Inc. ("Micron"), Motorola, Inc. ("Motorola"), NEC Corporation ("NEC") and Packard Bell. In response to its customers' need to develop and integrate new technologies rapidly, the Company has developed its business with a particular emphasis on providing local engineering service and support in each of its major target regions: Asia (primarily Taiwan), North America and Europe. Award Software International(R), Award Software(TM), Award(TM), APIAccess(TM), AwardBIOS(TM), CardWare(R), MR BIOS(R), PC DIAG(R), POSTcard(R), SMSAccess(R), Unicore(R), USBAccess(TM) and WWWAccess(TM) are either pending trademark approval or are trademarks of the Company. 3 INDUSTRY BACKGROUND PC systems consist of four layers: the hardware, the BIOS, the operating system and the application software. The computer's primary hardware component, the motherboard, is connected to peripheral hardware devices, such as a keyboard, hard disk drive and mouse. The BIOS is stored in a non volatile memory chip on the motherboard while the operating system and application software are stored on the hard disk drive. The BIOS, which is the software initially executed after the system is turned on, tests and initializes hardware components and initiates the operating system. After the BIOS completes the start up or "booting" of the system, it serves as the interface between the computer hardware and the operating system. By acting as the bridge between the operating system and the computer hardware, the BIOS makes it possible to develop hardware and software independently. As a result, the pace of innovation for hardware products in the PC industry, where the typical life cycle of a hardware design is six to twelve months, has not been constrained by the slower pace of operating system development, where generational advances can take several years to develop. Enhanced BIOS and other system management software have been developed to support implementation of new industry standards and technologies, such as Plug and Play, PC Card, DMI, "hot-docking" and ACPI. Improved versions of BIOS are currently being developed to support IEEE-1394 and the latest PC industry standards. Many of these new technologies will play an important part in the development of PCs and embedded devices for the Internet and other network computing environments. Several important trends are currently affecting the system management software industry: Outsourcing of System Management Software Development. The rapid pace of technological innovation in recent years has required system makers to adapt to short production cycles and operate in an environment of continuous innovation. As PC and motherboard designers and manufacturers continuously improve their hardware products, they must ensure the compatibility of these new designs with existing operating systems through a customized BIOS. While some PC and motherboard manufacturers develop system management software internally, increasingly complex technology, demand for compatibility with industry standards and competitive market pressures are driving many manufacturers to rely on dedicated system management software providers. These manufacturers demand high levels of support at all stages of product development, making it necessary for system management software vendors to provide effective localized engineering support during the production process. Outsourcing of Motherboard Production. Competitive pressures in the PC market, including sub-$1,000 PCs ("Segment Zero"), have also caused system manufacturers to outsource PC motherboard production to reduce cost and stay current with advancing technologies. Manufacturers in Taiwan have taken advantage of this trend to become significant participants in the world desktop system and motherboard production market. Further, their role has expanded to include design decisions, such as the selection of the BIOS and other system management software. To rapidly integrate new motherboard designs into the overall PC system, these manufacturers require locally based system management software engineering resources. Rapid Growth of the Embedded Device Market. Embedded devices perform a single or limited number of tasks for a dedicated purpose. These devices require advanced capabilities for data analysis, communication, control and ease-of-use and depend upon highly customized system management software solutions to ensure performance, reliability and functionality. Two distinct trends are emerging in the embedded systems market. First, traditional PC architecture, which is based on the x86 design, is being adopted for use in the embedded computer market. The implementation of x86 architecture permits the development of open systems that can employ standard software, development tools and peripheral hardware products. Second, new generations of high-performance, low-cost Reduced Instruction Set Computing ("RISC")-based processors are fostering the invention of new types of devices and the miniaturization of existing products such as Internet telephones and personal communicators. To minimize time to market, these classes of designs are relying more and more on technologies and standards emanating from the PC industry. Need to Reduce Total Cost of Ownership ("TCO"). As PC use by less technically sophisticated home and business users has grown, PC system manufacturers have been searching for cost-effective solutions to reduce TCO. Today's computing environment potentially provides system manufacturers with the ability to access the hardware and operating systems to ascertain the problems of the user and to make repairs. Additionally, manufacturers of embedded systems are searching for cost-effective ways to maintain and support their products, which are broadly 4 distributed and sometimes installed in remote locations that cannot be directly accessed by support personnel. To address this opportunity, providers of system management software are beginning to work closely with system manufacturers to develop products with remote access, diagnostic and repair capabilities. Management Information System ("MIS") organizations and individuals are seeking ways to prolong the useful life of PCs that have enough computing power for daily usage, but are no longer compatible with hardware technologies introduced after the PCs were manufactured. AWARD STRATEGY The Company's objective is to become the leading designer, developer and marketer of system enabling and management software by providing innovative solutions to the desktop PC, mobile PC and embedded device markets. The Company's strategy includes the following key elements: Build on Desktop Leadership in Asia. Award is currently a leading provider of system management software to the Asian desktop motherboard market and will attempt to increase market share in this important region. The Company believes that PC manufacturers worldwide increasingly outsource PC design decisions, including the selection of system management software and solutions used to reduce TCO, to the OEMs and original design manufacturers in Taiwan that form the core of the Company's client base. Award further believes its long-standing focus on Asia positions it to take advantage of this market growth, and the Company plans to maintain a high level of engineering and management resources in this region. See "Business --Business Risks, International Operations; Currency Fluctuations; International Unrest." Leverage Existing Customer Relationships and Desktop PC Expertise to Pursue the Mobile Market. The Company believes that it can leverage its desktop system management software expertise to design and develop products for the mobile PC. To complement its mobile BIOS products, the Company also offers system management software to support the PC Card standard, which is broadly implemented in the mobile PC market. The Company believes that the leading Taiwanese desktop system and motherboard manufacturers, many of which are Award customers, will enter the mobile PC market and provide the Company with opportunities to license its mobile BIOS products. In addition, the Company has established a full-service joint venture subsidiary operation in Yokohama, Japan to market, customize and support system management software to the mobile PC manufacturers in Japan, which are significant participants in the mobile PC market. Provide the Embedded Systems Marketplace with Innovative Products based on the Company's PC Industry Core Competencies. With the increasing uniformity of the PC industry, where products generally must be Intel- and Microsoft- compatible, software developers and peripherals manufacturers can design products with very large and instantaneous markets. Designers of embedded systems cannot benefit from this broad product availability, given the traditional embedded system's incompatibility with Microsoft Corp. ("Microsoft") Windows and Intel Corporation ("Intel") products. Award's strategy is to bridge the two environments by leveraging its PC expertise and making PC technologies available on embedded and real-time systems. In 1997, the Company released several products based on PC technology and geared toward the embedded systems market. The Company's USBAccess provides embedded system connectivity to USB devices. WWWAccess, which includes web browser technology licensed from third parties, provides embedded devices -- including intelligent terminals, set-top boxes and telephones -- with Internet capabilities. APIAccess enables developers of embedded systems to develop application software using PC development tools and paradigms, including the Win32(R) application program interface standard. Provide Localized Customer Service in Key Markets. The Company provides responsive and competitive system management software engineering and support by maintaining engineering, marketing and sales staff in the four key PC design centers around the world: Taiwan, the U.S., Germany and Japan. For many of its customers, Award serves as an important source of research and development, providing customized solutions within the tight timeframes required in the competitive motherboard market. In addition, the Company's local service centers allow it to act as an important conduit between the technology centers in the U.S. and key PC design centers. Easy accessibility, frequent communication and localized interaction are crucial to the selection and implementation of Award system enabling and management software. The Company believes that its emphasis on local service enables it to perform high-quality, reliable and timely engineering and support services and provides it with a competitive advantage. 5 BUSINESS RISKS Dependence on the Underlying PC Industry; Dependence on Current PC Industry Standards The demand for the Company's system management software depends principally on (i) PC manufacturers and other customers licensing the Company's software rather than developing their own system management software, (ii) market acceptance of the products incorporating the Company's software sold by the Company's original equipment manufacturer ("OEM") customers, (iii) the emergence of new PC technologies that require system management software solutions to provide functionality, user value and performance, and (iv) the technological competence of the Company's core products. Sales of PCs fluctuate substantially from time to time based on numerous factors, including general economic conditions in the markets for the Company's customers' products, new hardware and software product introductions, demand for new applications, shortages of key components and seasonality. Further, the markets in the PC industry are extremely competitive and characterized by rapid and frequent price reductions. The introduction of new hardware architectures, microprocessors, peripheral equipment and operating systems within the PC industry has increased the complexity, time to market and total cost of ownership. A number of computer manufacturers, including IBM Corporation ("IBM") and Compaq, develop some of their own BIOS products to achieve compatibility with and integrate new technologies into their products. While the Company believes that price and time-to-market pressures will continue to foster a trend among its customers and potential customers to out-source system management software requirements to third parties, there can be no assurance that this trend will continue or will not reverse itself, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry Background" and "--Award Strategy." The Company's software to date has been primarily based on central processing units ("CPUs") designed by or compatible with those of Intel and operating system software designed by Microsoft. If the market for Intel and Intel- compatible CPUs with x86 architecture is materially diminished or if another CPU, such as Motorola's PowerPC, achieves a high degree of success, demand for the Company's current software would be reduced. In addition, most of the Company's software has been installed on computers using Microsoft's MS/DOS or Windows operating systems. If Microsoft's operating systems cease to be the dominant operating systems for the PC industry, or if PC manufacturers use other operating systems, which are not compatible with MS/DOS or Windows, the Company could experience increased product development costs and/or diminished revenues. Concentration of Revenues from Desktop BIOS The Company depends on sales of desktop BIOS for a substantial majority of its revenues. The Company has not generated substantial revenues from the sale of other products to date, including sales of mobile PC products. If sales of the Company's desktop BIOS decline for any reason, or if the average price of desktop BIOS declines as the trend toward "Segment Zero" continues, the Company's business, financial condition and results of operations would be adversely affected unless the Company is able to replace those sales with increased sales of other products. Sales of desktop BIOS could decline for a number of reasons, including a shift in the market for PCs away from desktop PCs in favor of mobile PCs and a delay in expected new hardware and software technologies from Intel and Microsoft. Competition from System Management Software Companies and Other Participants, including Microsoft and Intel, in the PC Industry The markets for the Company's software are highly competitive. The Company faces competition primarily from other system management software companies, including American Megatrends, Inc. ("AMI"), Phoenix Technologies Ltd. ("Phoenix Technologies") and SystemSoft Corporation ("SystemSoft"), as well as in-house software development staffs of current and prospective customers. Certain of the companies with which the Company competes or may in the future compete have substantially greater financial, marketing, sales and support resources and greater brand name and technology leadership recognition than the Company. There can be no assurance that the Company will be able to develop software comparable or superior to software offered by its competitors. In addition, the PC market experiences intense price competition and the Company expects that, to 6 remain competitive, it may have to decrease unit prices on some or all of its software products. Any such decrease would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that interdependencies may develop between system management software companies and their customers, which would need to be overcome to replace an entrenched competitor. While the Company believes that such entrenchment may benefit the Company in its existing relationships with key participants in the desktop PC market, customer entrenchment may make it more difficult for the Company to displace entrenched competitors or increase market presence, particularly in the mobile PC market, where competitors may already have strong relationships with certain mobile PC manufacturers. Intel has entered into formal agreements with, and has become a significant shareholder in, Phoenix Technologies and SystemSoft. In addition, SystemSoft has entered into agreements with Microsoft, IBM and Compaq to license its PC Card software. Operating system software vendors may in the future enter the Company's primary markets as direct competitors or may incorporate enough features into their products to reduce the need for the Company's products. Microsoft includes basic PC Card software in its Windows 95 operating system and announced the inclusion of full PC Card software support in its next generation Windows 98 and Windows NT 5.0 operating systems. Microsoft's recently released Windows CE 2.0 operating system includes embedded toolkit software that incorporates system management software features and some PC Card capabilities. As software developers provide greater functionality and features, user value and performance in their products that eliminate or reduce the need for the Company's system management software, the market for the Company's products could be materially diminished. In addition, chipset manufacturers, including Intel, may increase their presence in the motherboard manufacturing market, which may have an adverse effect on the Company's OEM customers. There can be no assurance that other participants in the PC industry will not develop products and solutions that reduce the demand or obviate the need for the Company's products. See "Business --Competition." Ability to Respond to Rapid Technological Change The market for system management software is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The general trend in the PC industry is toward shorter product life cycles, resulting in rapid product and technology obsolescence. The life cycle of the Company's products is highly dependent on the life cycles of the products sold by its customers, who are primarily in the desktop PC industry. Although the Company's core products, specifically, the desktop and embedded device BIOS, PC Card software and embedded system enabling products, may have a life cycle as long as several years, specific customized adaptations of the Company's core products are generally expected to have a life cycle of six months to one year. The Company's future success will depend on its ability to enhance its core software and to develop and introduce new software that keeps pace with technological developments and evolving industry standards, as well as its ability to respond to its customers' and end-users' demand for greater features and functionality. The Company is currently developing certain technologies that it will need to remain competitive. There can be no assurance that the Company will be successful in developing such enhancements or new software, or, even if successful, that it will not experience delays in achieving such developments. Any failure or delay by the Company to develop such enhancements or new software or the failure of its software to achieve market acceptance would adversely affect the Company's business, financial condition and results of operations. In addition, there can be no assurance that products or technologies developed by others will not render the Company's software or technologies non-competitive or obsolete. See "Business --Industry Background" and "--Product Development." Dependence on Key Customer Relationships; Concentration of Credit Risk The Company believes that its success to date has been largely due to its relationship with participants in the desktop PC industry, particularly OEMs in the desktop PC market. The Company works closely with its customers to provide quick response to their product design needs and assists them in evaluating new technological developments as they affect future products and enhancements to be sold by the Company's customers. The loss of any one of these strategic relationships or any other significant customer in the PC industry could adversely affect the Company's product development efforts, business, financial condition and results of operations. The Company's customer base consists primarily of motherboard manufacturers and OEMs in the desktop PC market, and as a result the Company maintains individually significant receivable balances from these customers. If 7 these customers fail to satisfy their payment obligations, the Company's business, financial condition and results of operations would be adversely affected. Uncertain Acceptance in New and Developing Markets The Company's future success is dependent on customer acceptance of new products and penetration of markets outside the desktop PC market. There can be no assurance that the Company will be able to expand its products and technologies into the mobile PC, embedded device and network computing and Internet markets or that the Company will be able to increase its market presence in the desktop PC market. Expansion of the Company's software and technology into the mobile PC market will depend primarily on the Company's ability to replace entrenched competitors. Penetration of markets outside the desktop PC market, such as the embedded device market, will depend upon the development and availability of system management software providing the necessary functionality and customer acceptance of such new technology. There can be no assurance that the Company will be able to develop or obtain from third parties the necessary software and technology to penetrate these markets, or that, if such software and technology are developed by the Company or obtained from third parties through licensing, which may include payments of license fees or royalties in advance, the Company will be able to successfully distribute such products. There can be no assurance that such products will not be developed by others, rendering the Company's products non-competitive or obsolete. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of such new products, or that such products will achieve market acceptance. In addition, there can be no assurance that the introduction of Microsoft Windows CE into the embedded device and Internet appliance market will not have a material impact on the Company's new products for these markets. Any increase in the demand for the Company's embedded device products is dependent upon the increasing use and complexity of embedded computer systems in new and traditional products. No assurance can be given that this trend will continue or, even if it does, that the Company will be able to design system management software that will address the unique requirements of the embedded device market. Further, since the Company's experience and expertise are based on Intel x86 architecture, the Company's success in the embedded device market is significantly dependent on Intel's continued commitment to, and the increased presence of x86 architecture in, this market. There can be no assurance that Intel will not de-emphasize or withdraw its support of the embedded device market, or that the trend toward x86 architecture in the embedded device market will continue, any of which could result in a material adverse effect on the Company's growth strategies, financial condition and results of operations. Certain of the markets for the Company's existing and future products, such as the Internet and private internet protocol networks ("Intranet"), have only recently begun to develop and are rapidly evolving. Demand and market acceptance for recently introduced or developing products are subject to a high level of uncertainty and risk. Critical issues concerning the commercial use of the Internet remain unresolved and could adversely affect the growth of Internet use. There can be no assurance that commerce and communication over the Internet or Intranet will become widespread, or that the Company's planned products addressing the Internet and Intranet markets will become widely accepted. Because these markets for the Company's existing and developing products are new and rapidly emerging, it is difficult to predict the future growth rate, if any, and size of these markets. There can be no assurance that such markets for the Company's existing and developing products and technology will develop or that such products will be accepted. If these markets fail to develop, develop more slowly than anticipated or become saturated with competitors, or if the Company's products do not obtain customer acceptance, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business --Award Strategy." Fluctuations In Quarterly Operating Results; Seasonality The Company has experienced and expects to continue to experience fluctuations in its quarterly results of operations. The Company's revenues are affected by a number of factors, including the demand for PCs and embedded devices, timing of new product introductions, product mix, volume and timing of customer orders, activities of competitors and the ability of the Company to penetrate new markets. The Company's business is seasonal with revenues generally increasing in the fourth quarter as the result of increased PC shipments during the holiday season. Consequently, during the three quarters ending in March, June and September, the Company has historically not been as profitable as in the quarter ending in December. In addition, the Company's profits have historically decreased in the first quarter of each year as compared with the fourth quarter of the previous year. The 8 Company generally ships orders as they are received and, as a result, has little or no backlog. Quarterly revenues and results of operations therefore depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Because the Company's staffing and other operating expenses are based on anticipated revenues, delays in the receipt of orders can cause significant variations in results of operations from quarter to quarter. The Company also may choose to reduce prices, increase spending in response to competition or pursue new market opportunities, each of which decisions may adversely affect the Company's business, financial condition and results of operations. Therefore, the Company believes that period-to-period comparisons of its revenues and operating results are not necessarily meaningful and should not be relied upon as indicators of future performance. Due to all of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. Regardless of the general outlook for the Company's business, the announcement of quarterly results of operations below analyst and investor expectations is likely to result in a decline in the trading price of the Company's Common Stock. Variations in Operating Results The revenue growth rates experienced by the Company to date may not be indicative of future growth rates and there can be no assurance that the Company will remain profitable in the future. Future results of operations may fluctuate significantly based on numerous factors including the demand for PCs and embedded devices, the timing of new product introductions, product mix, volume and timing of customer orders, activities of competitors and the ability of the Company to penetrate new markets. The volume and timing of new contracts and delays in the achievement of milestones could have a significant impact on operating results for a particular quarter. In addition, the delay of Windows 98 by Microsoft could slow the growth of the PC market until such time as that product is released. Dependence on Key Personnel; Ability to Attract and Retain Key Technical Employees The Company's success to date has depended to a significant extent upon a number of key management and technical employees. The loss of services of one or more of these key employees, particularly George C. Huang, the Company's Chairman of the Board, President and Chief Executive Officer; and Lyon T. Lin, General Manager, Taiwan and President, Award Software Hong Kong Limited, Taiwan Branch, could have a material adverse effect on the Company's business, financial condition and results of operations. Except for two employees in the U.S. and all employees in Germany, none of the Company's employees is party to an employment agreement with the Company. The Company believes that its future success will also depend in large part upon its ability to attract and retain highly skilled technical, management and sales and marketing personnel. Moreover, because the development of the Company's software requires knowledge of computer hardware, operating system software, system management software and application software, key technical personnel must be proficient in a number of disciplines. Competition for such technical personnel is intense, and the failure of the Company to hire and retain talented technical personnel or the loss of one or more key employees could have an adverse effect on the Company's business, financial condition and results of operations. Future growth, if any, of the Company will require additional engineering, sales and marketing, and financial and administrative personnel to expand customer services and support and to expand operational and financial systems. There can be no assurance that the Company will be able to attract and retain the necessary personnel to accomplish its growth strategies or that it will not experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion. If the Company's management is unable to manage growth effectively, the Company's business, financial condition and results of operations could be adversely affected. Management of Growth The growth of the Company's business and, in particular, the Company's customer base, has placed, and is expected to continue to place, a strain on the Company's management systems and resources. The Company's ability to compete effectively and manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, and to expand, train and manage its work force. There can be no assurance that the Company will be able to do so successfully, and the failure to do so would have a material adverse effect upon the Company's business, financial condition and results 9 of operations. The Company's success will depend to a significant degree on the ability of its executive officers and other members of its senior management, none of whom has any prior experience managing public companies in their current roles, to manage future growth, if any. International Operations; Currency Fluctuations; International Unrest The Company operates on a multinational basis, and a significant portion of its business is conducted in currencies other than the U.S. Dollar. As a result, the Company is subject to various risks, including exposure to currency fluctuations, greater difficulty in administering its global business, multiple regulatory requirements and other risks associated with international sales, such as import and export licenses, political and economic instability, overlapping or differing tax structures, trade restrictions, changes in tariff rates, different legal regimes, difficulty in protecting intellectual property, enforcing agreements and collecting accounts receivable. During the year ended December 31, 1997, approximately 41% and 3% of the Company's revenues were denominated in New Taiwan Dollars and German Marks, respectively. The Company's revenues denominated in Japanese Yen were immaterial during the year ended December 31, 1997. While the impact of foreign exchange rate movements have not had a material impact on the Company's financial statements, there can be no assurance that fluctuation in foreign currency exchange rates will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not currently engage in foreign currency hedging transactions. There can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company operates in Taiwan, Hong Kong, Japan, and Germany. Its business, financial condition or results of operations could be adversely affected by factors associated with international operations such as changes in foreign currency exchange rates, uncertainties relative to regional economic circumstances, political instability in emerging markets, and difficulties in staffing and managing foreign operations, as well as by other risks associated with international activities. In particular, the recent currency devaluations in South East Asia and the general downturn of the economies in Asia, including Japan, could materially adversely affect the Company's business, financial condition or results of operations. As a result of such economic instability, Dataquest, Inc., has revised downward its forecasts of demand for PCs in the region. Any such reduction in demand for PCs would adversely affect the Company's business, financial condition or results of operation. See "Dependence on the Underlying PC Industry; Dependence on Current PC Industry Standards." Award Software Hong Kong Limited, the company's wholly owned subsidiary, is incorporated under the laws of Hong Kong ("Award Hong Kong"). Substantially all of the Company's Asian desktop motherboard and OEM development and design facilities are operated through Award Hong Kong's branch office located in Taipei, Taiwan. These operations could be severely affected by national or regional political instability in China, including instability which may occur in connection with a change in leadership in China, change of control of Hong Kong from the United Kingdom to China, by evolving interpretation and enforcement of legal standards, by conflicts, embargoes, increased tensions or escalation of hostilities between China and Taiwan and by other trade customs and practices that are dissimilar to those in the United States. Interpretation and enforcement of China's laws and regulations continue to evolve and the Company expects that differences in interpretation and enforcement will continue in the foreseeable future. Intellectual Property and Proprietary Rights The Company's success depends in significant part on the development, maintenance and protection of its intellectual property. The Company regards all of its software as proprietary and attempts to protect it with a combination of patents, copyrights, trademarks and trade secrets, employee and third-party nondisclosure agreements and other methods of protection. Despite these precautions and the protection of copyright laws, it may be possible for unauthorized third parties to copy the Company's software or to reverse engineer or obtain and use information that the Company regards as proprietary. The Company currently holds a patent in the U.S. for one invention and a patent abroad for one invention which is jointly owned with a third party. The Company has patent applications pending in the U.S. and/or abroad on seven inventions, two of which are owned jointly with a third party. However, the Company does not generally rely on patents to protect its products. The Company licenses its object and source code under written license agreements. Certain provisions of such licenses, including provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed programs, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign jurisdictions, including 10 Taiwan, do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the protections put in place by the Company will be adequate. Significant and protracted litigation may be necessary to protect the Company's intellectual property to determine the scope of the proprietary rights of others or to defend against claims of infringement. Moreover, although the Company is not currently involved in any litigation with respect to intellectual property rights, in the past there have been allegations that certain portions of the Company's core BIOS infringed on a third party's copyrights. In response, the Company rewrote certain software routines in a "clean room" procedure and upgraded its customers to the new version of such software routines to avoid any further allegations of infringement. The Company believes that its software does not presently infringe the copyrights of any third parties. However, there can be no assurance that other parties will not make allegations of infringement in the future. Such assertions could require the Company to discontinue the use of certain software codes or processes, to cease the manufacture, use and sale of infringing products, to incur significant litigation costs and expenses and to develop non-infringing technology or to obtain licenses to the alleged infringing technology. Although the Company has been able to acquire licenses from third parties in the past, there can be no assurance that the Company would be able to develop alternative technologies or to obtain such licenses or, if a license were obtainable, that the terms would be commercially acceptable to the Company in the event such assertions are made in the future. Volatile Market for Stock The market for the Company's stock is highly volatile. The trading price of the Company's Common Stock has been and will continue to be subject to fluctuations in response to financial condition and results of operations, announcements of technological innovations or new products by the Company and its competitors, changes in the Company's or its competitors' product mix or product direction, changes in the Company's revenue mix and revenue growth rates, changes in expectations of growth for the PC industry, as well as other events or factors which the Company may not be able to influence or control. Statements or changes in opinions, ratings or earnings estimates made by brokerage firms and industry analysts relating to the market in which the Company does business, companies with which the Company competes or relating to the Company specifically could have an immediate and adverse effect on the market price of the Company's stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market price for many high-technology companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. PRODUCTS--SYSTEM MANAGEMENT AND ENABLING SOFTWARE Personal Computer Software Products Award System BIOS The Company's Award System BIOS, or AwardBIOS, consists of core software code that can be combined with additional software modules to add specific functions and features, including Plug and Play, PCI, APM, USB and DMI. The Company integrates the core software code with some or all of these software modules to create a product that meets the needs of its three principal markets: desktop PCs, embedded devices and mobile PCs. To date, the majority of the Company's software license fees have been derived from sales in the desktop PC market. Desktop BIOS integrates the core software code with modules that support the following technological advancements: . Plug and Play permits the BIOS and operating system software to automatically recognize and configure PC hardware and peripherals, such as printers, network cards and multimedia accessories. A variation of this technology, known as "Hot" Plug and Play, allows for the installation, recognition and removal of peripherals while power is on. 11 . PCI was developed by a consortium led by Intel and provides an automatically configured interface between high-speed peripheral components and PC systems. . APM reduces power consumption by continuously monitoring system activity, sensing idle time and powering down or powering off components. . DMI is an industry standard that allows the desktop configuration data to be easily accessed locally or over a network. This software is capable of detecting and storing configuration information from devices and systems that comply with the industry standard Desktop Management Task Force specification. . USB is a new Plug and Play interface designed to provide an easy connection of slow- and medium-speed peripherals to a PC by supplying a uniform connector to make installing a peripheral as simple as plugging in a telephone. Mobile PC BIOS is a customized BIOS solution for use in notebook and other portable PCs. It integrates the core software code with modules that support Plug and Play, PCI, APM, DMI and USB. In addition, this new product supports the hardware associated with mobile PCs, such as chipsets and keyboard controllers, as well as other advanced technologies. For example, "hot docking" allows users to connect to and disconnect from their mobile PCs to desktop docking stations without turning off their machines. The Company has also developed smart battery support that ensures compatibility and monitors diagnostic information for the advanced batteries found in mobile PCs. Remote Management Software Award Preboot Manager, and its companion product, Award Preboot Agent, is a patent-pending solution developed by the Company that allows technical support personnel to remotely access a disabled PC via a modem or network connection. The Company believes that this software is unique because it operates without a functioning hard drive or operating system and thus can solve a number of system problems. Award Preboot Manager allows an expert system or technical support person to run BIOS setup, see error messages, download files and download diagnostic software. Consequently, PC manufacturers will be able to efficiently diagnose and potentially repair systems without the usual user telephone relay or site visit. The Award Preboot Manager and Award Preboot Agent solution benefits PC system manufacturers as well as third-party service providers because it can reduce both the time and cost expended to diagnose and repair the system. PC Card Software The Personal Computer Memory Card International Association ("PCMCIA") was formed to enact standards for credit card size computer memory and peripheral add-on products called PC Cards. Award supplies software to enable PCs and other electronic devices to recognize, install, configure and operate peripheral devices that comply with PCMCIA standards. Award's PC Card software, CardWare, provides a number of benefits over traditional PC Card software, including the efficient use of system memory, greater portability, ease of maintenance and a more modular design. BIOS Upgrade Solutions Computers manufactured a few years ago often have enough computing power to meet the users' needs, but may lack support for certain technologies, such as large, removable media, which did not exist when the PC was built. Award provides BIOS upgrades for PCs based on the Company's and its competitors' BIOS, allowing the end-users to extend the useful life of their PC systems. PC Diagnostics Software 12 With the mounting complexity of today's PCs, the ability to distinguish between user mistakes ("operator errors") and actual system failures becomes more important. The Company's PC DIAG and POSTcard offer standalone software and hardware diagnostic solutions, respectively, allowing MIS personnel and PC end-users alike to quickly determine the causes of their system failures. Embedded Systems Software Products Embedded System BIOS AwardBIOS for Embedded Systems integrates the core software code with selected modules and additional custom features. Award works closely with embedded device customers to incorporate BIOS into design intensive embedded hardware. Unlike PC products, which typically experience short product cycles, a typical embedded device solution has a relatively long product life, with most designs lasting through the life cycles of the products into which they are integrated. Win32-Compatible Software for Embedded Devices The Win32 application program interface ("API") standard has become the computer industry's most popular programming environment. As such, large numbers of application programs and software development tools are available for Microsoft Windows software end-users and developers. The Company's APIAccess product enables developers of embedded systems to use many of the same software development tools that they currently use for developing PC applications, and then to compile, link and run these applications on non-Windows-based, RISC or x86 systems, reducing time to market and development costs. Internet-Enabling Software for Embedded Devices To reduce time to market, manufacturers of Internet-enabled embedded devices, such as Internet telephones, set-top boxes and intelligent terminals, require off-the-shelf, integrated solutions combining the operating system, an Internet browser and other connectivity or productivity applications. The traditional approach is to license a RTOS and a RTOS-specific version of a browser, requiring the manufacturer to develop other supporting applications using the RTOS vendor's development tools. The Company's WWWAccess product brings the Win32 paradigm to these classes of embedded devices, providing a complete Internet Appliance solution while also enabling the manufacturer to develop or select Windows-based commercial applications, such as email tools or connectivity solutions for inclusion on their devices. USB-Enabling Software USB is the emerging standard for PC connectivity of slow- and medium-speed peripherals such as keyboards, mice, printers and scanners. Windows 98, currently scheduled to be released in mid-1998, will be the first operating system to support USB, although PC systems have had USB hardware connectivity built-in since 1997. The Company's USBAccess product enables non-Windows operating systems, including RTOS, to support the same USB standard and the same PC peripherals available on the market. CUSTOMERS The Company services over 200 customers worldwide, including designers and manufacturers of desktop PC motherboards, PC systems and notebooks, hardware components and embedded devices. Current customers include Compaq, LG Electronics, Micron, Motorola, NEC and Packard Bell. From time to time, the Company has worked with selected customers to co-develop certain products and expects to pursue additional co-development opportunities in the future. For the years ended December 31, 1997, 1996 and 1995, Vobis Microcomputer AG ("Vobis") accounted for approximately 5%, 11% and 13% of the Company's revenues, respectively. 13 Sales and Marketing The Company markets its products directly and through independent sales representatives. In North America, Award sales managers operate from the Company's headquarters in Mountain View, California and North Andover, Massachusetts. In Asia, the Company operates from its office in Taipei, Taiwan, Hong Kong, China; Yokohama, Japan, and through an independent sales representative in Korea. In Europe, the Company markets through its office in Munich, Germany. The Company supports its sales efforts with marketing programs that include exhibitions at trade shows, participation in industry associations and events, attendance at technical seminars and designation as hardware reference platform designs by processor and chipset manufacturers. The Company believes that customer service and technical support are important competitive factors in the system management software market. Accordingly, the Company provides local service and support for its customers in the U.S., Asia and Europe. In addition, the Company provides worldwide technical support from the U.S. for end-users of its products through dial-in telephone services, facsimile, e-mail and the Company's web site on the World Wide Web. Information contained in the Company's home page shall not be deemed to be a part of this Form 10-K. Award believes that close contact with its customers not only improves its customers' level of satisfaction, but also provides early access to its customers' new product plans and requirements. PRODUCT DEVELOPMENT Award's research and development efforts consist of new product development, product enhancements and product customization for individual customers. The Company develops new products in response to emerging PC standards such as IEEE- 1394 and I2O, and to address perceived opportunities in related markets such as mobile computing, remote diagnostics and embedded systems. Award's engineers actively participate in a number of relevant industry standard groups, such as the I2O Special Interest Group, the Personal Computer Memory Card International Association, the Desktop Management Task Force, the Peripheral Component Interconnect Special Interest Group and the IEEE-1394 Trade Association, which help guide the Company's product planning. The Company's software is developed in a modular fashion to facilitate changes and updates as needed to meet customer requirements and rapid development of new products. An important function of the Company's engineering group is to perform the customization of the BIOS for each new motherboard and the customization of other enabling software for new embedded designs. The Company works closely with the customer's engineers to ensure that the final motherboard design and the Award BIOS, or the customers' embedded systems and the Company's other enabling software, are developed efficiently. The turnaround time for customizing a BIOS for a customer can be as short as one week. Customization of embedded products can take longer, depending on the Company's product in question. Customization of BIOS or other enabling software can be done in the U.S., Taiwan, Japan or Germany, depending on resource availability and customer needs. Because the development of the Company's software products requires knowledge of computer hardware, operating system software, system management software and application software, key technical personnel must be proficient in a number of disciplines. Competition to attract and retain such personnel is intense, and the failure of the Company to hire and retain talented technical personnel or the loss of one or more key technical employees could have an adverse effect on the Company's business, financial condition and results of operations. See "Business Risks --Dependence on Key Personnel; Ability to Attract and Retain Key Technical Employees." COMPETITION The markets for the Company's products are highly competitive. The principal competitive factors affecting the markets for the Company's software include technological excellence, timeliness of product