<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
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
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
411 East Plumeria Drive, San Jose, California 95134
---------------------------------------------------
(Address of principal executive offices, including zip code)
(408) 570-1000
--------------
(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
----- -----
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 16,762,000
----------------------------- -------------------------------
Class Number of shares Outstanding at
April 30, 1998
Exhibit Index is on Page 16
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PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and September 30, 1997 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the
Three and Six Months Ended March 31, 1998 and 1997 . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 14
Item 6. Exhibits and Report on Form 8-K
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Report on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Mar. 31, Sep. 30,
1998 1997
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,072 $ 22,169
Short-term investments 25,354 25,368
Accounts receivable, net of allowances of $498 at
March 31, 1998 and $608 at September 30, 1997 21,766 23,172
Prepaid expenses and other current assets 6,194 15,823
----------- -----------
Total current assets 88,386 86,532
Other marketable securities 9,813 26,524
Property and equipment, net 10,641 9,607
Computer software costs, net 5,080 4,880
Other assets 2,414 1,268
----------- -----------
Total assets $ 116,334 $ 128,811
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,089 $ 2,707
Payroll related liabilities 3,898 3,434
Other accrued liabilities 5,547 5,377
Income taxes payable 4,312 6,047
----------- -----------
Total current liabilities 16,846 17,565
Long-term obligations 2,514 7,519
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares authorized,
none issued -- --
Common stock, $.001 par value, 40,000 shares authorized,
16,755 and 16,895 shares issued and outstanding at
March 31, 1998 and September 30, 1997, respectively 17 17
Additional paid-in capital 71,181 71,131
Retained earnings 22,930 20,366
Unrealized gain on available-for-sale securities 3,768 12,570
Accumulated translation adjustment (922) (357)
----------- -----------
Total stockholders' equity 96,974 103,727
----------- -----------
Total liabilities and stockholders' equity $ 116,334 $ 128,811
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 20,132 $ 16,095 $ 37,902 $ 33,862
Services 5,260 2,905 10,046 5,714
--------- ---------- --------- ----------
Total revenue 25,392 19,000 47,948 39,576
Cost of revenue:
License fees 1,382 1,124 3,141 2,083
Services 3,795 2,220 7,126 4,350
--------- ---------- --------- ----------
Total cost of revenue 5,177 3,344 10,267 6,433
--------- ---------- --------- ----------
Gross margin 20,215 15,656 37,681 33,143
Operating expenses:
Research and development 9,050 6,818 16,443 13,093
Sales and marketing 5,675 3,989 10,501 8,527
General and administrative 3,066 2,584 6,159 5,845
--------- ---------- --------- ----------
Total operating expenses 17,791 13,391 33,103 27,465
--------- ---------- --------- ----------
Income from operations 2,424 2,265 4,578 5,678
Interest income, net 852 894 1,733 1,584
Other income, net - 19 1,107 647
--------- ---------- --------- ----------
Income before income taxes 3,276 3,178 7,418 7,909
Provision for income taxes 1,049 1,016 2,374 2,530
--------- ---------- --------- ----------
Net income $ 2,227 $ 2,162 $ 5,044 $ 5,379
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Earnings per share:
Basic $ 0.13 $ 0.13 $ 0.30 $ 0.32
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Diluted $ 0.13 $ 0.12 $ 0.29 $ 0.29
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Weighted average number of shares:
Basic 16,807 16,933 16,844 16,814
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Diluted 17,395 18,281 17,542 18,264
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,044 $ 5,379
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 3,897 2,817
Realized gain on sale of other marketable securities (1,146) (799)
Change in operating assets and liabilities:
Accounts receivable 822 (1,654)
Prepaid expenses and other assets (1,631) (41)
Accounts payable 387 424
Payroll and related liabilities 551 19
Other accrued liabilities 1,634 (1,061)
Income taxes payable (1,656) (901)
Discontinued operations (81) (1,099)
--------- ---------
Total adjustments 2,777 (2,295)
--------- ---------
Net cash provided by operating activities 7,821 3,084
Cash flows from investing activities:
Maturity of short-term and long-term investments 31,377 32,808
Purchases of short-term and long-term investments (29,322) (29,974)
Proceeds from sale of other marketable securities 1,193 837
Purchases of property and equipment (2,655) (4,353)
Additions to computer software costs (2,424) (2,532)
Proceeds from the sale of minority interest in Softbank
Content Group 9,810 -
Other investing activities - (376)
--------- ---------
Net cash provided by (used in) investing activities 7,979 (3,590)
Cash flows from financing activities:
Proceeds from stock purchases under stock option and
stock purchase plans 1,090 2,230
Repurchases of common stock (3,553) -
--------- ---------
Net cash provided by (used in) financing activities (2,463) 2,230
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (434) (86)
--------- ---------
Net increase in cash and cash equivalents 12,903 1,638
Cash and cash equivalents at beginning of period 22,169 25,752
--------- ---------
Cash and cash equivalents at end of period $ 35,072 $ 27,390
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Income taxes paid during the period, net of refunds $ 916 $ 3,626
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Phoenix Technologies Ltd. (the "Company") designs, develops, markets and
supports standards-based system software and synthesizable cores for personal
computers and other microprocessor-based products.
