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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A-1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to ____________ .
Commission file number 0-17111
PHOENIX TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2685985
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or organization)
2770 De La Cruz Boulevard, Santa Clara, California 95050
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(Address of principal executive offices, including zip code)
(408) 654-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.001 15,369,352
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Class Number of shares Outstanding at
July 31, 1996
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The following is amendment no. 1 to the Form 10-Q filed by Phoenix
Technologies Ltd. for the quarter ended June 30, 1996. Other than the
statement contained under the heading "Forward Looking Statements" and the
language appearing below in Item 2 under the heading "Business Risks", the
information contained in the Form 10-Q as originally filed with the
Securities and Exchange Commission remains unchanged.
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain factors described herein and in other documents. Readers should
pay particular attention to the section of this Report entitled "Business
Risks" and should also carefully review the risk factors described in the
other documents the Company files from time to time with the Securities and
Exchange Commission.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
On July 17, 1996, the Company entered into a definitive agreement to acquire
all of the outstanding common stock of Virtual Chips, Inc., a leading
supplier of synthesizable cores for PC and computer industry standards in
exchange for approximately 1,390,000 shares of newly issued common stock. The
transaction will be accounted for as a pooling of interest. Such exchange
will be effected through a merger of a wholly-owned subsidiary of the Company
into Virtual Chips. The agreement is subject to the approval of Virtual
Chips' stockholders. This merger is expected to expand the Company's
business and contribute to growth in revenue in the area of interconnects for
microprocessor and peripherals.
REVENUE Revenue for the three and nine month periods ended June 30, 1996
increased by $4.5 million and $12.4 million (34%), respectively, from the
same periods a year ago. The increase resulted primarily from an increase in
royalty revenue from the Company's expanding customer base as well as
additional sales to existing customers. Revenue increased in all geographic
areas. The composition of revenues changed slightly, as there was a shift
from license revenues to service revenues of approximately 2% for the three
and nine month periods ended June 30, 1996 as compared to the same periods a
year ago. For the three and nine month periods ended June 30, 1996 one
customer accounted for approximately 16% and 11% of total revenues. For
the three and nine month periods ended June 30, 1995 no customer accounted
for 10% or more of total revenues.
GROSS MARGIN Gross margin as a percent of revenue for the three and nine
month periods ended June 30, 1996 decreased to 80% and 79% of net revenues,
respectively, as compared to 82% and 81% for the comparable periods a year
ago primarily due to increases in royalty expense and amortization of
capitalized computer software costs. License fees gross margin for the three
and nine month periods ended June 30, 1996 decreased to 90% and 89%,
respectively, as compared to 93% and 92% for the comparable periods a year
ago whereas service gross margin increased
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to 22% for the three and nine month periods ended June 30, 1996 as compared
to no margin and 9% for the same periods a year ago. The increase in service
gross margin is attributable to a decrease in costs associated with non
recurring engineering fees.
RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the
three and nine month periods ended June 30, 1996 increased by $2.3 million
(87%) and $4.1 million (51%), respectively, from the same periods a year ago.
The increase in research and development expenses is primarily due to an
increase in the Company's engineering staff to continue development of
system-level software.
The Company capitalized approximately $0.7 million and $1.9 million of
internally developed software costs for the three and nine month periods
ended June 30, 1996, respectively, as compared to $0.5 million and $1.1
million for the same periods a year ago. Such amounts were offset by
amortization of capitalized software costs of $0.6 million and $2 million for
the three and nine month periods ended June 30, 1996, respectively, as
compared to $0.5 million and $0.9 million for the same periods a year ago.
The Company believes that continued investment in new and evolving
technologies is essential to meet rapidly changing industry requirements.
SALES AND MARKETING EXPENSES Sales and marketing expenses for the three
month period increased only slightly by $0.1 million (3%) but decreased $0.2
million (2%) for the nine month period ended June 30, 1996 from the same
periods a year ago. The decrease for the nine month period ended June 30,
1996 resulted primarily from the discontinuance in fiscal 1996 of advertising
expenses related to products marketed through the retail channel. The
Company discontinued retail distribution in the second half of fiscal 1995.
