ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter market and the NASDAQ National Market System under the symbol PRMO since the Company's initial public offering on September 20, 1995.
The closing price of the Company's common stock as reported by the NASDAQ National Market System on March 3, 1997 was $7.625 per share. The price per share in the following table sets forth the low and high closing prices in the NASDAQ National Market System for the quarter indicated:
Premenos has not paid dividends and does not plan to pay dividends on its common stock in the foreseeable future. The Company presently intends to reinvest earnings to fund future growth.
At December 31, 1996, there were approximately 60 stockholders of record of the Company. The Company is unable to estimate the total number of stockholders represented by these record holders as many of such shares are held by brokers and other institutions on behalf of stockholders.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with the more detailed consolidated financial statements presented in Item 8 of this Form 10-K. The selected consolidated financial data as of December 31, 1992 and for the year then ended have been derived from the unaudited consolidated financial statements of the Company. The unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position at the end of, and the results of operations for, the periods presented.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports a broad range of electronic commerce software products and services that enable businesses to engage in secure and reliable business-to-business electronic transactions and communications. The Company was incorporated in July 1995 for the purpose of acquiring all of the issued and outstanding Common Stock of Premenos Holdings, Inc. and, indirectly, substantially all of the issued and outstanding Common Stock of, and the business of, Premenos Corp. All of the business activities described herein are conducted by subsidiaries of Premenos Technology Corp., namely Premenos Corp. (and its wholly-owned subsidiaries, Premenos Europa S.A., Premenos U.K. Ltd. and Premenos S.A.), Premenos Canada Corp. and Prime Factors, Inc.
The Company derives its revenues primarily from the licensing of computer software programs, sales of software support services, consulting and education services. Software license revenues are generated from licensing to end-users and royalties from third-party distributors. Service revenues are generated primarily from software support, consulting and education services. To date, the most significant portion of the Company's software licenses and services revenues have been derived from its EDI/400 product. The Company expects that revenues from EDI/400 will continue to account for a majority of its revenues through 1997. As a result, if product sales, support renewals or pricing levels of EDI/400 were to decline materially, whether as a result of technological change, competition or any other factors, the Company's business, results of operations and financial condition would be adversely affected.
In order to expand its product offerings and address a significant market opportunity, the Company introduced its Templar product in 1995. Templar allows business customers to engage in electronic commerce transactions over the Internet and other TCP/IP networks by facilitating the exchange of secure, digitally-signed electronic documents, including EDI documents. The Company began developing Templar in 1993 and has committed substantial resources to its development.
During 1996, the Company acquired Don Valley Technology Corporation ("Don Valley"), a developer of forms-based electronic commerce software, and Prime Factors, Inc., a developer of encryption software. In May, the Company acquired all of the common stock of Don Valley, a Canadian corporation based in Toronto, Ontario, Canada, for 57,657 shares of newly issued common stock and approximately $1.1 million in cash. In July, the Company acquired Prime Factors, a U.S. corporation based in Eugene, Oregon, for 46,931 shares of newly issued common stock and approximately $3.0 million in cash. Both transactions have been accounted for as purchases. Accordingly, the results of operations of both Don Valley and Prime Factors have been included in the Company's consolidated financial statements from their respective acquisition dates of May 14, 1996 and July 19, 1996.
The Company has experienced significant quarterly fluctuations in revenues and operating results and expects these fluctuations to continue in the future. The Company believes that these fluctuations have been attributable to the budgeting and purchasing practices of its customers, the length of the customer product evaluation process for the Company's products, the timing of customer system conversions and the Company's sales commission practices, which are based partly on quarterly and annual incentives. In addition, in 1996 the Company experienced significant fluctuations in reported operating results relating to acquisition related costs. Future revenues and operating results may fluctuate as a result of these and other factors, including the demand for the Company's products and services, the timing and cost of new product introductions and enhancements, changes in the mix of products and services sold and in the mix of sales by distribution channels, the size and timing of customer orders, changes in pricing policies by the Company or its competitors, timing of any acquisitions and associated costs, competitive conditions in the industry and general domestic and international economic and political conditions.
Overview (Continued)
The Company's revenues and results of operations may also be affected by seasonal factors which may include higher revenues in the Company's fourth fiscal quarter and lower revenues in the other fiscal quarters. Consequently, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.
Results of Operations
The following table sets forth the percentage of revenues represented by certain items in the Company's consolidated statements of operations for the periods indicated.