The accompanying condensed consolidated financial statements of Phoenix
Technologies Ltd. and its wholly-owned subsidiaries have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The information included in this report should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1997.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Company's
financial position at March 31, 1998 and September 30, 1997, and the results of
its operations and its cash flows for the three and six-month periods ended
March 31, 1998 and 1997. All significant intercompany accounts and transactions
have been eliminated. The operating results for the three and six-month periods
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1998 or for any other future period.
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation.
NOTE 2. CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of less
than three months are considered cash equivalents.
NOTE 3. SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES
Short-term investments consist of U.S. government and agency obligations,
bankers' acceptances, corporate debt securities and commercial paper with
original maturities generally ranging from three months to one year. Short-term
investments are classified as held-to-maturity as the Company has the intent and
the ability to hold them until maturity. Such investments are recorded at
amortized cost. At March 31, 1998 and September 30, 1997, the fair value of
such short-term investments approximated amortized cost and gross unrealized
holding gains and losses were not material.
Other marketable securities consist of common shares of Xionics Document
Technologies, Inc. ("Xionics") (NASDAQ: XION) and U.S. government agency
obligations owned by the Company. The shares of Xionics stock are recorded at
fair value based on quoted market prices and are classified as
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available-for-sale. The unrealized gain on the Xionics investment, less
related deferred income taxes, has been recorded as a separate component of
stockholders' equity. The carrying value of the Xionics shares and the
related deferred income taxes and unrealized gain are adjusted to the current
market value in each period. At March 31, 1998, the Company held 1.1 million
shares of Xionics stock, with a market value of $5.63 per share.
The U.S. government agency obligations have maturities greater than one
year, and the Company has the intent and ability to hold them until maturity.
These securities are recorded at amortized cost. At March 31, 1998 and
September 30, 1997, the fair value of such securities approximated amortized
cost and gross unrealized holding gains were not material.
NOTE 4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
required the Company to change the method it used to compute earnings per share.
Under SFAS 128, primary and fully diluted earnings per share have been replaced
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported primary earnings per share. All earnings per share amounts
for prior periods have been restated to conform to the new SFAS 128
requirements. The following table presents the calculation of basic and
diluted earnings per share required under SFAS 128 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 2,227 $ 2,162 $ 5,044 $ 5,379
-------- -------- -------- --------
-------- -------- -------- --------
Denominator:
Weighted average common shares
outstanding -- denominator for basic
earnings per share 16,807 16,933 16,844 16,814
Effect of dilutive securities:
Stock options 588 1,188 628 1,262
Warrants - 160 70 188
-------- -------- -------- --------
Total dilutive securities 588 1,348 698 1,450
Weighted average common and equivalent
shares outstanding -- denominator -------- -------- -------- --------
for diluted earnings per share
17,395 18,281 17,542 18,264
-------- -------- -------- --------
Earnings per share:
Basic $ 0.13 $ 0.13 $ 0.30 $ 0.32
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.13 $ 0.12 $ 0.29 $ 0.29
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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NOTE 5. STOCK REPURCHASE PROGRAM
Pursuant to a share repurchase program whereby the Board of Directors
authorized the repurchase of up to 1,000,000 shares of its outstanding common
stock, the Company repurchased and retired approximately 258,000 shares at a
cost of approximately $3.6 million during the six-months ended March 31, 1998.
Since the inception of the program, the Company has repurchased and retired
approximately 645,000 shares at a cost of approximately $8.6 million. In April
of 1998, the program was terminated.