The decrease in advertising expenses from the prior year was partially offset
by additional commissions paid on increased revenue in the current year.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for
the three and nine month periods ended June 30, 1996 increased by $0.2
million (10%) and $2.2 million (45%), respectively, from the same periods a
year ago. The increase resulted primarily from increased salaries and
related benefits associated with headcount growth and increased recruiting
and relocation costs associated primarily with increased engineering
headcount.
PROVISION FOR INCOME TAXES The Company recorded income tax provisions of
$1.1 million and $3 million for the three and nine months ended June 30,
1996, respectively, as compared to $0.9 million and $2.3 million for the same
periods in the prior year. The fiscal 1996 provision reflects an estimated
annualized effective tax rate of 29%. The effective tax rate for fiscal year
1995 was adjusted in the fourth quarter to 26% (before adjustment to the
deferred tax asset valuation allowance). The higher tax rate in fiscal 1996
is due to the increase in net income and the utilization of certain tax
credits.
LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company's primary
sources of liquidity included cash, cash equivalents and short-term
investments of $50.5 million and available borrowings under a bank credit
facility of $10 million. There were no borrowings outstanding under the bank
credit facility at June 30, 1996. The Company believes that its existing
sources of liquidity will be sufficient to satisfy the Company's cash
requirements for at least the next twelve months.
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CHANGES IN FINANCIAL CONDITION Net cash generated from operating activities
during the nine month period ending June 30, 1996 was $10.4 million,
resulting primarily from cash provided by net income, adjusted for non-cash
increases in depreciation and amortization, equity interest in a subsidiary,
an increase in accounts payable, accrued income taxes and a decrease in other
assets. This increase was partially offset by increases in accounts
receivable and decreases in accrued payroll and other accrued liabilities.
Net cash used in investing activities during the nine month period ending
June 30, 1996 was $21.1 million which consisted primarily of purchases of
short-term investments of $34.9 million, purchases of property and equipment
of $2.8 million, and additions to computer software costs of $1.9 million for
use in the Company's operations and was partially offset by maturities of
short-term investments of $18.4 million. Cash generated from financing
activities during the nine month period ending June 30, 1996 was $11.8
million resulting from the issuance of common stock and a warrant to Intel
Corporation for $10.4 million and the exercise of common stock options and
issuance of stock under the Company's employee stock purchase plan of $3.4
million, partially offset by $2 million of purchases of treasury stock.
The Company announced a major technology and license agreement with Intel
Corporation during the first fiscal quarter of 1996. In the second quarter
of 1996, Intel purchased, for $10.4 million, 894,971 newly issued,
unregistered shares of Phoenix's common stock, representing 6% of
post-transaction shares and a warrant to buy 1,073,965 additional shares of
Phoenix common stock which vests with an escalating exercise price over four
years.
BUSINESS RISKS
In addition to other information contained in this Form 10-Q or
incorporated herein by reference, the following factors should be considered
carefully in evaluating Phoenix and its business:
UNCERTAINTIES RELATING TO THE INTEGRATION OF VIRTUAL CHIPS OPERATIONS:
Phoenix and Virtual Chips entered into the acquisition agreement referred to
above with the expectation that the Merger will result in beneficial
synergies for the combined companies. Achieving the anticipated benefits of
the merger will depend in part upon whether the integration of the two
companies' businesses is achieved in an efficient and effective manner and
there can be no assurance that this will occur. Virtual Chips products
address new and emerging technologies and its customer base includes
participants in the personal computing industry (such as peripheral device
manufacturers) which have not been among Phoenix's traditional customer base.
The combination of the two companies will require, among other things, the
integration of the two companies' sales forces. There can be no assurance
that such integration will be accomplished smoothly, on time, or
successfully. Phoenix's operating results could be adversely affected if
Phoenix does not adequately train its sales force to sell the products based
on these new technologies into this new market.
VARYING OPERATING RESULTS: Phoenix's future operating results may vary
substantially from period to period. The timing and amount of its license
fees are subject to a number of factors that make estimating revenues and
operating results prior to the end of a quarter uncertain. While Phoenix
receives recurring revenue on royalty-based license agreements and some
agreements contain minimum quarterly royalty commitments, a significant
amount of license fees in any quarter is dependent on signing agreements and
delivering the licensed software in that quarter. Generally, Phoenix has
experienced a pattern of recording 50% of its quarterly revenues in the third
month of the quarter. Phoenix has historically monitored its
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revenue bookings through regular, periodic worldwide forecast reviews during
the quarter. However, while these reviews keep management informed of areas
where additional selling effort may be needed in order to meet the internal
plans and market expectations, there can be no assurances that this process
will result in revenue expectations being met. Operating expenses for any
year are normally based on the attainment of planned revenue levels for that
year and are incurred ratably throughout the period. As a result, if
revenues are less than planned in any quarter while expense levels remain
relatively fixed, Phoenix's operating results would be adversely affected for
that quarter. In addition, the incurring of unplanned expenses could adversely
affect operating results for the period.