Revenues
Total revenues were $33.5 million, $25.5 million and $20.0 million in 1996, 1995 and 1994, respectively, representing increases of 31% from 1995 to 1996 and 28% from 1994 to 1995. Included in 1994 software licenses and services revenues is a total of $1.7 million related to one major, non-recurring contract. International revenues were $2.9 million, $2.6 million and $1.7 million in 1996, 1995 and 1994, respectively.
Software Licenses. Revenues from license fees and royalties increased to $21.7 million in 1996 from $17.8 million in 1995 and $13.3 million in 1994, representing increases of 22% and 34%, respectively. The increase in 1996 over 1995 was largely due to revenues derived through the Company's network of distributors and increased acceptance of the Company's EDI/Open translator product for open systems, combined with improved revenues from sales of the Company's Templar product and revenues derived from licensing of the Prime Factors' products. The increase in 1995 over 1994 was primarily due to generally increasing market acceptance of EDI technology and the Company's products, along with hardware system upgrades of existing customers.
Results of Operations (Continued)
Services. Revenues from services increased to $11.8 million in 1996 from $7.7 million in 1995 and $6.7 million in 1994, representing increases of 52% and 16%, respectively. Product support, consulting and education services revenues each increased in 1996 over the corresponding prior year levels. The Company's product support revenues continue to constitute the largest portion of services revenues, and grew 47% in 1996 and 34% in 1995. Product support revenues were $9.9 million, $6.7 million and $5.0 million in 1996, 1995 and 1994, respectively, and as a percentage of total Company revenues were 29%, 26% and 25%, respectively. The growth in services revenues reflects the continued increase in the Company's installed base of products under support contracts and increased revenues from education and software integration services.
Cost of Revenues. Cost of revenues were $9.3 million, $6.7 million and $4.9 million, representing 27.8%, 26.5% and 24.7% of revenues in 1996, 1995 and 1994, respectively.
Cost of licenses includes royalties paid to third parties for licensed software incorporated into the Company's products, amortization of capitalized software development costs and costs associated with product packaging, documentation and software duplication. Cost of licenses were $3.9 million, $3.4 million and $2.3 million in 1996, 1995 and 1994, respectively. As a percentage of revenues from licenses, costs of licenses revenues were 18.1%, 18.9% and 17.6% in 1996, 1995 and 1994, respectively. The increase from 1994 to 1995 reflects a broadening of the Company's product offerings and related costs of sublicensing embedded technologies from third parties. The decrease from 1995 to 1996 is primarily due to reduced third party fees resulting from renegotiation of the Company's agreement with IBM.
Cost of services consists primarily of the personnel costs related to providing product support, training and contract services. Cost of services were $5.4 million, $3.4 million and $2.6 million in 1996, 1995 and 1994, respectively. As a percentage of services revenues, costs of services were 45.7%, 43.7% and 38.7% in 1996, 1995 and 1994, respectively. The increased costs in 1996 and 1995 reflect the Company's increasing emphasis on providing software integration and consulting services to its customers.
Product Development. Product development expenditures consist primarily of personnel and equipment costs required to conduct the Company's research and development efforts, including project engineers, product documentation, internal testing and development, standards and quality assurance. Product development expenses, net of capitalized software development costs, were $8.9 million, $7.0 million and $4.7 million in 1996, 1995 and 1994, representing 26.7%, 27.6% and 23.5% of revenues, respectively. The Company capitalized software development costs of $2.7 million, $1.8 million and $1.1 million in 1996, 1995 and 1994, respectively, in accordance with Statement of Financial Accounting Standards No. 86. The increases in the amounts capitalized reflect the fact that the Company incurred greater expenses on products that had reached technological feasibility. The amounts capitalized represented 23%, 20% and 19%, respectively, in 1996, 1995 and 1994, of gross product development expenditures which were $11.6 million, $8.8 million and $5.8 million, respectively. The increase from 1995 to 1996 also reflects continuing development of technologies acquired in connection with the Don Valley Technology Corporation acquisition and the Prime Factors, Inc. acquisition. The Company believes that research and development expenditures are essential to maintaining its competitive position and expects these costs to continue to constitute a significant percentage of revenues. Product development expense and the capitalization rate may fluctuate from period to period depending in part upon the number and status of software development projects in process.