introduction, responsiveness to customer requirements, customer relationships, industry relationships, engineering services, ease of use, ease of integration and price. Due to its technological competence, large customer base in the desktop PC market, and strong relationships with industry participants, the Company believes it competes favorably with respect to all of these factors. Further, part of the Company's strategy is to develop innovative software product solutions to 14 address the emerging trends in the PC and embedded device markets. There can be no assurance that such products or technologies will be successfully developed by the Company or that such products will not be developed by others, rendering the Company's software or technologies non-competitive or obsolete. Failure to successfully implement this strategy could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business--Industry Background" and "--Product Development." The Company faces competition primarily from other PC and embedded systems management software companies, including AMI, Phoenix Technologies and SystemSoft, and also from the in-house software development staffs of current and prospective customers. Certain of the companies with which the Company competes or may in the future compete have substantially greater financial, marketing, sales and support resources and greater brand name and technological leadership recognition than the Company. There can be no assurance that the Company will be able to develop software comparable or superior to software offered by its competitors. In addition, the PC market experiences intense price competition and the Company expects that, to remain competitive, it may have to decrease unit prices on some or all of its software products. Any such decrease would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that interdependencies may develop between system management software companies and their customers, which would need to be overcome to replace an entrenched competitor. While Award believes such entrenchment may benefit the Company in its existing relationships with key participants in the PC market, especially with its customers in Taiwan, customer entrenchment may make it more difficult for the Company to displace competitors or increase market presence, particularly in the mobile PC market, where competitors may have strong relationships with certain mobile PC manufacturers. Intel, for example, has entered into formal agreements with, and become a significant shareholder in, Phoenix Technologies and SystemSoft. In addition, SystemSoft has entered into agreements with Microsoft, IBM and Compaq to license its PC Card software. The Company believes that competitive pressures in the system management software market may increase as operating software system software vendors incorporate more system management software into their products. As software manufacturers provide greater functionality and features, user value and performance to their products that eliminate or encroach upon the need for the Company's software products, the market for such products could be materially diminished. Microsoft's recently released Windows CE operating system includes embedded toolkit software that incorporates system management software features. Microsoft includes basic PC Card software in its Windows 95 operating system and has announced the inclusion of full PC Card software support in its next generation Windows 98 and Windows NT 5.0 operating systems. The Company has developed PC Card software for Microsoft's Windows NT. If end-users of Microsoft's version of the basic PC Card and Plug and Play software included in its operating systems perceive such software as being adequate for their computing needs, Award's revenues from PC Card software would be adversely affected. While the Company believes that the trend in the PC industry toward greater complexity will continue and that the Company's products offer a technologically proven, timely and cost-effective solution to this need, there can be no assurance that other participants in the PC industry will not develop products and solutions that encroach upon the demand, or obviate the need, for the Company's products. See "Business Risks--Dependence on Key Customer Relationships; Concentration of Credit Risk." INTELLECTUAL PROPERTY The Company's success depends in significant part on the development, maintenance and protection of its intellectual property. The Company regards all of its software as proprietary and attempts to protect it with a combination of patents, copyrights, trademarks and trade secrets, employee and third-party nondisclosure agreements and other methods of protection. Despite these precautions and the protection of copyright laws, it may be possible for unauthorized third parties to copy the Company's software or to reverse engineer or obtain and use information that the Company regards as proprietary. The Company currently holds a patent in the U.S. for one invention and a patent abroad for one invention which is jointly owned with a third party. The Company has patent applications pending in the U.S. and/or abroad on seven inventions, two of which are owned jointly with a third party. However, the Company does not generally rely on patents to protect its products. The Company licenses its object and source code under written license agreements. Certain provisions of such licenses, including provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed programs, may be 15 unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign jurisdictions, including Taiwan, do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the protections put in place by the Company will be adequate. Significant and protracted litigation may be necessary to protect the Company's intellectual property rights to determine the scope of the proprietary rights of others or to defend against claims of infringement. Moreover, although the Company is not currently involved in any litigation with respect to intellectual property rights, in the past there have been allegations that certain portions of the Company's core BIOS infringed on a third party's copyrights. In response, the Company rewrote certain software routines in a "clean room" procedure and upgraded its customers to the new version of such software routines to avoid any further allegations of infringement. The Company believes that its software does not presently infringe the copyrights of any third parties. However, there can be no assurance that other parties will not make allegations of infringement in the future. Such assertions could require the Company to discontinue the use of certain software routines, to cease the manufacture, use and sale of infringing products, to incur significant litigation costs and expenses and to develop non infringing technology or to obtain licenses to the alleged infringing technology. Although the Company has been able to acquire licenses from third parties in the past, there can be no assurance that the Company would be able to develop alternative technologies or to obtain such licenses or, if a license is obtainable, that the terms would be commercially acceptable to the Company in the event such assertions are made in the future. EMPLOYEES As of December 31, 1997, the Company had 163 full-time employees, of whom 82 are engaged in engineering and technical positions, 49 in sales and marketing, and 32 in finance, operations and administration. Except for two employees in the U.S. and all employees in Germany, none of the Company's employees is party to an employment agreement with the Company. No employee of the Company is represented by a labor union or is subject to a collective bargaining agreement. The Company has never experienced a work stoppage due to labor difficulties and believes that its employee relations are good. EXECUTIVE OFFICERS Management The executive officers of the Company and their ages as of December 31, 1997 are as follows: 16 NAME AGE Position ---- --- -------- George C. Huang........... 56 Chairman of the Board, President, Chief Executive Officer and Director Reza Afghan............... 37 Vice President and General Manager, System Software; President, Award Software Japan KK Kevin J. Berry............ 48 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Maurice W. Bizzarri....... 42 Vice President, Research and Development Laurent K. Gharda........ 39 Vice President, Marketing Lyon T. Lin.............. 45 General Manager, Taiwan; President, Award Software Hong Kong Limited Pierre A. Narath......... 34 Vice President and President, Unicore Software, Inc. Ann P. Shen.............. 57 Senior Vice President, Strategic Business Vice President and General Manager, David J. Wippich......... 33 Internet and Embedded Products GEORGE C. HUANG has served as Chairman of the Board of Directors, President, Chief Executive Officer and Director since July 1993. From January 1984 to the present, Dr. Huang has served as Chairman of the Board of Directors of GCH Systems, Inc. ("GCH"), a company that develops and markets embedded controllers, application specific integrated circuits and PC systems; and from January 1984 until November 1994, he also served as Chief Executive Officer of GCH. From February 1987 to the present Dr. Huang has served as a Director of GCH-Sun Systems Company Ltd. ("GSS"), a subsidiary of GCH. From January 1990 to May 1996, Dr. Huang served as a Director of Fidelity Venture Capital Corporation ("FVCC"), a shareholder of GCH and the Company. Dr. Huang received a B.S. from National Taiwan University, an M.S. from Washington State University, and a Ph.D. in Electrical Engineering from the University of Washington. REZA AFGHAN has served as Vice President and General Manager of System Software since January 1998, and President of Award Software Japan KK since March 1997. From January 1997 to January 1998, Mr. Afghan served as Vice President, Mobile Products. From January 1994 to December 1997, he served as Vice President, Operations. From November 1987 to January 1994, Mr. Afghan served as Vice President, Sales and Operations of GCH. He received his B.S. in Electrical Engineering and Mathematics from Oregon State University. KEVIN J. BERRY has served as Vice President, Finance, Chief Financial Officer and Treasurer since June 1995 and Secretary since October 1995. From December 1988 to May 1995, Mr. Berry served as Vice President, Finance for the CMX and Aurora divisions of Chyron Corporation, a developer and manufacturer of software and systems for the video marketplace. Mr. Berry received a B.S. in Finance and an M.B.A. from New York University. MAURICE W. BIZZARRI has served as Vice President, Research and Development since January 1998. From July 1995 to January 1998, Mr. Bizzarri served as Vice President, Engineering. From June 1992 to July 1995, he consulted in the systems software industry. From November 1990 to June 1992, he served as Vice President, Research and Development of Connective Strategies, Inc., a hardware/software company. LAURENT K. GHARDA has served as Vice President, Marketing since February 1997. From July 1996 to February 1997, Mr. Gharda served as Vice President, Marketing and Sales of Willows Software, a developer of 17 software used to migrate Windows applications to alternative platforms. In April 1995, he founded and served as President of QualSoft Corp., a provider of UNIX and Windows software development and migration tools, until it was merged with Willows Software. From 1993 to April 1995, Mr. Gharda served as Vice President, Sales of Veritas Software, a developer of storage management technology. Mr. Gharda received a B.A. in Computer Science from the University of California at Berkeley. LYON T. LIN has served as General Manager, Taiwan, and President, Award Software Hong Kong Limited, since July 1993. From January 1984 to June 1993, Mr. Lin served as Vice President of GCH. Mr. Lin is also a director of GSS. Mr. Lin received a B.S. in Electrical Engineering from National Chiao-Tung University and an M.S. in Electrical Engineering from Santa Clara University. Mr. Lin is the brother-in-law of George C. Huang. PIERRE A. NARATH has served as Vice President, and President, Unicore Software, Inc., since May 1997. From February 1990 to May 1997, Mr. Narath founded and served as President of Unicore Software, Inc. ANN P. SHEN has served as Senior Vice President, Strategic Business since January 1997. From December 1994 to January 1997, Dr. Shen served as Vice President, Sales and Marketing. From June 1994 to December 1994, she served as Vice President, Engineering and Marketing and from August 1993 to June 1994 she served as Vice President, Engineering. Dr. Shen served as Vice President, Engineering at GCH from October 1992 to June 1994. From March 1990 to August 1992, Dr. Shen served as Vice President, Engineering and Manufacturing of OPTA, a digital camera and high-end graphic/video card company. Dr. Shen received a B.S. in Physics from National Taiwan University, an M.S. in Physics from the University of California, Los Angeles and a Ph.D. in Solid State Physics from New York Polytechnical University. DAVID J. WIPPICH has served as Vice President and General Manager, Internet and Embedded Products since January 1997. From November 1995 to January 1997, Mr. Wippich served as Director of Sales, North America. From December 1994 to November 1995, he served as Chief Operating Officer and Executive Vice President of TEI Contract Manufacturing Services, a contract manufacturing company. From September 1992 to December 1994, Mr. Wippich served as Director of Marketing and Sales. Mr. Wippich received a B.S. in Business from the University of Phoenix. ITEM 2. PROPERTIES The Company's headquarters are located in Mountain View, California. The Company subleases approximately 36,800 square feet in this facility renewable on a yearly basis after December 31, 1996. The Company also leases office space in Irvine, California; North Andover, Massachusetts; Taipei, Taiwan; Hong Kong, China; Yokohama, Japan; and Munich, Germany. These offices provide sales and technical support to its customers in Southern California, Canada and the Eastern U.S., Asia, Japan and Europe, respectively. The Company believes that its facilities are adequate to support operations for the next twelve months. In the event that additional space is needed, the Company believes that suitable additional or alternative space adequate to serve its needs will be readily available on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The Company is not currently engaged in any material litigation or legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 1997. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK MATTERS Price Range of Common Stock. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "AWRD." Public trading of the Common Stock commenced on October 25, 1996. Prior to that, there was no public market for the Common Stock. The following table sets forth for the period indicated the high and low closing price per share of the common stock on the Nasdaq National Market. FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW Fourth Quarter ended December 31, 1996 $ 9.88 $ 6.50 FISCAL YEAR ENDED HIGH LOW DECEMBER 31, 1997 First Quarter ended March 31, 1997 $18.13 $ 9.38 Second Quarter ended June 30, 1997 $14.75 $10.25 Third Quarter ended September 30, 1997 $13.00 $ 9.13 Fourth Quarter ended December 31, 1997 $13.50 $ 6.88 Dividend Policy. The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Number of Holders. On March 17, 1998, there were 88 holders of record of the Company's Common Stock. Recent Sales of Unregistered Securities. In May 1997, the Company acquired all of the outstanding stock of Unicore Software, Inc. ("Unicore") through the merger of Unicore with and into a wholly owned subsidiary of the Company (the "Unicore Merger") pursuant to an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated as of May 29, 1997, by and among the Company, its wholly owned subsidiary, Unicore and Pierre A. Narath ("Narath"). Pursuant to the terms of the Merger Agreement, the Company issued to Narath, the selling shareholder, 218,571 shares of the Company's Common Stock. The sale and issuance of securities in the transaction described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under the Securities Act. The purchaser represented his intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transaction. The purchaser either received adequate information about the Company or had access, through employment or other relationships, to such information. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth, for the periods indicated, certain selected consolidated financial data. This data should be read in conjunction with the audited consolidated financial statements and notes related thereto included elsewhere in this Form 10-K. 19
THE COMPANY PREDECESSOR ---------- ----------- YEAR ENDED SIX MONTHS SIX MONTHS DECEMBER ENDED ENDED 31, DECEMBER 31, JULY 1, (In thousands, except per share data) 1997 1996 1995 1994 1993 1993 ------- ------ ------ ------- ------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues Software license fees..................... $19,502 $11,721 $6,989 $5,585 $ 1,903 $ 1,763 Engineering services...................... 2,366 472 239 161 107 47 Related parties........................... 1,499 1,878 1,902 972 50 -- ------- ------- ------ ------ ------- ------- Total revenues............................. $23,367 $14,071 $9,130 $6,718 $ 2,060 $ 1,810 ======= ======= ====== ====== ======= ======= Income (loss) from operations.............. $ 5,641 $ 3,961 $1,861 $2,057 $(1,125) $ (628) ======= ======= ====== ====== ======= ======= Net income (loss).......................... $ 4,680 $ 2,885 $1,165 $1,258 $(1,178) $ (655) ======= ======= ====== ====== ======= ======= Basic net income (loss) per share(1)....... $0.68 $0.54 $0.28 $0.33 $(0.31) ======= ======= ====== ====== ======= 6,867 5,335 4,136 3,842 3,842 Weighted average common shares............. $0.61 $0.47 $0.25 $0.33 $(0.31) ======= ======= ====== ====== ======= Diluted net income (loss) per share(1) Weighted average number of common and common equivalent shares............... 7,705 6,095 4,650 3,842 3,842
THE COMPANY PREDECESSOR DECEMBER 31, JULY 1, ------------- ------- (Dollars in thousands) 1997 1996 1995 1994 1993 1993 ------- ------- ------ ------ ------- ------- ........................................ CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.................. $24,631 $23,248 $6,498 $1,374 $ 280 $ 156 Working capital (deficit).................. 27,416 23,792 6,642 1,173 (1,113) (1,189) Total assets............................... 34,381 28,410 9,083 3,119 1,807 1,088 Shareholder's equity (deficit)............. 29,812 25,091 7,169 1,695 (468) (1,099)
_______ (1) For an explanation of the number of shares used to compute basic net income (loss) per share and diluted net income (loss) per share, see Note 2 of Notes to Consolidated Financial Statements. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21A of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Business --Business Risks" and elsewhere in this Form 10-K and in other documents on file with the Securities and Exchange Commission. OVERVIEW The Company's predecessor, Award Software, Inc. (the "Predecessor"), was founded in 1983 to design, develop and market a suite of Basic Input/Output System software ("BIOS") for the system management software market. During the mid- and late-1980s, the Company established a significant market presence by providing BIOS for the 286/386 PC markets and achieved early market success as a BIOS supplier to the Taiwanese motherboard market. The Company was acquired in July 1993 by GCH Systems, Inc. ("GCH"), an independent developer of microcomputers and application-specific integrated circuits, and operated as a wholly owned subsidiary. On October 25, 1996, the Company consummated the initial offering of its Common Stock to the public. The Company markets and licenses its products and services worldwide and is a leading provider of system management software to the PC motherboard market in Asia, which accounts for over 60% of worldwide motherboard production. The Company has historically generated the substantial majority of its revenues from the licensing of desktop system management software, primarily to motherboard manufacturers and PC OEMs. Sales from international operations, particularly to customers in Taiwan, comprise a substantial portion of the Company's total revenues. During the three year periods ended December 31, 1997, 1996 and 1995, revenues from international operations represented 55%, 71% and 68% of the Company's total revenues, respectively. Software license fees are recognized upon delivery of the product, fulfillment of acceptance terms, if any, and satisfaction of significant support obligations, if any. Engineering services revenues generally consist of amounts charged for customization of the software prior to delivery and are generally recognized as the services are performed. Related parties revenues include software license fees and non- recurring engineering services provided to a Common Stock shareholder and a Common Stock warrant holder. The Company believes that its business is subject to seasonal fluctuations, with shipments in the fourth calendar quarter being somewhat higher due to higher levels of PC shipments in that time period. The Company has an established international presence and consequently generates a significant portion of its revenues and expenses in currencies other than the U.S. Dollar, primarily the New Taiwan Dollar and the German Mark. As a result, any appreciation or depreciation in the U.S. Dollar against these currencies could adversely affect the Company's business, financial condition, results of operations and cashflows. In addition, foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. During the years ended December 31, 1997, 1996 and 1995, fluctuations in the value of currencies in which the Company conducts its business relative to the U.S. Dollar were not significant on an annual basis. See "Business Risks--International Operations; Currency Fluctuations; International Unrest." On September 10, 1997, the Company entered into a Master Original Equipment Manufacturer (OEM) Software License Agreement ("the License Agreement") with Intel to market and distribute Intel's LANDesk Client Manager software to its Taiwan customers. Products incorporating this software, coupled with or without Company products, would then be distributed throughout the world. The License Agreement is non-exclusive, royalty-bearing, and automatically renews for additional one-year terms subject to certain termination rights. Intel's software, because it is designed as a PC and network-based solution to ease both client and system administration to reduce the total cost of PC ownership, compliments the existing system management software offerings of the Company to existing and potential customers around the world. On May 30, 1997, the Company acquired all of the outstanding stock of Unicore through the Unicore Merger pursuant to the Merger Agreement, dated as of May 29, 1997, by and among the Company, its wholly owned subsidiary, Unicore and Narath. Unicore is engaged in the business of providing basic input/output software 21 upgrades for personal computers and embedded systems. Pursuant to the terms of the Merger Agreement, the Company issued to Narath, the selling shareholder, 218,571 shares of the Company's common stock. The Merger is being treated as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and is being accounted for as a pooling of interests. The terms of the Merger Agreement were determined through arm's-length negotiations between the Company and Unicore and Narath. In addition, Narath entered into an employment agreement with the Company pursuant to which Narath shall serve as a Vice President of the Company and President of Unicore, the Company's wholly owned subsidiary. On April 30, 1997, the Company entered into a memorandum of understanding with Sun and Axis Corporation ("Axis") to establish a majority-owned subsidiary, Award Software Japan KK ("Award Japan"), a joint venture corporation incorporated under the laws of Japan and based in Yokohama, Japan (the "Japan Joint Venture"). The objective of Award Japan is to market and distribute the Company's products in Japan. The Company, Sun and Axis contributed approximately $310,000, $95,000 and $95,000 for 62%, 19% and 19% ownership of Award Japan, respectively. On February 21, 1997, the Company acquired certain assets of Willows software ("Willows acquisition") for $400,000 cash, direct acquisition costs of $40,000 and the assumption of liabilities totaling $44,000. The purchase price was allocated based upon the estimated fair market value of identifiable tangible and intangible assets and liabilities assumed, including $289,000 to in-process research and development. The amount allocated to in-process research and development relates to acquired development projects that had not reached technological feasibility at the acquisition date and had no alternative future use. The Unicore Merger, Japan Joint Venture and Willows acquisition were motivated by many factors, including the desire to obtain new technologies, the desire to expand and enhance the Company's product lines and the desire to attract key personnel. The integration of such operations is typically difficult, time consuming and subject to a number of inherent risks. In the case of software development enterprises, the success of acquisitions is dependent upon the integration and retention of existing employees. There can be no assurance that key employees of an acquired enterprise will remain with the Company after an acquisition. The success of acquisitions and joint ventures will also be dependent upon the Company's ability to fully integrate the management information and accounting systems and procedures of such entities with those of the Company. The Company's management will be required to devote substantial time and attention to the integration of these businesses and to any material operational or financial problems that may occur as a result of such transactions. There can be no assurance that operational or financial problems will not occur as a result of any acquisition, business combination or joint venture. Failure to effectively integrate such businesses could have a material adverse effect on the Company's business, results of operations and financial condition. From time to time, the Company reviews, evaluates and holds discussions regarding strategic acquisition, business combination and joint venture opportunities as a way of enhancing its business and shareholder value. In connection therewith the Company's Board of Directors formed a committee authorized to evaluate such opportunities. Enhancement of the Company's business and shareholder value through strategic acquisitions, business combinations and joint ventures has a number of risks including the failure to realize anticipated benefits (such as cost savings and synergies) and issues related to product transition (such as distribution, engineering and customer support). There can be no assurance that the Company will consummate any strategic acquisition, business combination or joint venture in the future, or if consummated, that any such strategic acquisition, business combination or joint venture will ultimately be beneficial to the Company and its shareholders. As a general rule, the Company only discloses publicly such transactions upon execution of a definitive agreement. 