PRODUCT DEVELOPMENT: Phoenix's long-term success will depend on its
ability to enhance its existing products and to introduce new products on a
timely and cost-effective basis that meet the needs of its current customers
in their present markets and of current and future customers in new and
emerging markets. There can be no assurance that Phoenix will be successful
in developing new products or in enhancing existing products or that new or
enhanced products will meet market requirements. Phoenix has from time to
time experienced delays in introducing new products which could adversely
impact acceptance and revenue generated from the sale of such products.
Finally, Phoenix's software products and their enhancements contain complex
code which may contain undetected errors or bugs when first introduced,
despite testing. There can be no assurance that new products or enhancements
will not contain errors or bugs that will adversely affect commercial
acceptance of such products or enhancements.
RETENTION OF KEY PERSONNEL: Phoenix believes it employs more BIOS
engineers than any other company in the PC industry. Virtual Chips products are
based on new and emerging technologies which are different than BIOS
technologies. Phoenix ability to achieve its revenue and operating
performance objectives will depend in large part on its ability to attract
and retain technically qualified engineers. The available pool of engineering
talent is limited for both companies. Accordingly, failure to retain and grow
its research and development teams could adversely affect Phoenix's business
and operating results.
COMPETITION: The market for Phoenix's products is extremely competitive.
Phoenix competes primarily with three other independent suppliers with
respect to its system-level software products: American Megatrends, Inc.,
Award Software and SystemSoft Corporation. It also competes for BIOS
business with in-house research and development departments of PC
manufacturers that have significantly greater financial and technical
resources than those of Phoenix. These companies include Compaq Computer
Corporation, International Business Machines Corporation, Dell Computer
Corporation and Toshiba Corporation. In the synthesizable core business
begun with the acquisition of Virtual Chips, Phoenix competes with businesses
such as Mentor Graphics Corporation, Synposys Corporation and Cadence Systems
who have resources far greater than those of Phoenix and with other companies
such as Sand Microsystems and CAE Technology. There can be no assurance that
Phoenix will continue to compete successfully with its current competitors or
that it will be able to compete successfully with new competitors.
IMPORTANCE AND IMPACT OF MICROSOFT AND INTEL STRATEGIC DIRECTIONS: For a
number of years, Phoenix has worked closely with Microsoft Corporation and
Intel Corporation in developing standards for the PC Industry. In addition,
Phoenix has been a supplier of its system-level software technology to Intel
and in December 1995 the two companies entered into a significant, long-term
technology agreement pursuant to which Phoenix licensed its desktop and
server BIOS products for Intel to include with its motherboard products for
those markets.
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Phoenix presently expects its ongoing relationships with these two industry
leaders to remain good. There can, however, be no assurance that either
Microsoft or Intel will not develop alternate product strategies which could
conflict with Phoenix's product plans and marketing strategies and,
accordingly, adversely impact Phoenix's business and results of operations.
Presently, there is little overlap or conflict in Phoenix's product offerings
and strategies and those of Intel. Windows NT and Windows CE, Microsoft's
newer operating systems, incorporate some functionality that has traditionally
resided in the BIOS; however, PCs which support multiple operating systems
still require this support in the BIOS. To provide products to OEMs
manufacturing systems using only these newer Microsoft operating systems,
Phoenix must migrate its intellectual property from the BIOS to the lower
levels of these operating systems. There can be no assurances that Phoenix
will be successful in these efforts.