Results of Operations (Continued)
Sales and Marketing. Sales and marketing expenses consist primarily of salaries and commissions of sales and marketing personnel and outside marketing and promotional expenses. Sales and marketing expenses increased to $11.6 million in 1996 from $8.5 million in 1995 and $5.8 million in 1994, and increased to 34.7% of revenues in 1996 from 33.3% in 1995 and 29.0% of revenues in 1994. The Company continues to place significant emphasis on direct sales through building its own sales force. In addition, the Company is continuing to pursue marketing its products through indirect channels, both domestically and internationally, in order to increase market share while reducing distribution costs.
General and Administrative. General and administrative expenses increased to $3.9 million in 1996 from $2.2 million in 1995 and $1.7 million in 1994, representing 11.6%, 8.8% and 8.5% of revenues, respectively, in 1996, 1995 and 1994. These increases are due primarily to increases in personnel and infrastructure in support of the Company's revenue growth and, in 1996, requirements related to being a publicly traded company and increased mergers and acquisitions activity.
Acquisition-Related Costs. During 1996, approximately $4.5 million of in- process product development was expensed in connection with the Company's acquisitions of Don Valley and Prime Factors.
Also during 1996, the Company granted options to acquire 9,006 shares of Premenos Technology Corp. common stock in exchange for options to acquire 6,848 shares of Premenos Corp. common stock and issued 920 shares of Premenos Technology Corp. common stock in exchange for 700 shares of Premenos Corp. common stock held by minority shareholders. These transactions resulted in a charge of $232,000 in 1996.
Other Income (Expense), Net. Other income (expense) consists of interest income, interest expense and other non-operating expenses. Net other income was $2.8 million in 1996 and $732,000 in 1995 due to interest earned on the proceeds from the Company's initial public offering of stock in September 1995, while net other expense was $102,000 in 1994. Net other income as a percentage of revenues in 1996 and 1995 was 8.4% and 2.9%, respectively, while net other expense as a percentage of revenues was 0.5% in 1994.
Provision for Income Taxes. The Company's provision for income taxes in 1996, 1995 and 1994 were $850,000, $238,000 and $645,000, respectively. These represent effective income tax rates of 33% (excluding the non-deductible acquisition-related costs), 14% and 23%, respectively, in 1996, 1995 and 1994. The Company realized tax benefits of approximately $2.9 million and $557,000 as a result of employee stock option exercises during 1996 and 1995, respectively. These tax benefits were credited directly to stockholders' equity and, accordingly, were not reflected in the income tax provisions. The Company's tax rate has been affected each year by the utilization of research and experimentation credits and, in 1995 and 1994, by changes in the valuation allowance provided against the Company's deferred tax assets.
Minority Interest. Minority interest of $4,000, $(20,000) and $310,000 in 1996, 1995 and 1994, respectively, represents the minority stockholders' proportionate share of net income (loss) of Premenos Corp.
Net Income (Loss) Net income (loss) for 1996, 1995 and 1994 were $(3.0) million, $1.5 million and $1.8 million, respectively. Excluding the acquisition-related costs, net income for 1996 was $1.7 million, or 5.1% of total revenues.
Quarterly Results of Operations
The Company's quarterly results have historically been subject to fluctuations and, as a result, the operating results for any quarter are not necessarily indicative of results for any future period. Operating income has fluctuated significantly from quarter to quarter as the result of quarterly revenue fluctuations and one-time costs relating to acquisitions.
The following tables present the Company's quarterly operating results for 1996 and 1995. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements appearing in Item 8
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Premenos Technology Corp.:
We have audited the consolidated financial statements and the financial statement schedule of Premenos Technology Corp. and subsidiaries (the Company) listed in the index on page 24 of this Form 10-K. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premenos Technology Corp. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule, referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
San Francisco, California January 31, 1997, except for Paragraph 3 of Note 16 as to which the date is March 16, 1997
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Premenos Technology Corp. and its subsidiaries (collectively, the Company) develop and market electronic commerce software products that facilitate the exchange and processing of commercial information and transaction documents, electronically. The Company also offers consulting, education and support services in support of its customers' use of its software products.
Premenos Technology Corp. was organized in 1995 for the purpose of effecting a reorganization to consolidate the stockholdings of the Company into one entity. This was effected by an exchange of shares of Premenos Technology Corp. common stock and stock options for shares of common stock and stock options of its subsidiaries.
Basis of Presentation The consolidated financial statements of the Company include the accounts of Premenos Technology Corp. and its direct and indirect subsidiaries. All significant intercompany balances and transactions between the companies have been eliminated.