22 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain consolidated statement of income information as a percentage of the Company's total revenues represented by each item. The Company's historical results are not necessarily indicative of results in any future period. YEAR ENDED ----------------------------- DECEMBER 31, ----------------------------- 1997 1996 1995 ------- --------- --------- (AS A PERCENTAGE OF TOTAL REVENUES) Revenues: Software license fees.......... 84% 83% 77% Engineering services........... 10 4 2 Related parties................ 6 13 21 ---- ---- ---- Total revenues............... 100 100 100 ---- ---- ---- Cost of revenues: Software license fees.......... 8 4 4 Engineering services........... 3 1 1 Related parties................ 0 2 2 ---- ---- ---- Total cost of revenues....... 11 7 7 ---- ---- ---- Gross profit..................... 89 93 93 ---- ---- ---- Operating expenses: Research and development....... 28 30 30 Sales and marketing............ 21 20 25 General and administrative..... 16 15 17 ---- ---- ---- Total operating expenses..... 65 65 72 ---- ---- ---- Income from operations........... 24 28 21 Interest expense................. -- -- -- Interest and other income, net... 5 4 1 ---- ---- ---- Income before income taxes....... 29 32 22 Provision for income taxes....... 9 12 9 ---- ---- ---- Net income....................... 20% 20% 13% ==== ==== ==== Comparison of Years Ended December 31, 1997 and December 31, 1996 Revenues. The Company's revenues increased 66% from $14.1 million in 1996 to $23.4 million in 1997. Software license fees increased 66% from $11.7 million in 1996 to $19.5 million in 1997. The increase was primarily due to higher unit shipments to new and existing motherboard customers in Taiwan and the U.S. and to embedded systems customers in the U.S. Revenues from the distribution of the Company's PC Card software accounted for 3% and 6% of the Company's total revenues in the years ended December 31, 1997 and 1996, respectively. Engineering services revenues increased from $472,000 in 1996 to $2.4 million in 1997, primarily due to higher engineering services revenues from customers in the U.S. and Japan. Related parties revenues decreased 20% from $1.9 million in 1996 to $1.5 million in 1997 primarily due to lower volume of software license fees and engineering services. Revenues from international operations were 55% and 71% of the Company's revenues in 1997 and 1996, respectively. During the year ended December 31, 1997, 41% and 3% of the Company's revenues were denominated in New Taiwan Dollars and German Marks, respectively. Fluctuations in foreign currency exchange rates did not have a material impact on total revenues in either 1997 or 1996. However, there can be no 23 assurance that future fluctuations in foreign currency exchange rates will not have a material adverse effect on the Company's future revenues, business, financial condition and results of operations. Cost of Revenues. Cost of revenues increased from $980,000, or 7% of revenues, in 1996 to $2.6 million, or 11% of revenues, in 1997. Cost of software license fees increased from $521,000 in 1996 to $1.8 million in 1997. This increase was primarily due to increased volume and higher costs of royalty fees associated with the Intel LANDesk Client Management software, which the Company began shipping in the fourth quarter. Cost of engineering services revenues increased from $131,000 in 1996 to $686,000 in 1997. This increase was primarily due to higher engineering salary and related costs. Cost of related parties revenues decreased 77% from $328,000 in 1996 to $76,000 in 1997. This decrease was primarily due to a decrease in cost of software license fees and cost of engineering services revenues from a related party product development effort. The Company anticipates that if sales of the Intel Software increase, there will be additional increases in cost of revenues. Research and Development. Research and development expenses increased 57% from $4.2 million, or 30% of revenues in 1996, to $6.6 million, or 28% of revenues, in 1997. This increase was primarily due to the growth in research and development personnel from 55 to 82 individuals during the year hired as part of the effort to develop new software products and to service new and existing customers, and a one-time charge of $289,000 for in-process research and development as a result of the Willows acquisition. The Company anticipates that it will continue to devote substantial resources to product research and development and that such expenses will continue to increase in absolute dollars. Sales and Marketing. Sales and marketing expenses increased 74% from $2.9 million, or 20% of revenues, in 1996 to $5.0 million, or 21% of revenues, in 1997. This increase was primarily due to the hiring of sales and marketing personnel and related expenses, higher sales commissions for increased revenues, increased participation in trade shows and higher professional services fees. General and Administrative. General and administrative expenses increased 73% from $2.1 million, or 15% of revenues, in 1996 to $3.6 million, or 16% of revenues, in 1997. This increase was primarily due to higher public company expenses, the hiring of general and administrative personnel and related expenses, higher professional services fees and higher facilities costs. Amortization of deferred compensation expense of $74,000 and $75,000 is included in general and administrative expense in 1997 and 1996, respectively. Interest expense. Interest expense increased from $6,000 in 1996 to $33,000 in 1997 due to a short-term borrowing under an existing loan agreement of one of the Company's subsidiaries, which credit line was terminated in the third quarter. Interest and Other Income. Interest and other income increased from $552,000 in 1996 to $1.2 million in 1997 primarily due to an increase in interest income earned on higher cash balances. Provision for Income Taxes. The Company's effective tax rate decreased from 36% in 1996 to 31% in 1997. The decrease in effective tax rate was primarily due to an increase in income taxable in Taiwan at rates lower than the applicable statutory rates in the U.S. and Germany. Comparison of Years Ended December 31, 1996 and December 31, 1995 Revenues. The Company's revenues increased 54% from $9.1 million in 1995 to $14.1 million in 1996. Software license fees increased 68% from $7.0 million in 1995 to $11.7 million in 1996. The increase was primarily due to higher unit shipments to the Company's existing Taiwanese motherboard customers, and to a lesser degree to existing U.S. customers, partially offset by a decrease in software license fees from a European customer due to weak economic conditions and a decrease in demand for PCs in the German economy. A significant customer, which accounted for 5% of total revenues and approximately 83% of revenues from distribution of the Company's PC Card software for the year ended December 31, 1996, discontinued licensing the Company's PC Card software in the second half of 1996. Accordingly, the Company does not currently expect to receive any revenues from that customer from the distribution of the Company's PC Card software in the foreseeable future. Revenues from the distribution of the Company's PC Card software accounted for 6% and 15% of the Company's total revenues in the 24 years ended December 31, 1996 and 1995, respectively. Engineering services revenues increased from $239,000 in 1995 to $472,000 in 1996. This increase was primarily due to higher engineering services revenues from customers in the U.S. Related parties revenues were unchanged at $1.9 million in 1996 and 1995. Revenues derived from international operations were 71% and 68% of the Company's revenues in 1996 and 1995, respectively. During the year ended December 31, 1996, 47% and 8% of the Company's revenues were denominated in New Taiwan Dollars and German Marks, respectively. Fluctuations in foreign currency exchange rates did not have a material impact on total revenues in 1995 or 1996. However, there can be no assurance that future fluctuations in foreign currency exchange rates will not have a material adverse effect on the Company's future revenues, business, financial condition and results of operations. Cost of Revenues. Cost of revenues increased 54% from $636,000, or 7% of revenues, in 1995 to $980,000, or 7% of revenues, in 1996. Cost of software license fees increased 35% from $387,000 in 1995 to $521,000 in 1996. This increase was primarily due to increased volume. Cost of engineering services revenues increased 205% from $43,000 in 1995 to $131,000 in 1996. This increase was primarily due to increased engineering services provided to customers. Cost of related parties revenues increased 59% from $206,000 in 1995 to $328,000 in 1996. This increase was primarily due to direct costs associated with engineering services partially offset by a decrease from cost of engineering services revenues associated with a related party product development effort. Research and Development. Research and development expenses increased 53% from $2.8 million, or 30% of revenues, in 1995 to $4.2 million, or 30% of revenues, in 1996. This increase was primarily due to the growth in research and development personnel from 45 to 55 individuals during the year. These additional personnel were hired as part of the effort to develop new software products, such as mobile BIOS and the SMSAccess product suite. The Company anticipates that it will continue to devote substantial resources to product research and development and that such expenses will continue to increase in absolute dollars. Sales and Marketing. Sales and marketing expenses increased 25% from $2.3 million, or 25% of revenues, in 1995 to $2.9 million, or 20% of revenues, in 1996. This increase was primarily due to the hiring of sales and marketing personnel and related expenses and higher sales commissions for increased revenues. General and Administrative. General and administrative expenses increased 30% from $1.6 million, or 17% of revenues, in 1995 to $2.1 million, or 15% of revenues, in 1996. The increase was primarily due to higher professional services fees and a one-time employee severance cost of $90,000 in the Company's European operations and amortization of deferred stock compensation expense. Amortization of deferred compensation expense of $75,000 and $42,000 is included in general and administrative expense in 1996 and 1995, respectively. Interest Expense. Interest expense decreased from $9,000 in 1995 to $6,000 in 1996, due to a decrease in short-term borrowings. Interest and Other Income. Interest and other income increased from $105,000 in 1995 to $552,000 in 1996, primarily due to an increase in interest income earned on higher cash balances. Provision for Income Taxes. The Company's effective tax rate decreased from 40% in 1995 to 36% in 1996. The decrease in effective tax rate was primarily due to an increase in income taxable in Taiwan at rates lower than the applicable statutory rates in the U.S. and Germany. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations primarily through the sale of equity securities and from cash generated from operations. As of December 31, 1997, the Company had cash and cash equivalents of $24.6 million and working capital of $27.4 million. Net cash provided by operating activities was $3.0 million in 1997 and was primarily due to higher net income partially offset by reductions in accrued liabilities and increases in accounts receivable and other current assets. 25 Net cash used in investing activities was $1.8 million in 1997 and was primarily due to the Company's purchase of computer hardware and software equipment, the purchase of equipment resulting from the Willows acquisition and an increase in capitalized software development costs. Net cash provided by financing activities was $255,000 in 1997 and was primarily due to proceeds from Common Stock issuances as a result of purchases of stock under the Employee Stock Purchase Plan partially offset by payments under note obligations. On October 25, 1996, the Company completed the initial offering of its Common Stock to the public ("IPO"). Pursuant to the IPO, the Company sold an aggregate of 1,250,000 shares of Common Stock at $8.00 per share, resulting in net proceeds to the Company of approximately $7.8 million. The Company believes that the net proceeds from the sale of Common Stock, together with anticipated cash flows from operations and existing cash balances, will satisfy the Company's projected expenditures through 1998 for working capital and general corporate purposes, including an increase in the Company's internal product development, staffing in connection with new product introductions and other related product-development expenditures. From time to time, in the ordinary course of business, the Company enters into strategic relationships with its customers or other participants in the PC industry. Such strategic relationships may include equity investments in the Company. If additional funds are raised through the issuance of equity securities, the percentage ownership of the shareholders of the Company will be reduced, shareholders may experience additional dilution, or such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," and No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14 and requires segment information to be reported on the basis that is used entirely for evaluating segment performance and deciding how to allocate resources to segments in quarterly and annual reports. SFAS No. 131 is effective for annual reports for fiscal years beginning after December 15, 1997, and is applicable to interim financial statements beginning with the second year of application. The Company believes that the effect of adopting the new standards will not be material to its consolidated financial statements. In October 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," which is effective for transactions entered into in fiscal years beginning after December 15, 1997. Retroactive application of the provision of this SOP is prohibited. The Company has reviewed the SOP and believes that, based on its current policies, the application of this SOP will not have a material impact on the recording of future revenue. THE YEAR 2000 The Year 2000 Issue is the result of computer programs using two digits rather than four to define the applicable year. The Company's internal programs that have time-sensitive software may recognize a date using "00" as the calendar year 1900 rather than the calendar year 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. Because the Company licenses and provides services relating to PC software and firmware, the Company may become involved in investigations or allegations regarding the Year 2000 Issue. The Company is in the process of conducting a comprehensive review of its internal computer systems to identify the systems that could be affected by the Year 2000 Issue and is developing an enterprise-wide implementation plan to resolve any identified issues. The Company also believes, with modifications to existing operational software, the Year 2000 Issue will not pose significant operational problems for the Company's computer systems as so modified and converted. The Company expects to incur internal staff costs as well as consulting and other expenses related to the enhancements necessary to prepare the systems for the year 2000. The 26 Company has no reasonable estimate of the amount associated with the transitions of the Company's remaining systems. If modifications and conversions are not completed in a timely manner, the Year 2000 Issue may have a material impact on the Company's operations. Furthermore, there can be no assurance that the systems of other companies with which the Company deals and on which the Company's systems rely will also be timely converted or that any such failure to convert by another company would not have a material impact on the Company's operations. The Company believes its current products do not require modification for the Year 2000 Issue, and does not anticipate any material exposures related to the Year 2000 Issue for its products and services. The Company cannot anticipate the degree to which it may be the subject of claims or complaints regarding the Year 2000 Issue. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Award Software International, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Award Software International, Inc., and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 29, 1998 28 AWARD SOFTWARE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share data) DECEMBER 31, ----------------------- 1997 1996 ---------- ----------- ASSETS Current assets: Cash and cash equivalents.................. $24,631 $23,248 Accounts receivable, net................... 4,256 2,068 Accounts receivable from related parties... 747 1,197 Deferred income taxes...................... 483 131 Other current assets....................... 1,698 467 ------- ------- Total current assets.................... 31,815 27,111 Property and equipment, net.................. 1,367 683 Other assets................................. 1,199 616 ------- ------- $34,381 $28,410 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 449 $ 215 Accrued liabilities........................ 3,950 3,104 ------- ------- Total current liabilities............... 4,399 3,319 Minority interest............................ 170 -- ------- ------- 4,569 3,319 ------- ------- Commitments (Note 10) Shareholders' equity: Preferred stock, 5,000,000 shares authorized; no shares issued or outstanding...................... -- -- Common stock, 40,000,000 shares authorized; no par value; 6,941,846 and 6,538,951 shares issued and outstanding......................... 22,571 21,269 Deferred stock compensation.................. (106) (180) Retained earnings............................ 8,320 4,130 Cumulative translation adjustment............ (973) (128) ------- ------- Total shareholders' equity.............. 29,812 25,091 ------- ------- $34,381 $28,410 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 29 AWARD SOFTWARE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------- ----------- --------- Revenues: Software license fees...................................... $19,502 $11,721 $6,989 Engineering services....................................... 2,366 472 239 Related parties............................................ 1,499 1,878 1,902 ------- ------- ------ Total revenues.......................................... 23,367 14,071 9,130 ------- ------- ------ Cost of revenues: Software license fees...................................... 1,828 521 387 Engineering services....................................... 686 131 43 Related parties............................................ 76 328 206 ------- ------- ------ Total cost of revenues.................................. 2,590 980 636 ------- ------- ------ Gross profit................................................. 20,777 13,091 8,494 ------- ------- ------ Operating expenses: Research and development.................................... 6,571 4,198 2,751 Sales and marketing......................................... 4,963 2,855 2,282 General and administrative.................................. 3,602 2,077 1,600 ------- ------- ------ Total operating expenses................................. 15,136 9,130 6,633 ------- ------- ------ Income from operations........................................ 5,641 3,961 1,861 Interest expense.............................................. (33) (6) (9) Interest and other income..................................... 1,167 552 105 Minority interest............................................. 7 -- -- ------- ------- ------ Income before income taxes.................................... 6,782 4,507 1,957 Provision for income taxes.................................... 2,102 1,622 792 ------- ------- ------ Net income.................................................... $ 4,680 $ 2,885 $1,165 ======= ======= ====== Basic net income per share.................................... $ 0.68 $ 0.54 $ 0.28 ======= ======= ====== Weighted average common shares................................ 6,867 5,335 4,136 ======= ======= ====== Diluted net income per share.................................. $ 0.61 $ 0.47 $ 0.25 ======= ======= ====== Weighted average common and common equivalent shares.......... 7,705 6,095 4,650 ======= ======= ======
The accompanying notes are an integral part of these consolidated financial statements. 30 AWARD SOFTWARE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands)
DEFERRED CUMULATIVE TOTAL STOCK RETAINED TRANSLATION SHAREHOLDERS' COMMON STOCK COMPENSATION EARNINGS ADJUSTMENT EQUITY --------------------- ------------- -------- ---------- ------ SHARES AMOUNT ---------- --------- Balance at December 31, 1994....... 3,841,801 $ 1,627 -- $ 80 $ (12) $ 1,695 Issuance of Common Stock and war- rants, net of issuance costs of $165............................. 1,166,669 6,837 -- -- -- 6,837 Repurchase of Common Stock......... (499,687) (2,998) -- -- -- (2,998) Exercise of Common Stock warrants.. 70,000 70 -- -- -- 70 Exercise of Common Stock options... 7,500 8 -- -- -- 8 Warrants issued for services....... -- 374 -- -- -- 374 Deferred stock compensation........ -- 297 (297) -- -- -- Amortization of deferred stock compensation ...................... -- -- 42 -- -- 42 Cumulative translation adjustment... -- -- -- -- (24) (24) Net income.......................... -- -- -- 1,165 -- 1,165 --------- ------- ----- ------ ----- ------- Balance at December 31, 1995......... 4,586,283 6,215 (255) 1,245 (36) 7,169 Issuance of Common Stock and war- rants, net of issuance costs of 801,180 9,573 -- -- -- 9,573 $79................................ Repurchase of Common Stock........... (250,000) (2,500) -- -- -- (2,500) Exercise of Common Stock warrants.... 107,500 108 -- -- -- 108 Initial public offering, net of issuance costs of $2,172............ 1,250,000 7,828 -- -- -- 7,828 Exercise of Common Stock options............................. 43,988 45 -- -- -- 45 Amortization of deferred stock compensation........................ -- -- 75 -- -- 75 Cumulative translation adjustment.... -- -- -- -- (92) (92) Net income........................... -- -- -- 2,885 -- 2,885 --------- ------- ----- ------ ----- ------- Balance at December 31, 1996......... 6,538,951 21,269 (180) 4,130 (128) 25,091 Issuance of Common Stock, net........ 72,391 482 -- -- -- 482 Tax benefits related to disqualifying dispositions of stock options....................... -- 622 -- -- -- 622 Pooling of interests with Unicore.... 218,571 35 -- (490) -- (455) Exercises of Common Stock options.... 111,933 163 -- -- -- 163 Amortization of deferred stock compensation........................ -- -- 74 -- -- 74 Cumulative translation adjustment.... -- -- -- -- (845) (845) Net income........................... -- -- -- 4,680 -- 4,680 --------- ------- ----- ------ ----- ------- Balance at December 31, 1997......... 6,941,846 $22,571 $(106) $8,320 $(973) $29,812 ========= ======= ===== ====== ===== =======