NOTE 6. DISCONTINUED OPERATIONS AND DIVESTITURES
In fiscal 1994, the Company sold 80% of its Publishing Division to Softbank
Corporation of Japan ("Softbank"). At that time, Softbank and the Company
established a new entity, Phoenix Publishing Systems, Inc., later renamed
Softbank Content Group ("SCG"), and each contributed their respective interests
in the Publishing Division to SCG in exchange for 80% and 20%, respectively, of
the equity of SCG. On September 30, 1997, Phoenix exercised its right to require
Softbank to repurchase the SCG shares owned by the Company for $7,500,000. At
September 30, 1997, a receivable from Softbank in the amount of $7,500,000 was
included in other current assets, and in October 1997, payment was received.
Other assets at September 30, 1996, included equity and other investments
in Softbank, Inc., a joint venture company, in the amount of $2,388,000. The
investment was subsequently exchanged for a non-interest bearing $2,310,000 note
receivable from Softbank Holdings, Inc., which was included in other current
assets at September 30, 1997. The note was subsequently collected in October
1997.
NOTE 7. SUBSEQUENT EVENT
On April 15, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Award Software International, Inc.
("Award"), a publicly-held company that develops and markets system-enabling
software. Under the terms of the Agreement, the Company will issue
approximately 8.7 million shares of its common stock in exchange for all of the
outstanding common stock of Award. Each Award shareholder will receive 1.225
shares of the Company's stock for each share of Award stock. The Company will
also assume outstanding Award stock options, warrants and rights to acquire up-
to approximately 2.9 million shares of Phoenix common stock (on an equivalent
share basis).
The completion of the merger is subject to customary conditions to closing,
including shareholder approval of both companies and regulatory approval,
including expiration or termination of all waiting periods under the Hart-
Scott-Redino Antitrust Improvement Act of 1976, as amended. The transaction is
intended to be treated as a tax-free reorganization pursuant to the provisions
of Section 368 (a) of the Internal Revenue Code of 1986 and as a pooling of
interests for accounting purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT ON FORM 10-Q, INCLUDING WITHOUT LIMITATION THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED HEREIN AND IN PART II, ITEM 7
(MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS) OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1997 AND IN OTHER DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
COMPANY OVERVIEW
The Company designs, develops, markets and supports standards-based system
and chip level software for personal computers and other microprocessor-based
products. The Company has the following product lines:
PC SYSTEMS: The Company develops and markets system software and related
services to PC OEMs and system integrators. PC systems products include
BIOS (Binary Input Output Systems) and related products.
INFORMATION APPLIANCES: The information appliances product line (which
operates as PICO) provides system software and services for industrial,
hand-held and consumer information appliances based on the Intel x86 and
UNIX architectures.
INTERCONNECT: The interconnect product line (which operates as Virtual
Chips) provides synthesizable cores and simulation test environments that
help design teams quickly incorporate industry standard interfaces into
their chip designs.
REVENUE
Revenue by product line for the three and six-month periods ended March 31,
1998 and 1997, was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
----------------- ------------------
Three months ended March 31: 1998 1997 % CHANGE 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PC systems $19,384 $14,568 33.1% 76.3% 76.7%
Information appliances 3,473 2,494 39.3% 13.7% 13.1%
Interconnect 2,535 1,605 57.9% 10.0% 8.4%
Other - 333 - - 1.8%
------- ------- ------- -------
Total revenue $25,392 $19,000 33.6% 100.0% 100.0%
------- ------- ------- -------
------- ------- ------- -------
Six months ended March 31:
PC systems $36,132 $31,189 15.8% 75.4% 78.8%
Information appliances 7,587 5,370 41.3% 15.8% 13.6%
Interconnect 4,229 2,542 66.4% 8.8% 6.4%
Other - 475 - - 1.2%
------- ------- ------- -------
Total revenue $47,948 $39,576 21.2% 100.0% 100.0%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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The increases in PC systems revenue in the second quarter and the first six
months of fiscal 1998 were primarily due to increased demand for notebook
products. The growth for the quarter was significantly greater than for the six
months, reflecting a below trend second quarter in fiscal 1997.
Information appliances revenue increased approximately 40% for the
second quarter and fiscal year-to-date through March. The Company increased
the number of sales personnel during the past two quarters to support this
growth market, as well as the interconnect software products market.
Interconnect revenue also increased for the three and six-month periods
reflecting growing acceptance of outsourcing circuit intellectual property
and synthesizable cores ("chip level software"). The decline in other revenue
was due to discontinuance in fiscal 1997 of the Company's application
products.