The Company operates in one industry segment (the development and marketing of computer software and related services) and markets its products and services to customers in a broad range of industries, principally through a direct sales force domestically, and through distributors internationally.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition Software Licenses Revenues in this category consist of (i) fees from licenses of the Company's software products and (ii) royalty fees from distributors of the Company's software products. License revenue is recognized when an agreement has been signed, the product has been shipped and there are no other significant remaining obligations. Software royalties are recognized as reported. The Company accrues sales returns and other allowances at the time of shipment.
Services Service revenue consists primarily of product support, consulting and education services. Product support agreements generally require the company to provide technical support and updates of software products as they are released. Product support revenue is recognized ratably over the contract period, generally one year. Consulting and education services revenues are recognized as the related services are performed. Deferred revenue results from services billings for which revenue has not been recognized.
Cash, Cash Equivalents and Short-Term Investments Cash, cash equivalents and short-term investments are stated at cost, which approximates fair value, and consist primarily of money market funds and U.S. Treasury bills. The Company includes in cash and cash equivalents all short- term, highly liquid investments which mature within three months of their purchase date. Investments maturing between three and twelve months from date of purchase are classified as short-term investments.
Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of December 31, 1996, debt securities were classified as held-to- maturity as the Company intended to hold, and had the ability to hold, these securities to maturity. Held-to-maturity securities are stated at amortized cost, which approximates fair market value.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and other short-term obligations of the U.S. Government. The Company has placed its temporary cash investments primarily with one financial institution.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Property and Equipment Property and equipment is stated at historical cost and depreciated using the straight-line method over the estimated useful lives of the related assets over periods varying from three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Normal maintenance and repairs are charged to operations as incurred. When assets are sold or retired, the cost and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operations.
Capitalized Software Development Costs The Company capitalizes certain costs for software products developed internally in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs incurred in the design phase of software development, such as development of product specifications and system design for products and product updates, prior to establishing technological feasibility, are expensed as product development in the period incurred. Once the point of technological feasibility is reached, direct and indirect programming and testing costs are capitalized and amortized ratably as the related license revenue is recognized, but not less than the straight-line basis over three years. The Company evaluates the estimated net realizable value of each software product at each balance sheet date and records writedowns to net realizable value for any products for which the net book value is in excess of net realizable value.
Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Minority Interest in Consolidated Subsidiary Minority interest in consolidated subsidiary represents the minority stockholders' proportionate share of the equity of Premenos Corp. As of December 31, 1996, Premenos Technology owned approximately 99.5% of Premenos Corp.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Net Income (Loss) Per Common Share Net income (loss) per common share is computed based upon the weighted average number of common shares outstanding and dilutive common stock equivalents (options and warrants), using the treasury stock method. In 1995 and 1994, the weighted average number of common shares outstanding is adjusted for the 1995 stock dividend. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued during the 12 month period prior to the initial filing date of the initial public offering have been included in the calculation as if they were outstanding for all periods presented using the treasury stock method. Accordingly, for purposes of determining net income per common share for 1995 and 1994, net income has been adjusted to eliminate minority interest related to the minority shares exchanged. Adjusted net income (loss) and the weighted average number of common and common stock equivalents used in the determination of net income (loss) per share are:
There is no difference between primary and fully diluted net income per common share.
Initial Public Offering On September 20, 1995, the Company completed an initial public offering of its common stock at a price per share of $18 and received net proceeds of approximately $59.7 million.
Recently Issued Accounting Pronouncements In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (FAS 128) was issued and is effective for the Company's year ending December 31, 1997 financial statements. The Company expects that the implementation of FAS 128 should not have a material effect on the earnings per share calculation.
Reclassifications Certain reclassifications have been made to the financial statements to conform to the current period presentation with no effect on net income as previously reported.