The accompanying notes are an integral part of these consolidated financial statements. 31 AWARD SOFTWARE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................... $ 4,680 $ 2,885 $ 1,165 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................... 706 223 132 Deferred income taxes....................................... (352) 130 (143) Warrants issued for services................................ -- -- 374 Deferred stock compensation................................. 74 75 42 Minority interest........................................... 170 -- -- Changes in assets and liabilities, net of acquisition: Accounts receivable, net.................................. (2,396) (1,057) (40) Accounts receivable from related parties.................. 449 (347) (1,205) Other current assets...................................... (1,221) (539) 138 Other assets.............................................. (53) (211) 24 Accounts payable.......................................... 160 24 49 Accrued liabilities....................................... 821 1,372 899 ------- ------- ------- Net cash provided by operating activities............... 3,038 2,555 1,435 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.............................. (1,170) (579) (147) Capitalized software development costs.......................... (613) (209) -- ------- ------- ------- Net cash used in investing activities.................... (1,783) (788) (147) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from Common Stock issuances........................ 482 17,401 6,837 Proceeds from exercise of options and warrants.................. 163 153 78 Repurchases of Common Stock..................................... -- (2,500) (2,998) Repayments under note obligations............................... (390) -- (73) ------- ------- ------- Net cash provided by financing activities................ 255 15,054 3,844 ------- ------- ------- Effect of exchange rate changes on cash......................... (585) (71) (8) ------- ------- ------- Net increase in cash and cash equivalents....................... 925 16,750 5,124 Cash and cash equivalents at beginning of period................ 23,706 6,498 1,374 ------- ------- ------- Cash and cash equivalents at end of period...................... $24,631 $23,248 $ 6,498 ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest.......................................... $ 33 $ 6 $ 10 Cash paid for income taxes...................................... $ 2,300 $ 996 $ 282
The accompanying notes are an integral part of these consolidated financial statements. 32 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 1. ORGANIZATION AND BUSINESS The Company Award Software International, Inc. ("Award" or the "Company") designs, develops and markets system management software for the global computing market. System management software is one of the fundamental layers in personal computer ("PC") architecture and provides an essential interface between a PC's operating system software and its hardware. The Company's principal system management software products include a suite of Basic Input/Output System software ("BIOS"). Award's customers include designers and manufacturers of motherboards, PC systems and other microprocessor-based (or "embedded") devices. The Company was incorporated in California, in 1983, and operates in one business segment through its headquarters facility in Mountain View, California, a branch office in Irvine, California, a wholly owned subsidiary in North Andover, Massachusetts, a branch office in Munich, Germany, a joint venture in Yokohama, Japan and a wholly owned subsidiary in Hong Kong with a branch office in Taipei, Taiwan. On October 25, 1996, the Company completed its initial public offering of Common Stock. Merger and Acquisition In May 1997, the Company merged with Unicore Software, Inc. ("Unicore"), a privately held company providing basic input/output software upgrades for personal computers and embedded systems. Under the terms of the Agreement and Plan of Merger and Reorganization, the Company issued 218,571 shares of Common Stock for all of the outstanding stock of Unicore in a transaction accounted for as a pooling of interests. The historical operations of Unicore were not material and, as a result, the business combination has been reported by restating the Company's consolidated financial statements to include the consolidated financial statements of Unicore effective January 1, 1997. On February 21, 1997, the Company acquired certain assets of Willows software ("Willows acquisition") for $400 cash, direct acquisition costs of $40 and the assumption of liabilities totaling $44. The purchase price was allocated based upon the estimated fair market value of identifiable tangible and intangible assets and liabilities assumed, including $289 to in-process research and development. The amount allocated to in-process research and development relates to acquired development projects that had not reached technological feasibility at the acquisition date and had no alternative future use. Formation of Joint Venture In April 1997, the Company entered into an agreement with Sun Corporation ("Sun"), a shareholder, and Axis Corporation ("Axis") to establish a majority- owned subsidiary, Award Software Japan KK ("Award Japan"). The objective of Award Japan is to market and distribute the Company's products in Japan. The Company, Sun and Axis contributed approximately $310, $95 and $95 for 62%, 19% and 19% ownership of Award Japan, respectively. GCH Acquisition On July 2, 1993, GCH Systems, Inc. ("GCH"), an independent developer of microcomputers and application-specific integrated circuits, acquired 100 percent of Award's outstanding Common Stock for $1,905, consisting of $725 in cash and the assumption of $1,180 in liabilities. From the acquisition date through December 30, 1994, Award operated as a wholly owned subsidiary of GCH. On December 31, 1994, Award and GCH became separate companies through a spinoff of 100 percent of Award's Common Stock on a pro rata basis to GCH shareholders. Award and GCH have certain common members on their Boards of Directors. Award and GCH, from time to time have made non-interest-bearing cash advances to each other for working capital purposes. 33 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements of the Company include the accounts of Award Software International, Inc., its wholly owned subsidiaries and the Company's 62% ownership of Award Japan. All inter-company accounts and transactions have been eliminated in consolidation. 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 disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition The Company's revenues are derived primarily from software license fees and non-recurring engineering services. Software license fees are recognized upon delivery of the product, fulfillment of acceptance terms, if any, and satisfaction of any significant support obligations. The Company's normal sales terms are net 30 days and return privileges are not offered or provided to any customers. Payments received in advance of revenue recognition are recorded as deferred revenue. Engineering services revenue primarily consist of amounts charged for customization of the software and are generally recognized as the services are performed. Amounts received under engineering contracts that require software delivery are deferred until delivery and customer acceptance occur. Related parties revenues include software licenses and non-recurring engineering services to holders of the Company's Common Stock and Common Stock warrants. The Company does not offer separate post-contract customer support contracts, and due to the nature of the Company's product offerings, has not incurred any significant post-sale warranty or support obligations. The costs of insignificant support obligations are accrued at the time of revenue recognition. Allowances for uncollectible amounts and warranties are recorded in the same period as the related revenues based upon the Company's historical experience. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist principally of time deposits and money-market deposit accounts that are stated at cost, which approximates fair value. Property and equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. 34 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Software development costs Costs incurred in the research and development of new products and enhancements to existing products are charged to expense as incurred until the technological feasibility of the product or enhancement has been established. After establishing technological feasibility through the development of a working model, any additional costs incurred through the date the product is available for general release, if any, are capitalized and amortized over the estimated life, generally three years, using the greater of the amounts determined using the straight-line method or the ratio of current period product revenues over total estimated product revenues. Capitalized software development costs are included in other assets in the accompanying financial statements. Amortization of capitalized software development costs totaled $207, $22 and $18 for the three years ended December 31, 1997, 1996 and 1995, respectively. Goodwill Goodwill resulting from the acquisition of Award Common Stock by GCH is included in other assets at December 31, 1997 and 1996, and is being amortized using the straight line method over five years. Income taxes Income taxes are accounted for using an asset and liability approach in accordance with SFAS No. 109, "Accounting for Income Taxes." The asset and liability approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Foreign currency translation The Company's operations in Taiwan, Hong Kong, Japan and Germany use the local currencies as their functional currencies. Accordingly, all assets and liabilities of these entities are translated at the current exchange rate in effect at the balance sheet date and revenues and expenses are translated at the average exchange rates in effect during the reporting period. Gains and losses resulting from foreign currency translation are recorded directly into a separate component of shareholders' equity. Foreign currency transaction gains and losses were immaterial for all periods presented. Net income per share Basic net income per share is computed by dividing net income available to Common Shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of outstanding shares of Common Stock plus dilutive Common Stock equivalents. Common Stock equivalents consist of common stock options and warrants, using the treasury stock method based on the average stock price for the period. 35 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of APB No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized based on the difference, if any, between the quoted market price of the Company's stock on the date of grant and the amount an employee must pay to acquire the stock. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," and No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 supersedes SFAS No. 14 and requires segment information to be reported on the basis that is used entirely for evaluating segment performance and deciding how to allocate resources to segments in quarterly and annual reports. SFAS No. 131 is effective for annual reports for fiscal years beginning after December 15, 1997, and is applicable to interim financial statements beginning with the second year of application. The Company believes that the effect of adopting the new standards will not be material to its consolidated financial statements. In October 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," which is effective for transactions entered into in fiscal years beginning after December 15, 1997. Retroactive application of the provision of this SOP is prohibited. The Company has reviewed the SOP and believes that, based on its current policies, the application of this SOP will not have a material impact on the recording of future revenue. 3. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of bank deposits and accounts receivable. The Company places its cash and cash equivalents in checking and market rate accounts with two major financial institutions and has not incurred any losses related to these investments. The Company markets its products to OEMs in the personal computer market, designers of motherboards and other microprocessor-embedded system manufacturers and, as a result, maintains individually significant receivable balances from major customers located throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for uncollectible accounts receivable based on the expected collectability of all accounts receivable. The following table summarizes the net accounts receivable from customers located in the following geographic areas: 36 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data)
DECEMBER 31, ------------------ 1997 1996 --------- ------- United States.............................. $2,074 $ 327 Asia Pacific............................... 2,100 1,669 Europe..................................... 82 72 ------ ------ $4,256 $2,068 ====== ======
All related party receivables are from United States customers. No customer accounted for over 10.0% of accounts receivable at December 31, 1997. One customer accounted for 26.1% of accounts receivable at December 31, 1996. 4. BALANCE SHEET COMPONENTS
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- ACCOUNTS RECEIVABLE: Accounts receivable................................. $4,345 $2,183 Less: allowance for doubtful accounts............... (89) (115) ------ ------ $4,256 $2,068 ====== ====== PROPERTY AND EQUIPMENT: Computer equipment.................................. $1,453 $ 796 Office equipment.................................... 334 124 Furniture and fixtures.............................. 381 102 ------ ------ 2,168 1,022 Less accumulated depreciation....................... (801) (339) ------ ------ $1,367 $ 683 ====== ====== OTHER ASSETS: Goodwill............................................ $ 265 $ 265 Capitalized software................................ 1,346 344 Other............................................... 104 263 ------ ------ 1,715 872 Less accumulated amortization: Goodwill....................................... (239) (186) Capitalized software........................... (277) (70) ------ ------ $1,199 $ 616 ====== ====== ACCRUED LIABILITIES: Salaries and benefits............................... $1,195 $ 584 Royalties........................................... 543 90 Income taxes payable................................ 1,686 1,160 Deferred revenue.................................... 195 615 Other............................................... 331 655 ------ ------ $3,950 $3,104 ====== ======
5. NET INCOME PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share calculations for 1997, 1996 and 1995: 37 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data)
December 31, ------------ (in thousands, except per share data) 1997 1996 1995 ------------ ------------ ----------- BASIC NET INCOME PER SHARE Net income available to Common Shareholders....................... $4,680 $2,885 $1,165 ====== ====== ====== Weighted average common shares.................................... 6,867 5,335 4,136 ====== ====== ====== Basic net income per share........................................ $ 0.68 $ 0.54 $ 0.28 ====== ====== ====== DILUTED NET INCOME PER SHARE Net income available to Common Shareholders....................... $4,680 $2,885 $1,165 ====== ====== ====== Weighted average common shares.................................... 6,867 5,335 4,136 Dilutive common stock equivalents................................. 838 760 514 ------ ------ ------ Weighted average common shares and equivalents.................... 7,705 6,095 4,650 ====== ====== ====== Diluted net income per share...................................... $ 0.61 $ 0.47 $ 0.25 ====== ====== ======
During 1997, 1996 and 1995, options to purchase 32,699, 180,062 and 0 shares of Common Stock, respectively, were antidilutive and excluded from the dilutive net income per share calculations because the options' exercise price was greater than the average market price of the common shares. 6. SHAREHOLDERS' EQUITY On October 25, 1996, the Company completed an initial public offering (the "Offering") of 1,250,000 shares of its Common Stock at $8.00 per share. Proceeds to the Company totaled $7,828, net of underwriting discounts and issuance costs of $2,172. Prior to the Offering, in May 1996, the Board of Directors approved an increase in the number of common shares authorized to 40,000,000, authorized 5,000,000 shares of Preferred Stock and approved a 1-for- 2 reverse stock split of the Company's Common Stock. The reverse stock split was effected on August 21, 1996. All references to the number of common shares and per share amounts have been retroactively restated in the accompanying consolidated financial statements to reflect the reverse stock split. During January and February 1996, the Company repurchased 250,000 shares of Common Stock from existing shareholders at a price of $10.00 per share. In connection with the issuance and sale of 570,033 shares of Common Stock in January 1996, the Company issued 272,394 Common Stock warrants with an exercise price of $12.28 per share for $0.02 per warrant. The warrants are exercisable at any time up to September 30, 2000. No proceeds were separately allocated to the warrants. In June 1996, the Company entered into a joint technology development and support agreement with Advanced Micro Devices, Inc. ("AMD"), to support the design and development of products related to AMD's K6 microprocessor. As part of this relationship, in July 1996, the Company sold to AMD 160,000 shares of Common Stock at a price of $12.50 per share for approximately $2,000 in cash. In June 1995, the Company granted 20,000 Common Stock warrants with an exercise price of $1.00 per share to a holder of approximately 0.4% of the Company's Common Stock at the time of grant in exchange for marketing services. The warrants are exercisable at any time up to the later of (i) June 15, 1998 or (ii) the six month anniversary of the closing of an initial public offering. The Company recorded the difference between the estimated fair market value and the exercise price of the warrants of approximately $36 as sales and marketing expense. The warrants were exercised in December 1995. 38 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) In connection with the issuance of shares of Common Stock in 1995, the Company issued 123,333 Common Stock warrants with an exercise price of $1.00 per share for $0.02 per warrant. The warrants are exercisable at any time up to September 30, 2000. No proceeds were separately allocated to the warrants. In October 1994, the Company granted 200,000 Common Stock warrants to a customer under a software licensing agreement. The warrants were deemed to have a nominal value on the date of grant. The warrants have an exercise price of $1.00 per share and are exercisable at any time through March 31, 1998. During the period from October 1994 through June 1995, the customer earned 45,500 of the Common Stock warrants based on purchasing volumes. In July 1995, to solidify the Company's long-term relationship with the customer, the Company issued the remaining 154,500 warrants to the customer and recorded the difference between the estimated fair market value and the exercise price of the warrants of approximately $283 as sales and marketing expense. In July 1996, 77,500 of these warrants were exercised, resulting in proceeds totaling $78. In December 1994, in exchange for marketing services, the Company granted 80,000 Common Stock warrants with an exercise price of $1.00 per share to holders of approximately 16.1% of the Company's Common Stock at December 31, 1995. The warrants had a nominal value when granted and were exercised in November 1995. 7. EMPLOYEE BENEFIT PLANS Equity Incentive and Stock Option Plan During 1997, the Company adopted the 1997 Equity Incentive Plan, under which 700,000 shares of common stock are reserved for issuance to eligible employees, directors and consultants upon exercise of the stock options. Stock options are granted at prices determined by the Board of Directors and generally may not be less than 110% and 85%, for incentive and nonstatutory options, respectively, of the estimated fair value of the related shares on the date of grant. Options granted under the Plan are for periods not to exceed ten years, are exercisable generally one year after date of grant and vest ratably over a maximum period of five years following the date of grant. For options expired or canceled, the stock not purchased under such options shall revert to and again become available for re-issuance under the plan. The Plan provides for an unvested share repurchase option on behalf of the Company. In the event an optionee ceases to be eligible under the Plan for any reason, shares acquired on the exercise of an option which have not yet vested may be repurchased by the Company at the optionee's original cost per share. At December 31, 1997, no shares were subject to repurchase. During 1994, the Company adopted the 1995 Stock Option Plan, under which 1,250,000 shares of common stock are reserved for issuance to eligible employees, directors and consultants upon exercise of the stock options. Stock options are granted at prices determined by Board of Directors and generally may not be less than 100% and 85%, for incentive and nonstatutory options, respectively, of the estimated fair value of the related shares on the date of grant. Options granted under the Plan are for periods not to exceed ten years, are exercisable generally one year after date of grant and vest ratably over a maximum period of five years following the date of grant. For options expired or canceled, the stock not purchased under such options shall revert to and again become available for re-issuance under the plan. The Plan provides for an unvested share repurchase option on behalf of the Company. In the event an optionee ceases to be eligible under the Plan for any reason, shares acquired on the exercise of an option which have not yet vested may be repurchased by the Company at the optionee's original cost per share. At December 31, 1997, no shares were subject to repurchase. On June 30, 1997, the Company registered an additional 268,446 shares of Common Stock under the 1995 Stock Option Plan for issuance to new hires and existing employees of the Company, excluding directors and executive officers of the Company. During 1995, the Company recorded $297 of deferred stock compensation for the excess of the deemed fair market value over the exercise price at the date of grant related to certain options granted in 1995. The compensation 39 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) expense is being recognized over the option vesting period of four years. Compensation expense recognized in 1997 1996 and 1995 aggregated $74, $75 and $42, respectively. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been further reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Net income As reported ......................................................... $4,680 $2,885 $1,165 ====== ====== ====== Pro forma ........................................................... $3,475 $2,717 $1,155 ====== ====== ====== Net income per share As reported: Basic .......................................................... $ 0.68 $ 0.54 $ 0.28 ====== ====== ====== Diluted ........................................................ $ 0.61 $ 0.47 $ 0.25 ====== ====== ====== Pro forma: Basic .......................................................... $ 0.51 $ 0.51 $ 0.28 ====== ====== ====== Diluted ........................................................ $ 0.48 $ 0.45 $ 0.25 ====== ====== ======
Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively.