INTERNATIONAL SALES AND ACTIVITIES: Revenue derived from Phoenix's
international operations comprises a majority of total revenues. there can
be no assurances that Phoenix will not experience significant fluctuations in
international revenues. While virtually all of Phoenix's license fee or
royalty contracts are U.S dollar denominated, Phoenix is considering
permitting its overseas offices to invoice in local currencies. Phoenix
receives assistance from an software consulting firm in Madras, India in
connection with Phoenix's synethesizable core business. Phoenix's operations
and financial results 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.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS: Phoenix relies on a combination of trade secret, copyright, and
trademark and contractual provisions to protect its proprietary rights in its
software products. There can be no assurance that these protections will be
adequate or that competitors will not independently develop technologies that
are substantially equivalent or superior to Phoenix's technology. In
addition, copyright and trade secret protection for Phoenix's products may be
unavailable or unreliable in certain foreign countries. The Company has been
issued one patent with respect to its current product offerings and has a
number of patent applications pending with respect to certain of the products
it markets. Phoenix maintains an active internal program designed to identify
internally developed inventions worthy of being patented. There can be no
assurances that any of the applications pending will be approved and patents
issued or that Phoenix's engineers will be able to develop technologies
capable of being patented. As the number of software patents increases.
Phoenix believes that software developers may become increasingly subject to
infringement claims. There can be no assurance that a third party will not
assert that its patents or other proprietary rights are violated by products
offered by Phoenix. Any such claims, whether or not meritorious, can be time
consuming and expensive to defend, and could have an adverse effect on
Phoenix's business, results of operations and financial condition.
Infringement of valid patents or copyrights or misappropriation of valid
trade secrets could also have an adverse effect on Phoenix's business,
results of operations and financial condition.
VOLATILE MARKET FOR PHOENIX STOCK: The market for Phoenix's stock is
highly volatile. The trading price of Phoenix Common Stock has been and will
continue to be subject to fluctuations in response to its operating and
financial results, announcements by Phoenix and its competitors of
technological innovations, new products or customer contracts, changes in
Phoenix's or its competitors' product mix or product direction, changes in
Phoenix's revenue mix and revenue growth rates, changes in expectations of
growth for the PC industry, as well as other events or factors which Phoenix
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 Phoenix, the market in which Phoenix does business, or companies
with which Phoenix competes could have an immediate and adverse effect on the
market
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price of Phoenix's stock. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations that have affected the
market price for many high-technology companies and that often have been
unrelated to the operating performance of these companies.
DEPENDENCE ON THIRD-PARTY PROVIDERS OF TECHNOLOGY: Phoenix's products
use certain products and technologies of various third party software
developers, including both complete products offered as extensions of
Phoenix's product lines and technology used in the enhancement of internally
developed products. In addition, Phoenix recently announced that it had
become the exclusive distributor to OEMs of First Aid, a diagnostic and
repair utility from CyberMedia, Inc. for PCs and PC software. These products
are licensed under contractual agreements, which in some cases are for
limited time periods and in some cases provide for termination under certain
circumstances. There can be no assurance that the technology plans and
directions for the third party products licensed to Phoenix will remain
compatible with Phoenix's needs, that these third-party providers will commit
adequate development resources to maintain or enhance these products and
technologies, or that the license agreements with limited duration will be
renewed upon expiration. In such circumstances, Phoenix may not be able to
obtain or develop substitute products or technology, which could adversely
affect Phoenix's business, results of operation and financial condition.
CERTAIN ANTI-TAKEOVER EFFECTS: Phoenix's Certificate of Incorporation,
Bylaws and Stockholder Rights Plan and the Delaware General Corporation Law
include provisions that may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that stockholders might consider
in their best interests. These include provisions under which members of the
Board of Directors are divided into three classes and are elected to serve
staggered three year terms. The Stockholder Rights Plan permits holders of
Phoenix Common Stock to purchase shares of Series A Junior participating
Preferred Stock in the event of the acquisition by a third party of 20% or
more of Phoenix's outstanding Common Stock or if a third party announces its
tender offer for at least 30% of Phoenix's outstanding Common Stock. If
Phoenix is acquired in a merger or other business combination, each right
will entitle its holder to purchase a number of shares of Phoenix Common
Stock which equals the exercise price of the right divided by one-half of the
then current market price of Phoenix Common Stock. In addition, in connection
with the February 1996 sale of shares representing 6% of the outstanding
Phoenix Common Stock and of a warrant to purchase an additional 7%, Phoenix
granted Intel Corporation certain rights in the event of solicited or
unsolicited offers to acquire Phoenix.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
Date: November 14, 1996 By: /s/ Robert J. Riopel
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Robert J. Riopel
Vice President, Finance and
Chief Financial Officer
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