2. Acquisitions
In May 1996, the company acquired all the common stock of Don Valley Technology Corporation ("Don Valley"), a developer of electronic commerce business-to- business software products. The Company issued 57,657 shares of common stock and approximately $1.1 million in cash in a transaction accounted for as a purchase. Accordingly, the results of operations of Don Valley have been included in the Company's financial statements from the acquisition date and the fair market values of the acquired assets and liabilities were included in the Company's financial statements as of the acquisition date. The purchase price of $2.5 million was allocated based on the relative fair values of the assets acquired. Approximately $2.0 million of the purchase price was allocated to in-process product development. This amount was determined through known valuation techniques in the high-technology software industry and was immediately expensed in the period of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. Additionally, $750,000 was allocated to capitalized software costs and goodwill which are being amortized on a straight-line basis over three and five-year periods, respectively. Proforma information is not presented, because the results of Don Valley's operations are not material to the Company's historical results.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (Continued)
In July 1996, the Company acquired all the common stock of Prime Factors, Inc. ("Prime Factors"), a software developer and reseller of financial systems encryption software products. The Company issued 46,931 shares of common stock and approximately $3.0 million in cash in a transaction accounted for as a purchase. Accordingly, the results of operations of Prime Factors have been included in the Company's financial statements from the acquisition date and the fair market values of the acquired assets and liabilities were included in the Company's financial statements as of the acquisition date. The purchase price of $4.1 million was allocated based on the relative fair values of the assets acquired. Approximately $2.5 million of the purchase price was allocated to in-process product development. This amount was determined through known valuation techniques in the high-technology software industry and was immediately expensed in the period of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. Additionally, $1.6 million was allocated to capitalized software costs and goodwill which are being amortized on a straight-line basis over four and six-year periods, respectively. Proforma information is not presented, because the results of Prime Factors' operations are not material to the Company's historical results.
In November 1996, the Company entered into a purchase agreement to acquire 20% of the common stock of Trailblazer Systems, Inc. ("Trailblazer"), a developer of communications and other software for $25,000 in cash. The Company is also obligated to pay an additional $375,000 upon the achievement of three agreed- upon technical milestones by Trailblazer. This transaction has been accounted for using the equity method of accounting for investments in common stock. In January 1997, the Company paid $125,000 to Trailblazer upon its acceptance of the first milestone. The remaining balance is expected to be paid during fiscal 1997. In addition, the Company entered into a $100,000 secured promissory note. Pursuant to the terms of the promissory note, Trailblazer agrees to repay the principal portion of the note in November 1999, and the related accrued interest at 6% per annum on a quarterly basis. The Company is unable to determine the fair value of this note due to the early development stage of Trailblazer.
3. Trade Accounts Receivable
The components of trade accounts receivable are as follows (in thousands):
Maintenance contract renewals (prebilled maintenance) are billed one month in advance of the start of the renewal period. These billings are reflected as trade accounts receivable and deferred revenue in the consolidated balance sheets.
The Company licenses software and performs services for its customers on credit. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for potential credit losses.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment consist of the following (in thousands):
Depreciation and amortization expense of property and equipment at December 31, 1996, 1995 and 1994 was $1,803,000, $862,000 and $569,000, respectively. At December 31, 1996 and 1995, accumulated amortization on equipment and fixtures under capital leases was approximately $595,000 and $419,000, respectively.
5. Capitalized Software Development Costs
Net capitalized software development costs are as follows (in thousands):
Amortization of capitalized software development costs totaled $1,392,000, $774,000 and $431,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in thousands):
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt
Long-term debt consists of (in thousands):
In 1993, the Company entered into a Business Loan Agreement (Agreement) with a bank. This Agreement, as amended, is comprised of term loan facilities (Term Facilities). Any amounts outstanding under the Agreement are collateralized by substantially all of the assets of the Company. The Agreement contains certain standard covenants. The Company is also required to use the bank as its primary depository.
At December 31, 1996, the total amount outstanding under the Term Facilities was $377,000. The Term Facilities bear annual interest at the bank's reference rate plus 1.5%-2% (9.75% - 10.25% at December 31, 1996) and are generally repayable in monthly installments over two to three-year periods.
Principal maturities of the Term Facilities at December 31, 1996 are as follows (in thousands):
The carrying amounts of the term facilities approximate fair value due to the variable nature of the interest rate.
8. Commitments
The Company has entered into noncancelable operating leases for office space which expire in 1998, subject to renewal options. These leases provide that the Company is responsible for certain tax, insurance and maintenance costs in excess of the base year costs. The Company also leases equipment and fixtures under capital and operating leases. Substantially all of the capital leases are collateralized by the equipment associated with the leases. At December 31, 1996, the Company is obligated under these agreements to make the following lease payments (in thousands):
Rental expense under all operating leases for the years ended December 31, 1996, 1995 and 1994, was approximately $1,225,000, $686,000 and $439,000, respectively.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Equity
Capital Stock The authorized capital stock of the Company consists of 25,000,000 shares of common stock, par value $.01, and 1,000,000 shares of preferred stock, par value $.01. The Company has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions before issuance of these shares.