STOCK OPTION ASSUMPTIONS: YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- Stock Option Plan Expected dividend yield ............................................. 0.00% 0.00% 0.00% Expected stock price volatility ..................................... 60.75% 55.00% 55.00% Risk-free interest rate ............................................. 6.19% 6.05% 5.50% Expected life (years) ............................................... 5 5 5 Stock Purchase Plan Expected dividend yield ............................................. 0.00% -- -- Expected stock price volatility ..................................... 60.75% -- -- Risk-free interest rate ............................................. 5.37% -- -- Expected life (years) ............................................... 0.5 -- --
A summary of the status of the Company's stock option plan as of December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below: 40 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data)
SHARES SUBJECT TO OUTSTANDING OPTIONS ----------------------------------------------- WEIGHTED- OPTIONS AVERAGE AVAILABLE FOR NUMBER OF PRICE PER EXERCISE GRANT SHARES SHARE PRICE -------------- ---------------- --------------- ------------ Balance at December 31, 1994 ............................ 685,950 564,050 $ 1.00 $ 1.00 Granted ............................................... (191,105) 191,105 1.00-6.00 2.01 Exercised ............................................. -- (7,500) 1.00 1.00 Canceled .............................................. 1,500 (1,500) 1.00 1.00 -------- --------- ----------- ------ Balance at December 31, 1995.............................. 496,345 746,155 1.00-6.00 1.26 Granted ............................................... (329,000) 329,000 6.75-11.00 9.97 Exercised ............................................. -- (43,988) 1.00 1.00 Canceled .............................................. 61,709 (61,709) 1.00-10.00 2.24 -------- --------- ----------- ------ Balance at December 31, 1996 ............................ 229,054 969,458 1.00-11.00 4.16 Authorized.............................................. 968,446 -- -- -- Granted ............................................... (904,400) 904,400 9.25-11.25 10.37 Exercised ............................................. -- (111,933) 1.00-10.00 1.46 Canceled .............................................. 41,551 (41,551) 1.00-10.63 9.79 -------- --------- ----------- ------ Balance at December 31, 1997 ............................ 334,651 1,720,374 $1.00-11.25 $ 7.46 ======== ========= =========== ======
Options for 577,516, 345,685 and 106,500 shares of Common Stock were exercisable at December 31, 1997, 1996 and 1995, respectively. Weighted average fair value of options granted during the year were $5.98, $2.59 and $2.13 for 1997, 1996 and 1995, respectively. The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------- ------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE of NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE - --------------------- --------------- ------------ ----------- ----------- ------------ $1.000 -- 5.000 535,411 7.11 years $ 1.24 372,310 $ 1.18 6.000 -- 10.250 581,213 9.09 years 9.60 99,317 9.45 10.625 -- 13.125 603,750 9.21 years 10.91 105,889 10.69 --------- ------ ------- ------ 1,720,374 8.52 years $ 7.46 577,516 $ 4.35 ========= ====== ======= ======
Employee Stock Purchase Plan In May 1996, the Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the issuance of a maximum of 150,000 shares of Common Stock. Eligible employees may have up to 15% of their earnings withheld, to be used to purchase shares of the Common Stock on specified dates determined by the Board of Directors. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the specified purchase date. During 1997, the Company issued 72,391 shares of its Common Stock under the Purchase Plan. 41 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 401(k) Plan In January 1995, the Board of Directors adopted an employee savings and retirement plan (the "401(k) Plan") covering substantially all of the Company's employees. Under the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutory prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The Company may make contributions to the 401(k) Plan on behalf of eligible employees. The Company made no contributions to the 401(k) Plan in 1997, 1996 or 1995. 8. INCOME TAXES Income before income taxes was subject to tax in the following jurisdictions:
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ----------- ---------- ----------- United States .................. $1,438 $2,108 $ 464 Foreign ........................ 5,344 2,399 1,493 ------ ------ ------ $6,782 $4,507 $1,957 ====== ====== ======
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ------------ ---------- ------------ Current: Federal .......................................... $1,000 $ 709 $ 484 State ............................................ 98 59 46 Foreign .......................................... 1,356 724 405 ------ ------ ----- Total current .................................. 2,454 1,492 935 ------ ------ ----- Deferred: Federal............................................ (382) 95 (133) State.............................................. 30 35 (10) Foreign .......................................... -- -- -- ------ ------ ----- Total deferred ................................. (352) 130 (143) ------ ------ ----- $2,102 $1,622 $ 792 ====== ====== =====
Significant components of the Company's deferred tax assets (liabilities) were as follows: 42 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data)
DECEMBER 31, ------------------------- 1997 1996 ----------- ------------ Deferred tax liabilities: Capitalized software........................... $(320) $ (90) ----- ----- Deferred tax assets: Accrued liabilities............................ 67 79 Depreciation................................... 77 18 Allowance for doubtful accounts................ 34 34 State tax deduction............................ 2 6 Tax credits.................................... 478 0 Other.......................................... 145 84 ----- ----- 803 221 ----- ----- Net deferred tax assets.......................... $ 483 $ 131 ===== =====
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income before income taxes as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ------------ ----------- ------------ Tax provision at the U.S. federal statutory rate.... $2,306 $1,532 $ 666 of 34%............................................ Foreign income taxed at different rates............. (486) (80) (77) State and local taxes, net of federal benefit....... 69 221 117 Release of valuation allowance...................... -- -- (117) Nondeductible charges and accruals.................. 207 -- 166 Other............................................... 6 (51) 37 ------ ------ ----- Provision for income taxes.......................... $2,102 $1,622 $ 792 ====== ====== ===== Effective tax rates................................. 31% 36% 40% ====== ====== =====
9. REVENUES, GEOGRAPHIC INFORMATION AND EXPORT SALES Revenues from customers representing 10% or more of consolidated revenues were as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ------------ ----------- ----------- Customer A..................... -- -- 13.9% Customer B--Related party...... 5.4% 11.0% 13.4%
The components of related parties revenues and costs of revenues are:
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues: Software license fees........................... $1,479 $1,148 $1,084 Engineering services............................ 20 730 818 ------ ------ ------ Total related party revenues.................. $1,499 $1,878 $1,902 ====== ====== ====== Cost of revenues: Software license fees........................... $ 74 $ 58 $ 60 Engineering services............................ 2 270 146 ------ ------ ------ Total related party cost of revenues.......... $ 76 $ 328 $ 206 ====== ====== ======
43 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The following is a summary of the Company's geographic operations:
UNITED ASIA STATES EUROPE PACIFIC ELIMINATIONS CONSOLIDATED ---------- ---------- ---------- ------------- ------------ Year ended December 31, 1995: Revenues from unaffiliated customers .... $ 1,017 $2,216 $ 3,995 $ -- $ 7,228 Revenue from related parties ............ 1,902 -- -- -- 1,902 Income from operations .................. 393 59 1,409 -- 1,861 Identifiable assets ..................... 6,907 976 2,764 (1,564) 9,083 Year ended December 31, 1996: Revenues from unaffiliated customers .... $ 2,176 $1,195 $ 8,822 $ -- $12,193 Revenue from related parties ............ 1,878 -- -- -- 1,878 Income (loss) from operations ........... 1,651 (482) 2,792 -- 3,961 Identifiable assets ..................... 23,642 728 6,498 (2,458) 28,410 Year ended December 31, 1997: Revenues from unaffiliated customers .... $ 9,016 $ 640 $12,212 $ -- $21,868 Revenue from related parties ............ 1,499 -- -- -- 1,499 Income (loss) from operations ........... 1,161 (604) 5,084 -- 5,641 Identifiable assets ..................... 27,088 465 11,082 (4,254) 34,381
Substantially all of the financial information for the Europe and Asia Pacific geographic areas results from the Company's operations in Germany and Taiwan, respectively. Export sales from the United States to international customers were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ---------- ---------- ----------- Europe, principally Germany.......... $2,164 $2,003 $1,315 Asia Pacific, principally Japan...... 850 164 95 ------ ------ ------ $3,014 $2,167 $1,410 ====== ====== ======
10. COMMITMENTS Operating leases The Company leases its office facilities in the U.S., Taiwan, Hong Kong, Japan and Germany. Future minimum payments under non-cancelable operating leases, as of December 31, 1997, were $651 and $148 for 1998 and 1999, respectively. Under an agreement that extends through 1998, the Company subleases office facilities in Mountain View, California with GCH and was charged rent totaling $362, $161 and $84 for 1997, 1996 and 1995, respectively. The Company also leases office facilities in Taipei, Taiwan from GCH-Sun Systems Company Ltd., a subsidiary of GCH, and a shareholder on a month-to-month basis and was charged rent totaling $269, $225 and $101 for 1997, 1996 and 1995, respectively. In addition, the Company leases office facilities in North Andover, Massachusetts from a realty company owned by an executive officer of the Company and was charged rent totaling $69 in 1997. Management believes the terms of these transactions are no less favorable than could be obtained from unaffiliated third parties. Total rent expense, including amounts to related parties above, was $799, $470 and $273 for the years ended December 31, 1997, 1996 and 1995, respectively. 44 AWARD SOFTWARE INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) AWARD SOFTWARE INTERNATIONAL, INC. SUPPLEMENTARY DATA (UNAUDITED)
QUARTERS ENDED ------------------------------------------------------------------------------- 1997 1996 -------------------------------------- --------------------------------------- Dec. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 -------- -------- -------- -------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues.................. $7,535 $5,603 $5,202 $5,028 $4,522 $3,395 $3,342 $ 2,812 Gross profit.................... 6,237 5,080 4,773 4,688 4,231 3,137 3,199 2,524 Income from operations.......... 1,941 1,408 1,195 1,098 1,573 835 1,034 519 Net income...................... 1,660 1,128 1,000 892 1,174 608 717 386 Basic net income per share...... $ 0.24 $ 0.16 $ 0.15 $ 0.13 $ 0.19 $ 0.12 $ 0.14 $ 0.08 Diluted net income per share.... $ 0.22 $ 0.15 $ 0.13 $ 0.12 $ 0.17 $ 0.10 $ 0.13 $ 0.07
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 45 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS
NAME AGE PRINCIPAL OCCUPATION/POSITION HELD WITH THE COMPANY ---- --- --------------------------------------------------- George C. Huang.......................... 56 Chairman of the Board of Directors, President, Chief Executive Officer and Director of the Company Cheng Ming Lee........................... 55 President and Chief Executive Officer, Taiwan Venture Capital Corporation and Fidelity Venture Capital Corporation and Director of the Company David S. Lee............................. 60 Chairman, CMC Industries, Inc. and Director of the Company Masami Maeda............................. 64 President and Chief Executive Officer, Sun Corporation and Director of the Company Anthony Sun.............................. 45 General Partner, Venrock Associates and Director of the Company William P. Tai........................... 35 General Partner, Institutional Venture Partners and Director of the Company Willy Weck............................... 46 Finance Manager and Chief Financial Officer, Vobis Microcomputer AG and Director of the Company
GEORGE C. HUANG has served as Chairman of the Board of Directors, President, Chief Executive Officer and Director since July 1993. From January 1984 to the present, Dr. Huang has served as Chairman of the Board of Directors of GCH Systems, Inc. ("GCH"), a company that develops and markets embedded controllers, Application Specific Integrated Circuits and PC Systems, and from January 1984 until November 1994, he also served as Chief Executive Officer of GCH. From February 1987 to the present, Dr. Huang has served as a Director of GCH-Sun Systems Company Ltd. ("GSS"), a subsidiary of GCH. From January 1990 to May 1996, Dr. Huang served as a Director of Fidelity Venture Capital Corporation ("FVCC"), a shareholder of GCH and the Company. Dr. Huang received a B.S. from National Taiwan University, an M.S. from Washington State University and a Ph.D. in Electrical Engineering from the University of Washington. Dr. Huang and Lyon T. Lin, an executive officer of the Company, are brothers-in-law. CHENG MING LEE has served as a director since July 1993. From April 1987 to the present, Dr. Lee has served as the President and Chief Executive Officer of Taiwan Venture Capital Corporation ("TVCC") and FVCC, both of which are shareholders of the Company. Dr. Lee serves on the Board of Directors of Taiwan Opportunities Fund Limited and CNET Technology Corp. Dr. Lee received a B.S. from National Taiwan University, an M.S. from Stanford University and a Ph.D. in Chemical Engineering from the University of Houston. DAVID S. LEE has served as a director since December 1994. From May 1995 to the present, Mr. Lee has served as the Chairman of CMC Industries, Inc., a contract manufacturing company. From November 1985 to August 1994, Mr. Lee served as the President and Chief Executive Officer of DTC Data Technology Corporation (formerly Qume Corporation), a manufacturer of disk controller and communication peripherals. Mr. Lee serves on the Board of Directors of Linear Technology Corporation, Photonics Corporation and Centigram Communications Corporation. In addition, Mr. Lee is a member of the Board of Regents of the University of California. Mr. Lee holds an Honorary Doctorate of Engineering and a B.S. in Mechanical Engineering from Montana State University and an M.S. in Mechanical Engineering from North Dakota State University. MASAMI MAEDA has served as a director since January 1995. From April 1971 to the present, Mr. Maeda has served as President and Chief Executive Officer of Sun Corporation, a manufacturer of electronic devices. He is also a member of the Board of Directors of GCH and GSS. ANTHONY SUN has served as a director since October 1995. From 1979 to the present, Mr. Sun has been a general partner at Venrock Associates, a venture capital firm. Previously, Mr. Sun was employed by 46 HewlettPackard, TRW and Caere Corporation. Mr. Sun is a director of Cognex Corporation, a computer systems company, 3dFx Interactive, Inc., a 3-d semiconductor company, Inference Corporation, a client/server internet help desk software company, Komag, Inc., a computer storage component company, and Worldtalk Communications Corporation, a software application router company. Mr. Sun holds S.B.E.E., S.M.E.E. and Advanced Engineer degrees from the Massachusetts Institute of Technology and an M.B.A from Harvard University. WILLIAM P. TAI has served as a director since June 1995. From July 1997 to the present, Mr. Tai has been a general partner of funds managed by Institutional Venture Partners. From September 1991 to July 1997, Mr. Tai was affiliated with the Walden Group of Venture Capital Funds. From August 1987 to September 1991, Mr. Tai established Alex. Brown & Sons Inc.'s research effort in the semiconductor industry. Mr. Tai also serves on the Board of Directors of 8x8, Inc., Network Peripherals, Inc., and is Chairman of AUNET Corporation. Mr. Tai holds a B.S. with Honors in Electrical Engineering from the University of Illinois and an M.B.A. from Harvard University. WILLY WECK has served as a director since April 1997. From December 1993 to the present, Mr. Weck has served as Finance Manager and Chief Financial Officer of Vobis Microcomputer AG, a computer and peripherals retailing and production company. From January 1992 to December 1993, Mr. Weck served as head of the Controlling Department of Vobis Microcomputer AG. For a description of the voting agreement relating to Mr. Weck and Vobis Microcomputer AG, see "Certain Relationships and Related Transactions." SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company during, and with respect to, its most recent fiscal year and written representations that no other reports were required, if any, the filing requirements of Section 16(a) applicable to its officers, directors and 10% shareholder were satisfied during the fiscal year ended December 31, 1997, except as follows. Mr. Weck did not file Form 3. 47 ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION OF DIRECTORS During the fiscal year ended December 31, 1997, Drs. Huang and Lee, and Messrs. Lee, Maeda, Sun, Tai and Weck received $3,000, $4,000, $4,089, $6,000, $3,000, $3,000, and $2,000, respectively, cash compensation for service on the Board of Directors, and reimbursement of expenses in connection with attendance at Board meetings. As of December 31, 1997, cash compensation for service on any committee thereof, and reimbursement of expenses in connection with committee meetings were unpaid. In March 1997, in response to industry trends and customer demands, the Company's Board of Directors formed a special committee (the "Acquisition Committee") authorized to review, evaluate and make recommendations regarding strategic acquisitions, business combinations and joint venture opportunities as a way to enhance the Company's business and operations and long-term shareholder value. During the fiscal year ended December 31, 1997, Messrs. Lee, Sun and Tai, members of the Acquisition Committee, were granted options to purchase 25,000, 25,000 and 35,000 shares of the Company's common stock, respectively, at an exercise price of $10.625 per share. In addition, Mr. Weck, as a new director, was granted options to purchase 30,000 shares of the Company's common stock at an exercise price of $10.625 per share. COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION The following table shows for the fiscal year ended December 31, 1997, compensation awarded or paid to, or earned by, the Company's Chief Executive Officer and its other four most highly compensated executive officers at December 31, 1997 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - ---------------------------- ---- ---------- ------------ --------------- ----------- --------------- George C. Huang 1997 $160,000 $ 72,000 -- 30,000 -- Chairman of the Board, 1996 $133,503 $ 52,650 -- 35,000 -- President and Chief 1995 $ 92,986 -- -- -- -- Executive Officer Kevin J. Berry(l) 1997 $110,000 $ 49,500 -- 27,500 -- Vice President, Finance, 1996 $ 87,885 $ 32,063 -- 17,500 -- Chief Financial Officer, Treasurer and Secretary Lyon T. Lin 1997 $101,513 $222,877(2) -- -- -- General Manager, Taiwan; 1996 $ 94,500 $150,285(3) -- 20,000 -- President, Award Software 1995 $110,618 $ 62,703(4) -- -- -- Hong Kong Limited Ann P. Shen 1997 $ 95,000 $ 98,549(4) -- -- -- Senior Vice President, 1996 $ 91,461 $ 65,967(4) -- 7,500 -- Strategic Business 1995 $ 85,000 $ 32,090(4) -- -- --
48
SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - ---------------------------- ---- ---------- ------------ --------------- ----------- --------------- Pierre A. Narath (5) 1997 $229,633 $ 51,871 -- 55,000 -- Vice President and President, Unicore