Service revenue increased across all product lines in fiscal 1998 due to
increased design work for new customer business.
Revenue by geographic region was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
----------------- ------------------
Three months ended March 31: 1998 1997 % CHANGE 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
North America $ 9,816 $ 7,858 24.9% 38.7% 41.4%
Japan 8,060 5,639 42.9% 31.7% 29.7%
Asia (excluding
Japan) 4,666 3,177 46.9% 18.4% 16.7%
Europe 2,850 2,326 22.5% 11.2% 12.2%
------- ------- ------- -------
Total revenue $ 25,392 $ 19,000 33.6% 100.0% 100.0%
------- ------- ------- -------
------- ------- ------- -------
Six months ended March 31:
North America $ 17,634 $ 14,572 21.0% 36.8% 36.8%
Japan 15,916 12,772 24.6% 33.2% 32.3%
Asia (excluding
Japan) 9,035 7,733 16.8% 18.8% 19.5%
Europe 5,363 4,499 19.2% 11.2% 11.4%
------- ------- ------- -------
Total revenue $ 47,948 $ 39,576 21.2% 100.0% 100.0%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Revenue increased in all geographic regions in the three and six-months
ended March 31, 1997 from the comparable periods in fiscal 1997 due to market
growth and new business. In addition, the increases in Japan and Asia in the
second quarter were due to a below trend quarter in fiscal 1997.
For the three and six-month periods ended March 31, 1998, one customer
accounted for approximately 10% of revenue. For the three-month period ended
March 31, 1997, one customer accounted for approximately 13% of revenue and
another customer accounted for approximately 12% of revenue.
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GROSS MARGIN
Gross margin as a percentage of revenue for the three and six-month
periods ended March 31, 1998 were 79.6% and 78.6%, respectively, compared to
82.4% and 83.7% for the comparable periods in fiscal 1997. The decreases in
gross margin percentages for both the three and six-month periods were due to
a growth in service revenue as a percentage of total revenue. Service
revenue has lower gross margin than license fees. For the three-month periods
ended March 31, 1998 and 1997, amortization of capitalized software costs
were $0.8 million and $1.1 million, respectively, partially offsetting the
decrease in gross margin. For the six-month periods ended March 31, 1998 and
1997, amortization of capitalized software costs were $2.1 million and $1.7
million, respectively, which contributed to the decrease in gross margin.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and six-month periods
ended March 31, 1998 increased $2.2 million (32.7%) and $3.4 million (25.6%),
respectively, from the comparable periods in fiscal 1997. The increases were
primarily due to additions in the Company's engineering staff. These
personnel additions related in part to the up-front development costs
associated with the information appliance and interconnect product lines in
their early growth stage. In addition, the Company increased its personnel
dedicated to development of PC products in early fiscal 1998, largely as a
strategic investment to enhance the features and functionality of its PC
systems software.
The Company capitalized $0.8 million and $2.1 million of internally
developed software costs for the three and six-month periods ended March 31,
1998, respectively, as compared to $1.1 million and $2.0 million for the same
periods in fiscal 1997. The second quarter decrease was due to a smaller
percentage of costs being incurred that were within the capitalization
criteria in the Company's policy. 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 and six-month periods ended
March 31, 1998 increased $1.7 million (42.3%) and $2.0 million (23.1%),
respectively, from the comparable periods in fiscal 1997. The Company added
sales personnel during the period, particularly in the information appliance
and interconnect areas. Commission expense increased approximately $0.3
million due to increased revenue. Also contributing to the increase were
expanded participation in sales seminars and increases in product marketing
costs (approximately $0.2 million).
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and six-month periods
ended March 31, 1998 increased $0.5 million (18.7%) and $0.3 million (5.4%),
respectively, from the comparable periods in fiscal 1997. The increases were
primarily due to personnel increases to support the growth of the Company and
to increased space and occupancy costs in San Jose, Taiwan and Japan.
INTEREST INCOME, NET
Interest income, net, for the three and six-month periods ended March 31,
1998 decreased $42,000 (4.7%) and increased $149,000 (9.4%), respectively, from
the comparable periods in fiscal 1997. The decrease for the three-month period
ended March 31, 1998 was primarily due to lower interest rates received on cash
investments. The increase for the six-month period ended March 31, 1998 was
primarily due to an increase in cash available for investment during the period.