Warrants In connection with the formation of the Company's subsidiary, Premenos Corp., warrants to purchase shares of Premenos Corp. Class B common stock were issued to a director of Premenos Corp. In 1995, these warrants were exchanged for warrants with similar terms to purchase 46,025 shares of Premenos Technology Corp. common stock. Warrants totaling 39,450 remain outstanding and exercisable at $3.80 per share at any time through December 31, 1999, and are subject to certain antidilution provisions.
10. Stock Plans
1995 Employee Stock Purchase Plan In August 1995, the Company established an Employee Stock Purchase Plan (the ESPP) to provide employees of the Company with an opportunity to purchase common stock through payroll deductions. Under the ESPP 600,000 shares of common stock were reserved for issuance subject to certain antidilution adjustments. At December 31, 1996, approximately 555,000 shares were available for issuance and approximately $272,000 had been withheld from employees for future purchases under this plan.
1995 Incentive Stock Program The Company's 1995 Incentive Stock Program (the Incentive Program), was adopted in July 1995. A total of 2,630,000 shares of the Company's common stock were reserved for issuance under the Incentive Program. Grants under the Incentive Program may be in the form of incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock grants. The exercise price for an option granted under the Incentive Program shall generally be equal to the fair market value of the common stock at the time such option is granted, except that the exercise price for options granted to a holder of more than 10% of the voting power of the Company shall equal at least 110% of the fair market value. At December 31, 1996, approximately 445,000 options were available for grant pursuant to the Incentive Program.
Premenos Corp. Incentive Program Prior to the 1995 Incentive Stock Program, officers, directors, and employees of the Company's subsidiary, Premenos Corp., were granted options to purchase shares of Premenos Corp. Class B common stock pursuant to the Premenos Corp. Incentive Program (Program). Stock options granted under this Program became exercisable over time (generally over four years) or as specific performance goals are met.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Plans (continued)
A summary of the activity under the incentive programs is set forth below:
The following table summarizes information with respect to stock options outstanding at December 31, 1996:
The following information concerning the Company's stock option and employee stock purchase plans is provided in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation." The Company accounts for such plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995: dividend yield 0.0%, volatility of .42, risk-free interest rate of 6.0%, and an expected life of three years.
The weighted average fair value of those options granted in 1996 and 1995 was $14.07 and $10.33, respectively.
The Company has also estimated the fair value for the purchase rights issued pursuant to the Company's Employee Stock Purchase Plan under the Black-Scholes valuation model using the following assumptions: dividend yield 0.0%, volatility of .51, risk-free interest rate of 5.6%, and expected lives of .5 and .78 years, in 1996 and 1995, respectively.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Plans (continued)
The weighted average fair value of those purchase rights in 1996 and 1995 was $5.47 and $6.09, respectively. The following proforma income information has been prepared following the provisions of SFAS No. 123:
11. Income Taxes
Income tax expense comprises the following (in thousands):
The Company's income taxes currently payable for federal and state purposes have been reduced by the tax benefit derived from stock option transactions. The benefit, which totaled $2.9 million in 1996 and $557,000 in 1995, was credited directly to stockholders' equity.
The effective income tax rates differ from the statutory federal income tax rates for the following reasons:
Components of the Company's deferred income taxes are as follows (in thousands):
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.	Income Taxes (Continued)
At December 31, 1996, the Company has federal and state net operating loss carryforwards of $4.1 million and $3.2 million, respectively. The federal carryforwards expire in the year 2011 and the state carryforwards through the year 2001. Additionally, at December 31, 1996, the Company has available federal and state research and experimentation credit carryforwards of $887,000 and $454,000, respectively, which expire in the years 2004 through 2011. For balance sheet presentation, $1.1 million of the research and experimentation credit carryforward deferred tax asset is considered noncurrent, and is netted against noncurrent deferred income taxes. Management believes future taxable income will be sufficient to realize these deferred tax assets.
12.	 Distribution Agreements
The Company has various contractual agreements with a major hardware and software vendor. Pursuant to certain of those agreements the vendor pays the Company a specified percentage of the revenues associated with the licensing of the Company's products. The Company has also provided this vendor product development and other services pursuant to specific contracts. Revenues earned from these agreements and contracts with the vendor were approximately $1.9 million, $1.6 million and $2.3 million for the years ended December 31, 1996, 1995 and 1994, respectively. Additionally, the Company is obligated to pay the vendor a percentage of certain of its software licensing revenues.