____________ (1) Total annual compensation for 1995 did not exceed $100,000. (2) Represents sales commissions earned of $193,040 and cash bonus of $29,837. (3) Represents sales commissions earned of $141,458 and cash bonus of $8,827. (4) Represents sales commissions earned. (5) This Named Executive Officer was not an Officer of the Company prior to January 1, 1997. STOCK OPTION GRANTS AND EXERCISES The Company grants options to its executive officers under its 1995 Stock Option Plan (the "1995 Plan") and 1997 Equity Incentive Plan (the "1997 Plan"). In March 1997, the Company increased the number of shares of Common Stock issuable under the 1995 Plan by 268,446 shares for option grants made to existing and newly hired employees of the Company, none of whom were directors or executive officers. In June 1997, the Company adopted the 1997 Plan, under which 700,000 shares of Common Stock are reserved for issuance to eligible employees, directors and consultants upon exercise of the stock options. As of March 31, 1998, options to purchase a total of 1,288,884 shares were outstanding and 0 options to purchase shares remained available for grant thereunder under the 1995 Plan, and options to purchase a total of 700,000 shares were outstanding and 0 options to purchase shares remained available for grant thereunder under the 1997 Plan. The following tables show, for the fiscal year ended December 31, 1997, certain information regarding options granted to, exercised by, and held at year end by, the Named Executive Officers: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------- NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($) - --------------------- ------------ ------------ ----------- ---------- ----------- ----------- George C. Huang 30,000 3.32% $10.63 03/25/07 $200,494 $508,088 Kevin J. Berry 27,500 3.04% $10.63 03/25/07 $183,786 $465,747 Lyon T. Lin -- -- -- -- -- -- Ann P. Shen -- -- -- -- -- -- Pierre A. Narath 55,000 6.08% $10.25 07/30/07 $354,599 $898,618
____________ (1) Options granted generally become exercisable at the rate of 25% on the first anniversary date of grant and 1/48th monthly thereafter, except for Dr. Huang and Mr. Berry, whose options granted became exercisable at the rate of 25% on March 26, 1997 and 1/28th monthly thereafter. The term of the option is ten years. 49 (2) Based on an aggregate of 904,400 options granted to employees of, consultants to and directors of the Company during fiscal year ended December 31, 1997, including the Named Executive Officers. (3) The exercise price per share of each option is equal to the fair market value of the Common Stock on the date of grant. (4) The potential realizable value is calculated based on the term of the option at its time of grant (ten years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit the shareholder. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES SECURITIES VALUE OF VALUE OF UNDERLYING UNDERLYING UNEXERCISED UNEXERCISED SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY ACQUIRED OPTIONS AT OPTIONS AT OPTIONS AT OPTIONS AT ON VALUE 12/31/97 (#) 12/31/97 (#) 12/31/97 ($) 12/31/97 ($) NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1) - --------------------- ----------- ----------- ----------- ------------- -------------- ---------------- George C. Huang -- -- 75,475 49,525 $ 179,766 -- Kevin J. Berry -- -- 39,671 30,329 $ 40,995 -- Lyon T. Lin -- -- 44,791 25,209 $ 216,145 $ 58,856 Ann P. Shen -- -- 22,119 11,431 $ 115,649 $ 34,927 Pierre A. Narath -- -- -- 55,000 -- --
____________ (1) Based on the fair market value of the Common Stock of the Company as of December 31, 1997 ($7.50), minus the exercise price, multiplied by the number of shares underlying the option. EMPLOYMENT AGREEMENTS Except for two employees in the United States and all employees in Germany, none of the Company's employees is party to an employment agreement with the Company. Eight executive officers of the Company are parties to severance benefits agreements. See "Certain Relationships and Related Transactions" for a discussion of the severance benefits agreements, as amended. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board of Directors ("Committee") is composed of Messrs. David S. Lee, Anthony Sun and William P. Tai, none of whom are currently officers or employees of the Company. The Committee is responsible for establishing the Company's compensation programs for all employees, including executives. For executive officers, the Committee evaluates performance and determines compensation policies and levels. 50 COMPENSATION PHILOSOPHY The goals of the compensation program are to align compensation with business objectives and performance and to enable the Company to attract, retain and reward executive officers and other key employees who contribute to the long- term success of the Company and to motivate them to enhance long-term shareholder value. Key elements of this philosophy are: . Total compensation should be sufficiently competitive with other high- growth companies in the software industry so that the Company can attract and retain qualified executives. . The Company maintains annual incentive opportunities sufficient to provide motivation to achieve specific operating goals and to generate rewards that bring total compensation to competitive levels. . The Company provides significant equity-based incentives for executives and other key employees to ensure that they are motivated over the long- term to respond to the Company's business challenges and opportunities as owners and not just as employees. BASE SALARY. The Committee annually reviews each executive officer's base salary. When reviewing base salaries, the Committee considers individual and corporate performance, levels of responsibility, prior experience, breadth of knowledge and competitive pay practices. ANNUAL INCENTIVE. The bonus targets for executive officers are individually based. The Committee determines the amount targeted for the chief executive officer and the chief executive officer recommends to the Committee the bonus targets for the remainder of the executive officers. The amount of the bonus earned has historically been tied to the Company's sales and operating income. Specific financial and business objectives established under the bonus program are confidential commercial and business information and, as such, need not be disclosed pursuant to instruction 2 to Item 402(k) of Regulation S-K. As a percent of total cash compensation (percentage determined by dividing the target bonus by the sum of base salary and target bonus), 1997 target bonuses for the Named Executive Officers ranged from 18 % to 69 % with an average of 40%. The annual bonus is a variable pay program for officers and other senior managers of the Company to earn additional annual compensation (the "Bonus Plan"). The actual bonus award earned depends on the extent to which Company and individual performance objectives are achieved. At the start of each year, the Committee reviews and approves the annual performance objectives for the Company and individual officers. The Company objectives consist of operating, strategic and financial goals that are considered to be critical to the Company's fundamental long-term goal-building shareholder value. With respect to officers and senior management other than the chief executive officer, the Committee places considerable weight on the recommendations of the chief executive officer. LONG-TERM INCENTIVES. The Company's long-term incentive program consists of the 1995 Stock Option Plan and 1997 Equity Incentive Plan. The option program utilizes vesting periods (generally four years) to encourage key employees to continue in the employ of the Company. Through option grants, executives receive significant equity incentives to build long-term shareholder value. Grants are made at 100% of fair market value on the date of grant. Executives receive value from these grants only if the Company's Common Stock appreciates over the long-term. The size of option grants is determined based on competitive practices at leading companies in the software development industry and the Company's philosophy of significantly linking executive compensation with shareholder interests. In 1997, the Committee granted executive stock options that will vest over a four-year period. EMPLOYMENT AGREEMENTS. In recognition of their past and anticipated future contributions to the long-term success of the Company and shareholder value, and in light of the competitive market for qualified and experienced executives in the software industry, the Company entered into a Severance Benefits Agreement (each a "Severance Agreement") with all of its executive officers, except for one executive officer who is a party to an employment agreement with the Company. The Committee believes that each such Severance Agreement is consistent with the arrangements of other similarly qualified executive officers in the software industry. See "Certain Relationships and Related Transactions" for a discussion of the Severance Agreements, as amended. 51 CORPORATE PERFORMANCE AND CHIEF EXECUTIVE OFFICER COMPENSATION Dr. Huang's base salary at the beginning of 1997 as President and Chief Executive Officer was $160,000. In setting this amount, the Committee took into account (i) the scope of Dr. Huang's responsibility and (ii) the Board's confidence in Dr. Huang to lead the Company's continued development. Considering these factors, Dr. Huang was granted an option to purchase 30,000 shares of Common Stock (representing less than 1% of the Company's fully diluted equity) as an incentive for future performance, an amount the Committee determined was consistent with competitive practices. During 1997, the Company achieved all of its corporate objectives. The Committee rated Dr. Huang's individual performance as successful primarily reflecting the Company's achievement of its financial and other strategic goals including the Unicore Merger, Japan Joint Venture and Willows acquisition. This performance level resulted in a cash bonus of $72,000 for 1997 or 31% of his total cash compensation. ACQUISITION COMMITTEE In response to industry trends and customer demands to provide greater service at low costs and competitive pricing, the Company's Board of Directors formed the Acquisition Committee to review, evaluate and make recommendations regarding strategic acquisitions, business combinations and joint venture opportunities as a way to enhance the Company's business and operations and long-term shareholder value. In connection with their duties and responsibilities to the Acquisition Committee, Dr. Huang and Mr. Berry were granted options to purchase 30,000 and 27,500 shares of the Company's common stock, respectively, at an exercise price of $10.625 per share. CONCLUSION Through the plans described above, a significant portion of the Company's compensation program and Dr. Huang's compensation are contingent on Company performance, and realization of benefits is closely linked to increases in long- term shareholder value. The Company remains committed to this philosophy of pay for performance, recognizing that the competitive market for talented executives and the volatility of the Company's business may result in highly variable compensation for a particular time period. COMPENSATION COMMITTEE David S. Lee, Anthony Sun and William P. Tai COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. David S. Lee, Anthony Sun and William P. Tai. No member of the Compensation Committee of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. For a description of transactions and relationships involving the Company and members of the Compensation Committee, see "Certain Relationships and Related Transactions." PERFORMANCE MEASUREMENT COMPARISON(l) The following performance graph assumes an investment of $100 on October 25, 1996, the date of the Company's initial public offering, and compares the change to December 31, 1997 in the market price of the Common Stock with a broad market index (S&P 500) and an industry index (S&P Computers (Software & Services)). The Company paid no dividends during the periods shown and the performance of the indices is shown on a total return (dividend reinvestment) basis. The graph lines merely connect the prices on the dates indicated and do not reflect fluctuations between those dates. 52 COMPARISON OF CUMULATIVE TOTAL RETURN OF COMPANY, INDUSTRY INDEX AND BROAD MARKET - ---------------------------- FISCAL YEAR ENDING ------------------------------- COMPANY 1996 1996 1997 AWARD SOFTWARE INTERNAT 100.00 121.88 93.75 INDUSTRY INDEX 100.00 109.81 152.97 BROAD MARKET 100.00 105.43 140.60 (1) This section is not "soliciting material," is not being filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in such filing. 53 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the ownership of the Company's Common Stock as of March 1, 1998 by: (i) each director; (ii) each of the Named Executive Officers in the Summary Compensation Table employed by the Company in that capacity on March 1, 1998; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its Common Stock.
BENEFICIAL OWNERSHIP (1) --------------------------------- NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES TOTAL ---------------- --------------- ---------------- Vobis Microcomputer AG (2)................................................. 993,742 12.09% Carlo-Schmid-StraBe D-5102 Wurselen Germany George C. Huang (3)........................................................ 626,409 7.62% Award Software International, Inc 777 East Middlefield Road Mountain View, CA 94043 Wellington Management Company, LLP......................................... 442,400 5.38% 75 State Street Boston, MA 02109 Sun Corporation............................................................ 424,797 5.17% 250 Asahi, Kochino-Cho Konan City, Aichi Prefecture 483 Japan Venrock Associates (4)..................................................... 416,666 5.07% 30 Rockfeller Plaza, Room 5508 New York, NY 10112 Willy Weck (5)............................................................. 1,001,867 12.19% Cheng Ming Lee (6)......................................................... 572,929 6.97% Masami Maeda (7)........................................................... 455,265 5.54% Anthony Sun (8)............................................................ 453,919 5.52%
54
BENEFICIAL OWNERSHIP (1) --------------------------------- NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES TOTAL ---------------- --------------- ---------------- Lyon T. Lin (9)............................................................ 171,597 2.09% William P. Tai (10)........................................................ 54,708 * David S. Lee (11).......................................................... 47,857 * Ann P. Shen (12)........................................................... 38,870 * Kevin J. Berry (13)........................................................ 48,298 * Pierre A. Narath........................................................... 196,714 2.83% All directors and executive officers as a group (16 persons) (14).......... 3,757,744 45.71%
____________ * Less than one percent. (1) This table is based upon information supplied by officers, directors and principal shareholders and Schedule 13D and 13G filed with the Securities and Exchange Commission ("SEC"). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 6,961,154 shares outstanding on March 1, 1998, adjusted as required by rules promulgated by the SEC. (2) Includes (i) 272,394 shares issuable pursuant to a warrant exercisable within 60 days of March 1, 1998 and (ii) 80,146 shares issuable pursuant to exercise of Vobis' Catch-up Right. See "Certain Relationships and Related Transactions." Mr. Weck, a director of the Company, is Finance Manager and Chief Financial Officer of Vobis Microcomputer AG. Mr. Weck disclaims beneficial ownership of such shares held by Vobis. (3) Includes (i) 14,582 shares held by Margaret Huang, (ii) 17,727 shares held by Dwight Huang, (iii) 17,190 shares held by Edina Huang, Dr. Huang's wife, son and daughter, respectively. Also includes 87,678 and 20,000 shares issuable pursuant to options exercisable within 60 days of March 1, 1998 by Dr. Huang and his wife, respectively. Dr. Huang disclaims beneficial ownership of shares held by his wife, son and daughter. (4) Includes (i) 229,302 shares held by Venrock Associates, (ii) 104,031 shares held by Venrock Associates II, L.P. and (iii) 57,325 and 26,008 shares issuable pursuant to warrants exercisable within 60 days of March 1, 1998 by Venrock Associates and Venrock Associates II, L.P., respectively. Mr. Sun, a director of the Company, is a general partner of Venrock Associates. Mr. Sun disclaims beneficial ownership of shares held by such entities, except to the extent of his pecuniary interest therein. (5) Includes 913,596 shares held by Vobis Microcomputer AG of which Mr. Weck disclaims beneficial ownership. Also includes 8,125 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (6) Includes (i) 348,285 shares held by Taiwan Venture Capital Corporation, (ii) 186,945 shares held by Fidelity Venture Capital Corporation and (iii) 14,211 shares held by Hwaxing Capital Corporation. Dr. Lee, a director of the Company, is President and Chief Executive Officer of Taiwan Venture Capital Corporation, Fidelity 55 Venture Capital Corporation and Hwaxing Capital Corporation. Dr. Lee is deemed to have voting power over the shares held by such entities. He disclaims beneficial ownership of the shares held by such entities. (7) Includes (i) 424,797 shares held by Sun Corporation and (ii) 10,156 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. Mr. Maeda, a director of the Company, is President, Chief Executive Officer and majority shareholder of Sun Corporation. (8) Includes (i) 229,302 shares held by Venrock Associates, (ii) 104,031 shares held by Venrock Associates II, L.P. and (iii) 57,325 and 26,008 shares issuable pursuant to warrants exercisable within 60 days of March 1, 1998 by Venrock Associates and Venrock Associates II, L.P., respectively. Mr. Sun, a director of the Company, is a general partner of Venrock Associates. Mr. Sun disclaims beneficial ownership of shares held by such entities, except to the extent of his pecuniary interest therein. Also includes 37,253 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (9) Includes (i) 6,862 shares held by Anne Lin, Mr. Lin's wife, (ii) 5,000 shares held by each of Christine Lin and Eric Lin, Mr. Lin's children, and (iii) 50,625 and 6,093 shares issuable pursuant to options exercisable within 60 days of March 1, 1998 by Mr. Lin and his wife, respectively. Mr. Lin disclaims beneficial ownership of shares held by his wife and children. (10) Includes 42,708 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (11) Includes 17,857 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (12) Includes 24,915 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (13) Includes 46,725 shares issuable pursuant to options exercisable within 60 days of March 1, 1998. (14) Includes 407,601, 355,727, and 80,146 shares issuable pursuant to options, warrants and other rights, respectively, to purchase shares exercisable within 60 days of March 1, 1998 by executive officers and directors as a group. 56 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. FINANCINGS In January 1996, Vobis Microcomputer AG ("Vobis") purchased 570,033 shares of Common Stock at $12.28 per share and a warrant (the "Vobis Warrant") at $0.02 per warrant share to purchase 272,394 shares of Common Stock with an exercise price of $12.28 per share. Pursuant to that certain Investors' Rights Agreement, dated as of January 12, 1996, among the Company, Vobis and the other parties thereto (the "Investors Rights Agreement"), Vobis may elect in respect of future issuances of the Company's equity securities to purchase that number of shares as is necessary to maintain its ownership interest (in no event to exceed 17.5% assuming the exercise of the Vobis, Walden and Venrock Warrants) in the Company existing immediately prior to such future issuances, subject to certain restrictions (the "Catch-up Right"). Pursuant to the Catch-up Right, Vobis has the right until May 10, 1998 to purchase (a) up to 32,026 shares at a per share price of $14.00 and (b) up to 48,120 shares at a per share price of $7.625. The Catch-up Right expires and terminates in accordance with its terms upon the earlier of (i) the date upon which Vobis owns less than 8% of the Company's Common Stock assuming the exercise of the Vobis, Walden and Venrock Warrants or (ii) completion of an offering of shares of the Company's Common Stock under the Securities Act with an aggregate offering price to the public of at least $10,000,000 and a per share price of at least $13.60 (a "Qualified Public Offering"). In July 1996 and December 1996, Vobis acquired 41,169 and 30,000 shares at a per share price of $10.00 and $8.00, respectively, pursuant to its Catch-up Right. In connection with Vobis' investment, the Company entered into a voting agreement with Vobis, Walden Capital Partners II, L.P. and Walden Technology Ventures II, L.P. (collectively, "Walden"), Venrock Associates and Venrock Associates II, L.P. (collectively, "Venrock") and the Company's Chief Executive Officer pursuant to which such shareholders agreed not to reduce the number of directors of the Board of Directors below five and to elect a person designated by Vobis to the Company's Board of Directors. Presently, Mr. Willy Weck is Vobis' designee to the Company's Board of Directors. This agreement will terminate upon the earlier of (i) January 12, 1999, (ii) a change of control of the Company, (iii) the date upon which Vobis owns less than 8% of the Company's outstanding shares of Common Stock assuming the exercise of the Vobis, Walden and Venrock Warrants, or (iv) completion of a Qualified Public Offering. The Vobis, Walden and Venrock Warrants contain a net exercise provision and expire upon the earlier of (i) September 30, 2000 or (ii) completion of a Qualified Public Offering. The holders of these warrants are entitled to certain rights with respect to the registration of the shares of Common Stock issuable upon exercise thereof under the Securities Act. Under the Investors' Rights Agreement, Vobis, Walden and Venrock have the right to purchase equity securities of the Company in respect of certain future issuances thereof, which right terminates upon a Qualified Public Offering. MISCELLANEOUS The Company currently leases the Taiwan Office in Taipei, Taiwan, from Sun, a shareholder, and GSS. In 1997, the Company made lease payments to Sun of $69,188. The Company also made lease payments to GSS of $147,294 during 1997. The Company has entered into an agreement with Sun pursuant to which Sun provides the Company with marketing services in Japan and access to office space in Tokyo, Japan. The Company made payments to Sun of $31,200 during 1997. The Company believes that the foregoing transactions were in its best interests. As a matter of policy, all future transactions between the Company and any of its officers, directors or principal shareholders will be approved by a majority of the independent and disinterested members of the Board of Directors, will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties and will be in connection with bona fide business purposes of the Company. As of December 1, 1997, the Company entered into Severance Agreements with each of the following executive officers of the Company that provide for payment of certain severance amounts in the event of an involuntary termination of employment without cause or constructive termination of employment without cause from the Company. Each of the Severance Agreements was amended on April 15, 1998. 57
Name % of Salary/Bonus/Commission Reza Afghan 50% Kevin J. Berry 100% Maurice W. Bizzarri 50% Lyon T. Lin 100% Laurent K. Gharda 50% Ann P. Shen 50% David J. Wippich 50%
As of December 1, 1997, the Company entered into the Severance Agreement with Dr. Huang providing for a severance payment of 200% of his then existing base salary plus bonus in the event of an involuntary termination of employment without cause or constructive termination of employment without cause from the Company. This agreement also provides that in the event any excise taxes or penalties are levied on Dr. Huang in respect of such severance payment, including pursuant to Section 4999 of the Internal Revenue Code, Dr. Huang shall be entitled to receive additional amounts equal to such taxes and penalties. On March 1, 1998, the Company made a loan to Pierre A. Narath, Vice President of the Company and President of Unicore, in the principal amount of $200,000. This loan earns interest at 8.25% per annum payable quarterly in arrears. All principal and unpaid interest becomes due and payable upon the sooner of March 1, 2000 or the date of termination of Mr. Narath's employment or voluntary resignation. In consideration of this loan, Mr. Narath agreed to terminate his right to register shares of the Company's common stock held by him under the Securities Act of 1933, as amended, pursuant to that certain Registration Rights Agreement, dated as of May 30, 1997, between the Company and Mr. Narath. 58 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K. (a) (1) INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants....................................................................... 28 Consolidated Balance Sheet at December 31, 1997 and 1996................................................ 29 Consolidated Statement of Income for the three years ended December 31, 1997............................ 30 Consolidated Statement of Shareholders' Equity for the three years ended December 31, 1997.............. 31 Consolidated Statement of Cash Flows for the three years ended December 31, 1997........................ 32 Notes to Consolidated Financial Statements.............................................................. 33 Supplementary Data (Unaudited).......................................................................... 45
(2) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or in the notes thereto. (3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION 2.1+(2) Agreement and Plan of Merger and Reorganization, dated as of May 29, 1997, by and among the Company, Award Merger Sub Corp., Unicore Software, Inc. and Pierre A. Narath. 3.1(1) Amended and Restated Articles of Incorporation of the Registrant. 3.1.1(1) Form of Amended and Restated Articles of Incorporation of the Registrant effecting the 1-for-2 reverse stock split. 3.1.2(1) Form of Amended and Restated Articles of Incorporation of the Registrant, effective upon the completion of the IPO. 3.2(1) Amended and Restated Bylaws of the Registrant. 3.2.1(1) Form of Amended and Restated Bylaws of the Registrant, effective upon the completion of the IPO. 4.1(1) Reference is made to Exhibits 3.1 through 3.2 4.5(1) Specimen stock certificate. 10.1(1) Form of Indemnity Agreement to be entered into between the Registrant and its directors and officers, with related schedule. 10.2(1) Registrant's 1995 Stock Option Plan, as amended (the ``Option Plan''). 10.3(1) Form of Incentive Stock Option under the Option Plan. 10.4(1) Form of Nonstatutory Stock Option under the Option Plan. 10.5(1) Registrant's Amended and Restated Executive Compensation Plan.