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OTHER INCOME, NET
Other income, net, for the six-month period ended March 31, 1998 was
$1.1 million, compared to $0.6 million for the comparable period in fiscal
1997. The increase was primarily due to the sale of shares of Xionics stock
at a higher average sales price in the first quarter of fiscal 1998, when
compared to the first quarter of fiscal 1997. No Xionics shares were sold in
the three-month periods ended March 31, 1998 and 1997.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $1.0 million and $2.4
million for the three and six-month periods ended March 31, 1998,
respectively, as compared to $1.0 million and $2.5 million for the comparable
periods in fiscal 1997. The fiscal 1998 and 1997 provisions for income taxes
reflect an estimated annualized effective tax rate of 32%. The Company's
effective tax rate is lower than the Federal statutory rate, due to various
tax credits.
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 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 fail.
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 the issue. The Company 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 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 timely,
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 in
which the Company deals with and which the Company's systems rely on 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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity include cash, cash equivalents,
short-term investments and a $10.0 million revolving credit facility with a
commercial bank. There were no borrowings outstanding under the credit facility
at March 31, 1998. 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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The Board of Directors authorized the repurchase of up to 1,000,000
shares of outstanding common stock under a share repurchase program adopted
in fiscal 1997. Through March 31, 1998, the Company repurchased and retired
approximately 645,000 shares at a cost of approximately $8.6 million. In
April of 1998, the program was terminated.
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities in the six months ended
March 31, 1998 was $7.8 million, resulting primarily from cash provided by
net income, adjusted for non-cash items. Net cash provided by investing
activities in the six-month period was $8.0 million, which consisted
primarily of net maturities of short-term and long-term investments of $2.1
million, proceeds from the sale of the Company's minority interest in
Softbank Content Group for $9.8 million, and proceeds from the sale of
marketable securities of $1.2 million. These increases were partially offset
by purchases of property and equipment of $2.7 million; and additions to
computer software costs, including purchased software costs of $2.4 million.
Cash used for financing activities during the first six months of fiscal 1998
was $2.5 million, resulting from $3.6 million used for the repurchase of
common stock, partially offset by $1.1 million received from the exercise of
common stock options and issuance of common stock under the Company's
employee stock purchase plan.
The Company held 1.1 million shares of Xionics stock at March 31, 1998.
The market price per share of Xionics stock decreased from $17.38 per share
on September 30, 1997 to $5.63 per share on March 31, 1998. The decrease in
fair market value of Xionics stock was the primary reason for the
year-to-date decreases in other marketable securities, long-term obligations
(which includes deferred taxes), and unrealized gain on available-for-sale
securities of $16.7 million, $5.0 million and $8.8 million, respectively.
Page 13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of its Stockholders on February 18,
1998, at which the following occurred:
ELECTION OF DIRECTORS: The stockholders elected Ronald D. Fisher as a Class 2
Director, to serve until the 2001 Annual Meeting of Stockholders. The other
persons continuing as directors are Charles Federman, Lawrence G. Finch, Jack
Kay and Anthony P. Morris. The vote on the matter was as follows:
FOR 14,453,507
AGAINST --
WITHHELD 38,618
BROKERS NON-VOTES --
APPROVAL OF THE 1998 STOCK PLAN: The stockholders adopted the 1998 Stock Plan
under which 800,000 shares of the Company's Common Stock were reserved for
issuance pursuant to awards granted under the plan. The vote on the matter was
as follows:
FOR 7,704,158
AGAINST 1,663,224
ABSTAIN 139,995
BROKERS NON-VOTES 4,984,748
APPROVAL OF THE AMENDED AND RESTATED 1991 EMPLOYEE STOCK PURCHASE PLAN: The
stockholders approved the Amended 1991 Employee Stock Purchase Plan, which
included an increase to the number of shares reserved for issuance thereunder by
150,000 shares. The vote on the matter was as follows:
FOR 8,233,300
AGAINST 1,137,206
ABSTAIN 136,871
BROKERS NON-VOTES 4,984,748
APPOINTMENT OF INDEPENDENT AUDITORS: The stockholders ratified the appointment
of Ernst & Young, LLP as the Company's independent auditors for the year ending
September 30, 1998. The vote on the matter was as follows:
FOR 14,424,247
AGAINST 30,200
ABSTAIN 37,678
BROKERS NON-VOTES --
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index beginning on page 16 hereof.