In March 1995, the Company entered into a contractual agreement with a major software vendor in which the vendor pays the Company a specified percentage of the revenues associated with the licensing of the Company's products. Revenue earned from this contract was approximately $3.2 million and $1.5 million for the years ended December 31, 1996 and 1995, respectively.
The revenues associated with the distribution of the Company's products outside of North America primarily through third party distributors amounted to approximately $2.9 million, $2.6 million and $1.7 million for the years ended 1996, 1995 and 1994, respectively. These export sales are generated primarily in Europe.
The Company has entered into licensing agreements with certain other software vendors which enable the Company to embed the other vendors' products in its software. In exchange for these rights, the Company is obligated to pay royalty fees to the other vendors based on product sales.
13.	 Tax Advantage Savings and Retirement Plan
The Company has a 401(k) savings and retirement plan (the Plan) which covers substantially all employees. All employees, ages 18 or older, are eligible to participate in the Plan upon completion of six months of service. Employees may contribute from 1% to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Plan requires the Company to match, on a monthly basis, 25% of employee contributions to a maximum of 5% of their annual compensation. The Company's contributions will generally vest over a seven-year period. The Company's contributions were $91,000, $69,000 and $52,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
14.	 Related Party Transactions
One of the Company's directors is a partner of a law firm which provides various legal services to the Company. In 1996, such legal services included representation related to the acquisition of subsidiaries. Two other directors of the Company have also provided training and consulting services to the Company from time to time. Amounts incurred for all such services in 1996, 1995 and 1994 were approximately $879,000, $1,026,000 and $288,000, respectively.
15.	Fourth Quarter Adjustments
The Company's 1996 fourth quarter reflects a $200,000 increase to accrued liabilities and approximately $300,000 in write-off of certain prepaid royalties and capitalized software costs.
PREMENOS TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.	Subsequent Events
In January 1997, the Company granted stock options to acquire 319,000 shares of common stock to directors and employees at exercise prices ranging from $9.38 to $10.00 per share, pursuant to the Company's Incentive Program. These options are generally exercisable over four years. In addition, the Company granted stock options to acquire 450,000 shares of common stock to an officer at an exercise price of $9.38 per share, exercisable over five years.
In January 1997, the Company also completed a voluntary stock option repricing program in which 594,000 stock options, originally issued with exercise prices ranging from $10.00 to $27.25 per share, were reissued with an exercise price of $9.38 per share. These options are generally exercisable over four years and vesting restarts at the date of repricing.
On March 16, 1997, the Company's Board of Directors approved the repurchase of up to one million shares of the Company's common stock.
PART I I I
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and Section 16(b) compliance required by this item is incorporated by reference from the Company's definitive proxy statement ("Proxy Statement") for its annual stockholders' meeting to be held on May 29, 1997, to be filed by the Company with the Securities and Exchange Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company's Proxy Statement. The information specified in Item 402(k) and (1) of Regulation S-K and set forth in the Company's Proxy Statement is not incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Company's Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Company's Proxy Statement.
PART I V
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report: 1. Consolidated Financial Statements and Financial Statement Schedule - See Index to Consolidated Financial Statements at Item 8 on page 24 of this report. All other schedules are omitted because they were not required or the required information is included in the Consolidated Financial Statements or Notes thereto.
2. Exhibits The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PREMENOS TECHNOLOGY CORP.
Dated: March 27, 1997 By /s/ LEW JENKINS -------------------------- Lew Jenkins Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on March 27, 1997.
Signature Title /s/ LEW JENKINS - ------------------------------ Lew Jenkins Chairman of the Board and Director
/s/ DAVID HILDES - ------------------------------ David Hildes Vice Chairman, Secretary and Director
/s/ TIMOTHY A. DREISBACH - ------------------------------ Timothy A. Dreisbach President, Chief Executive Officer and Director
/s/ H. WARD WOLFF - ------------------------------ H. Ward Wolff Senior Vice President of Finance and Administration (Principal Financial and Accounting Officer)
/s/ FRANCIS R. WAGNER - ------------------------------ Francis R. Wagner Director
/s/ STEPHAN J. MALLENBAUM - ------------------------------ Stephan J. Mallenbaum Director
/s/ WILLIAM O. STUDEMAN - ------------------------------ William O. Studeman Director