59
EXHIBIT NUMBER DESCRIPTION 10.6(1) Registrant's Amended and Restated Executive Compensation Plan. 10.7(1) Lease, dated January 1, 1996, between GCH Systems, Inc. and the Registrant. 10.8(1) Summary of Leases, dated March 1, 1996, between Sun Corporation, GSS Corporation and the Registrant. 10.9(1) Voting Agreement, dated January 12, 1996, between the Registrant and certain persons named therein. 10.10(1) Investors' Rights Agreement among the Registrant and certain other persons named therein, dated as of January 12, 1996. 10.11(1) Warrant issued to Synnex Information Technologies, Inc. 10.12(1) Warrant issued to Vobis Microcomputer AG. 10.13(1) Warrant issued to Venrock Associates. 10.14(1) Warrant issued to Venrock Associates II, L.P. 10.15(1) Warrant issued to Walden Capital Partners II, L.P. 10.16(1) Warrant issued to Walden Technology Ventures II, L.P. 10.17+(1) Technology Development and Support Agreement, dated June 28, 1996, between Registrant and Advanced Micro Devices, Inc. 10.18(3) 1997 Compensation Plan. 10.19(2) Registration Rights Agreement, dated as of May 30, 1997, between the Company and Pierre A. Narath. 10.20(2) Escrow Agreement, dated as of May 30, 1997, by and among the Company, Pierre A. Narath and First Trust of California, N.A. 10.21(2) Employment Agreement, dated as of May 30, 1997, between Pierre A. Narath and the Company. 10.22(2) Employee Proprietary and Inventions Agreement, dated as of May 30, 1997, between the Company and Pierre A. Narath. 10.23(2) Noncompetition Agreement, dated as of May 30, 1997, between Pierre A. Narath and the Company. 10.24(2) General Release, dated as of May 30, 1997, between Pierre A. Narath and the Company. 10.25+(4) Memorandum of Understanding by and among Sun Corporation, Axis Corporation and the Company. 10.26(6) Commercial Lease, dated as of January 5, 1996 by and between Unicore Software, Inc. and 114 Realty Trust, as amended on May 30, 1997 and September 1, 1997. 10.27(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and George C. Huang. 10.28(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Lyon T. Lin. 10.29(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Kevin J. Berry. 10.30(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Ann P. Shen. 10.31(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Maurice W. Bizzarri.
60
Exhibit Number Description 10.33(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Reza Afghan. 10.34(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Laurent K. Gharda. 10.35(6) Promissory Note, dated March 1, 1998, issued by Pierre A. Narath to the Company. 10.36(6) Letter Agreement, dated March 1, 1998, between Pierre A. Narath and the Company. 10.37++(6) Master Original Equipment Manufacturer (OEM) Software License Agreement, dated September 10, 1997, between the Company and Intel Corporation. 10.38(7) Registrant's 1997 Equity Incentive Plan (the "Equity Incentive Plan"). 10.39(7) Form of Incentive Stock Option under the Equity Incentive Plan. 10.40(7) Form of Nonstatutory Stock Option under the Equity Incentive Plan. 10.41(8) Amendment and Recission of Provision of Executive Severance Benefits Agreement, dated April 15, 1998, between the Company and George C. Huang. 10.42(8) Form of Rescission of Provision of Executive Severance Benefits Agreement, dated April 15, 1998, between the Company and each of the following: Lyon T. Lin, Kevin J. Berry, Ann P. Shen, Maurice W. Bizzarri, David J. Wippich, Reza Afghan and Laurent K. Gharda. 21(5) Subsidiaries of the Registrant. 23.1(8) Consent of Independent Accountants. 24.2(6) Power of Attorney. See signature page. 27(6) Financial Data Schedule.
_____________ + The Securities and Exchange Commission has granted confidential treatment for portions of this document. ++ The Company has requested confidential treatment for portions of this document. (1) Incorporated by reference to the correspondingly numbered exhibit to the Company's Registration Statement on Form S-1, File No. 333-05107, filed on June 3, 1996, as amended. (2) Incorporated by reference to the correspondingly numbered exhibit to the Company's Current Report on Form 8-K filed on June 16, 1997, as amended on October 14, 1997. (3) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on May 6, 1997. (4) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on August 13, 1997. (5) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on November 13, 1997. (6) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual report on Form 10-K filed on March 31, 1998. (7) Incorporated by reference to Appendices A, B and C to the Company's Definitive Proxy Statement filed on April 30, 1997. (8) Filed herewith. (b) REPORTS ON FORM 8-K 61 A Form 8-K/A was filed on October 14, 1997 solely for the purpose of amending Exhibit 2.1 to the Form 8-K Current Report dated May 30, 1997 and filed on June 16, 1997. 62 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO ANNUAL REPORT ON FORM 10-K/A TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 29TH DAY OF APRIL 1998. AWARD SOFTWARE INTERNATIONAL, INC. By: /s/ GEORGE C. HUANG -------------------------- GEORGE C. HUANG CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES STATED.
Signature TITLE DATE - --------- ----- ---- Chairman of the Board, President, April 29, 1998 /s/ George C. Huang Chief Executive Officer and - --------------------------- Director (Principal Executive GEORGE C. HUANG Officer ) /s/ Kevin J. Berry Vice President, Finance, Chief April 29, 1998 - --------------------------- Financial Officer, Treasurer and KEVIN J. BERRY Secretary (Principal Financial and Accounting Officer ) /s/ * Director April 29, 1998 - --------------------------- CHENG MING LEE /s/ * Director April 29, 1998 - --------------------------- DAVID S. LEE /s/ * Director April 29, 1998 - --------------------------- MASAMI MAEDA /s/ * Director April 29, 1998 - --------------------------- ANTHONY SUN /s/ * Director April 29, 1998 - --------------------------- WILLIAM P. TAI /s/ * Director April 29, 1998 - --------------------------- WILLY WECK
* By: /s/ George C. Huang ------------------------- GEORGE C. HUANG ATTORNEY-IN-FACT 63 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 2.1+(2) Agreement and Plan of Merger and Reorganization, dated as of May 29, 1997, by and among the Company, Award Merger Sub Corp., Unicore Software, Inc. and Pierre A. Narath. 3.1(1) Amended and Restated Articles of Incorporation of the Registrant. 3.1.1(1) Form of Amended and Restated Articles of Incorporation of the Registrant effecting the 1-for-2 reverse stock split. 3.1.2(1) Form of Amended and Restated Articles of Incorporation of the Registrant, effective upon the completion of the IPO. 3.2(1) Amended and Restated Bylaws of the Registrant. 3.2.1(1) Form of Amended and Restated Bylaws of the Registrant, effective upon the completion of the IPO. 4.1(1) Reference is made to Exhibits 3.1 through 3.2 4.5(1) Specimen stock certificate. 10.1(1) Form of Indemnity Agreement to be entered into between the Registrant and its directors and officers, with related schedule. 10.2(1) Registrant's 1995 Stock Option Plan, as amended (the ``Option Plan''). 10.3(1) Form of Incentive Stock Option under the Option Plan. 10.4(1) Form of Nonstatutory Stock Option under the Option Plan. 10.5(1) Registrant's Amended and Restated Executive Compensation Plan. 10.6(1) Registrant's Amended and Restated Executive Compensation Plan. 10.7(1) Lease, dated January 1, 1996, between GCH Systems, Inc. and the Registrant. 10.8(1) Summary of Leases, dated March 1, 1996, between Sun Corporation, GSS Corporation and the Registrant. 10.9(1) Voting Agreement, dated January 12, 1996, between the Registrant and certain persons named therein. 10.10(1) Investors' Rights Agreement among the Registrant and certain other persons named therein, dated as of January 12, 1996. 10.11(1) Warrant issued to Synnex Information Technologies, Inc. 10.12(1) Warrant issued to Vobis Microcomputer AG. 10.13(1) Warrant issued to Venrock Associates. 10.14(1) Warrant issued to Venrock Associates II, L.P. 10.15(1) Warrant issued to Walden Capital Partners II, L.P. 10.16(1) Warrant issued to Walden Technology Ventures II, L.P. 10.17+(1) Technology Development and Support Agreement, dated June 28, 1996, between Registrant and Advanced Micro Devices, Inc. 10.18(3) 1997 Compensation Plan. 10.19(2) Registration Rights Agreement, dated as of May 30, 1997, between the Company and Pierre A. Narath. 10.20(2) Escrow Agreement, dated as of May 30, 1997, by and among the Company, Pierre A. Narath and First Trust of California, N.A. 10.21(2) Employment Agreement, dated as of May 30, 1997, between Pierre A. Narath and the Company. 10.22(2) Employee Proprietary and Inventions Agreement, dated as of May 30, 1997, between the Company and Pierre A. Narath. 10.23(2) Noncompetition Agreement, dated as of May 30, 1997, between Pierre A. Narath and the Company. 10.24(2) General Release, dated as of May 30, 1997, between Pierre A. Narath and the Company.
EXHIBIT NUMBER DESCRIPTION 10.25+(4) Memorandum of Understanding by and among Sun Corporation, Axis Corporation and the Company. 10.26(6) Commercial Lease, dated as of January 5, 1996 by and between Unicore Software, Inc. and 114 Realty Trust, as amended on May 30, 1997 and September 1, 1997. 10.27(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and George C. Huang. 10.28(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Lyon T. Lin. 10.29(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Kevin J. Berry. 10.30(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Ann P. Shen. 10.31(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Maurice W. Bizzarri. 10.32(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and David J. Wippich. 10.33(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Reza Afghan. 10.34(6) Severance Benefits Agreement, dated December 1, 1997, between the Company and Laurent K. Gharda. 10.35(6) Promissory Note, dated March 1, 1998, issued by Pierre A. Narath to the Company. 10.36(6) Letter Agreement, dated March 1, 1998, between Pierre A. Narath and the Company. 10.37++(6)Master Original Equipment Manufacturer (OEM) Software License Agreement, dated September 10, 1997, between the Company and Intel Corporation. 10.38(7) Registrant's 1997 Equity Incentive Plan (the "Equity Incentive Plan"). 10.39(7) Form of Incentive Stock Option under the Equity Incentive Plan. 10.40(7) Form of Nonstatutory Stock Option under the Equity Incentive Plan. 10.41(8) Amendment and Recission of Provision of Executive Severance Benefits Agreement, dated April 15, 1998, between the Company and George C. Huang. 10.42(8) Form of Rescission of Provision of Executive Severance Benefits Agreement, dated April 15, 1998, between the Company and each of the following: Lyon T. Lin, Kevin J. Berry, Ann P. Shen, Maurice W. Bizzarri, David J. Wippich, Reza Afghan and Laurent K. Gharda. 21(5) Subsidiaries of the Registrant. 23.1(8) Consent of Independent Accountants. 24.2(6) Power of Attorney. See signature page. 27(6) Financial Data Schedule.
_______________ + The Securities and Exchange Commission has granted confidential treatment for portions of this document. ++ The Company has requested confidential treatment for portions of this document. (1) Incorporated by reference to the correspondingly numbered exhibit to the Company's Registration Statement on Form S-1, File No. 333-05107, filed on June 3, 1996, as amended. (2) Incorporated by reference to the correspondingly numbered exhibit to the Company's Current Report on Form 8-K filed on June 16, 1997, as amended on October 14, 1997. (3) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on May 6, 1997. (4) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on August 13, 1997. (5) Incorporated by reference to the correspondingly numbered exhibit to the Company's Quarterly Report on Form 10-Q filed on November 13, 1997. (6) Incorporated by reference to the corresondingly numbered exhibit to the Company's Annual Report on Form 10-K filed on March 31, 1998. (7) Incorporated by reference to Appendices A, B and C to the Company's definitive Proxy Statement filed on April 30, 1997. (8) Filed herewith. EX-10.41 2 AMENDMENT AND RECISSION OF SEVERANCE BENEFITS EXHIBIT 10.41 AMENDMENT AND RESCISSION OF PROVISION OF EXECUTIVE SEVERANCE BENEFITS AGREEMENT WHEREAS, pursuant to Section 2.3 of that certain Executive Severance Benefits Agreement (the "Agreement"), dated as of December 1, 1997, by and between Award Software International, Inc. (the "Company") and the undersigned, the undersigned has certain rights to accelerate the vesting of stock options such that all of those option shares held by the undersigned which would not otherwise be vested and exercisable on the date of the Executive's Covered Termination (as that term is defined therein) shall become immediately vested and exercisable as of such date. WHEREAS, pursuant to Section 2.2 of the Agreement, undersigned has the right to receive, within thirty (30) days following the date of the undersigned's Covered Termination, a lump sum cash payment equal to three hundred percent (300%) of the sum of Base Pay plus Deemed Bonus (as those terms are defined in the Agreement), subject to applicable tax withholding. WHEREAS, neither the undersigned nor the Company intended to prohibit, restrict or otherwise limit the Company's ability to structure transactions that the Company may otherwise engage in. WHEREAS, the undersigned and the Company desire to rescind any rights pursuant to Section 2.3 of the Agreement. WHEREAS, the undersigned and the Company desire to amend Section 2.2 of the Agreement to reduce the lump sum cash payment from three hundred percent (300%) to two hundred percent (200%) of the sum of Base Pay plus Deemed Bonus, subject to applicable tax withholding. NOW, THEREFORE, the undersigned and the Company hereby irrevocably and unconditionally agree to rescind the rights under Section 2.3 of the Agreement, which shall be deemed null and void ab initio. The Optionee agrees to return any documentation received in connection with the rights under Section 2.3 of the Agreement to the Company. Each of the undersigned and the Company represents that he or it is not relying on any representation or promise of any other person in executing this Rescission, or in making the rescission provided for herein, and has assumed the risk of any misrepresentation, concealment or mistake. If either party should subsequently discover that a fact relied upon by he or it in entering into this Rescission was untrue, or that a fact was concealed from it, or that is understanding of the facts or of the law was incorrect, such party shall not be entitled to any relief in connection therewith, including, without limitation, any alleged right or claim to set aside or rescind this Rescission. This Rescission is intended to be and is final and binding, regardless of any claims of misrepresentation, promise made without the intention to perform, concealment of fact, mistake of fact or law, or of any other circumstance. This Rescission may be executed in one or more counterparts, each of which shall constitute an original and all of which shall constitute one instrument. NOW, THEREFORE, the undersigned and the Company hereby irrevocably and unconditionally agree to amend Section 2.2 of the Agreement in its entirety to read: "Within thirty (30) days following the date of Executive's Covered Termination, Executive shall receive a lump sum cash payment equal to only two hundred percent (200%) of the sum of Base Pay plus Deemed Bonus, subject to applicable tax withholding." IN WITNESS WHEREOF, the undersigned has executed this Rescission as of April ___, 1998. OPTIONEE: AWARD SOFTWARE INTERNATIONAL, INC. By: - --------------------------------- -------------------------------------- Name: George C. Huang Name: Title: 2. EX-10.42 3 FORM OF RECISSION OF EXECUTIVE SEVERANCE BENEFITS EXHIBIT 10.42 RESCISSION OF PROVISION OF EXECUTIVE SEVERANCE BENEFITS AGREEMENT WHEREAS, pursuant to Section 2.3 of that certain Executive Severance Benefits Agreement (the "Agreement"), dated as of December 1, 1997, by and between Award Software International, Inc. (the "Company") and the undersigned, the undersigned has certain rights to accelerate the vesting of stock options such that all of those option shares held by the undersigned which would not otherwise be vested and exercisable on the date of the Executive's Covered Termination (as that term is defined therein) shall become immediately vested and exercisable as of such date. WHEREAS, neither the undersigned nor the Company intended to prohibit, restrict or otherwise limit the Company's ability to structure transactions that the Company may otherwise engage in. WHEREAS, the undersigned and the Company desire to rescind any rights pursuant to Section 2.3 of the Agreement. NOW, THEREFORE, the undersigned and the Company hereby irrevocably and unconditionally agree to rescind the rights under Section 2.3 of the Agreement, which shall be deemed null and void ab initio. The Optionee agrees to return any documentation received in connection with the rights under Section 2.3 of the Agreement to the Company. Each of the undersigned and the Company represents that he or it is not relying on any representation or promise of any other person in executing this Rescission, or in making the rescission provided for herein, and has assumed the risk of any misrepresentation, concealment or mistake. If either party should subsequently discover that a fact relied upon by he or it in entering into this Rescission was untrue, or that a fact was concealed from it, or that its understanding of the facts or of the law was incorrect, such party shall not be entitled to any relief in connection therewith, including, without limitation, any alleged right or claim to set aside or rescind this Rescission. This Rescission is intended to be and is final and binding, regardless of any claims of misrepresentation, promise made without the intention to perform, concealment of fact, mistake of fact or law, or of any other circumstance. This Rescission may be executed in one or more counterparts, each of which shall constitute an original and all of which shall constitute one instrument. IN WITNESS WHEREOF, the undersigned has executed this Rescission as of April ___, 1998. OPTIONEE: AWARD SOFTWARE INTERNATIONAL, INC. By: - ------------------------------- ------------------------------------- Name: Name: Title: EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement of Award Software International, Inc. on Form S-8 (File No. 333-17607) of our report dated January 29, 1998 appearing on page 28 of this Annual Report on Form 10-K/A of Award Software International, Inc. for the year ended December 31, 1997. /s/ Price Waterhouse LLP San Jose, California April 29, 1998 -----END PRIVACY-ENHANCED MESSAGE-----