(b) REPORT ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
Page 14
<PAGE>
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: May 12, 1998 By: /s/ ROBERT J. RIOPEL
------------ ----------------------------
Robert J. Riopel
Vice President, Finance and
Chief Financial Officer
Page 15
<PAGE>
EXHIBIT INDEX
EXHIBIT
3.2 By-laws of the Registrant as amended through February 6, 1995
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8, Registration No. 333-03065 (the
"1996 ESPP S-8")).
3.6 Certificate of Ownership (incorporated herein by reference to Exhibit
3.6 to the 1988 Form 10-K).
3.8 Rights Agreement dated as of October 31, 1989 between the Registrant and
The First National Bank of Boston (incorporated herein by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated October
31, 1989 (the "1989 8-K")).
3.12 Restated Certificate of Incorporation of the Registrant dated as of
December 12, 1997 - filed as Exhibit 3.12 to the Company's Report on
Form 10-K for the fiscal year ended September 30, 1997 (the "1997
10-K") and incorporated herein by this reference.
4.1 Rights Agreement dated as of October 31, 1989 between the Company and
The First National Bank of Boston - filed as Exhibit 4.1 to the October
31, 1989 Form 8-K, and incorporated herein by this reference.
10.4 Employment Agreement dated June 9, 1994 between the Registrant and Jack
Kay - filed as Exhibit 10.9 to the Company's Quarterly Report on Form
10-Q - filed on August 15, 1994 and incorporated herein by this
reference.
10.9 Letter Amendment dated as of December 30, 1993 to Line of Credit
Agreement dated November 25, 1991 between the Registrant and Silicon
Valley Bank - filed as Exhibit 10.17 to the Company's Form 10-Q- filed
on February 14, 1994 and incorporated herein by this reference.
10.10 Purchase Agreement dated March 15, 1994 between the Company and Softbank
Corporation - filed as Exhibit 10.18 to the Company's Form 10-Q - filed
May 16, 1994 and incorporated herein by this reference.
10.13 Amendment No. 1 to the Purchase Agreement by and between Phoenix
Technologies Ltd. and Softbank Corporation dated as of March 15, 1994 -
filed as Exhibit 2.02 to the Company's Current Report on Form 8-K dated
September 30, 1994 and incorporated herein by this reference.
10.14 Asset Purchase Agreement made as of September 30, 1994 by and between
the Registrant and Xionics International Holdings, Inc. - filed as
Exhibit 2.01 to the Company's Current Report on Form 8-K dated November
8, 1994 and incorporated herein by this reference.
10.15 1994 Equity Incentive Plan, as amended through February 28, 1996 - filed
as Exhibit 10.17 to the Company's Report on Form 10-K for the fiscal
year ended September 30, 1995 (the "1995 10-K") and incorporated herein
by this reference.
10.16 Amended and Restated Employee Stock Purchase Plan, as amended February
28, 1996 - filed as Exhibit 4.10 to the 1996 ESPP S-8 and incorporated
herein by this reference.
10.21 Amended and Restated Lease Agreement dated March 15, 1995 between The
Prudential Insurance Company of America and the Company with respect to
certain facilities located at 846 University Avenue, Norwood, MA - filed
as Exhibit 10.23 to the 1995 10-K and incorporated herein by this
reference.
10.22 Agreement dated December 18, 1995 between Intel Corporation and the
Company - filed as Exhibit 10.24 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1995 as amended by a Form
Page 16
<PAGE>
10-Q/A-1 (the "December 1995 10-Q") and incorporated herein by this
reference. Portions have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.
10.23 Common Stock and Warrant Purchase Agreement dated as of December 18,
1995 by and between the Company and Intel Corporation - filed as Exhibit
10.25 to the December 1995 10-Q and incorporated herein by this
reference.
10.24 Warrant to Purchase Shares of Common Stock of the Company dated February
15, 1996 - filed as Exhibit 2 to the Schedule 13D of Intel Corporation
dated February 23, 1996 with respect to the purchase by Intel of shares
of the Company's common stock and of a warrant to purchase shares of the
Company's common stock (the "Intel Schedule 13D") and incorporated
herein by this reference.
10.25 Investor Rights Agreement, dated December 18, 1995, between the Company
and Intel Corporation - filed as Exhibit 3.2 to the Intel Schedule 13D
and incorporated herein by this reference.
10.26 Standard Industrial Lease - Full Net between The Equitable Life
Assurance Society of the United States as Landlord and Phoenix
Technologies Ltd. as Tenant dated as of May 15, 1996 for that certain
property located at 411 E. Plumeria Drive, San Jose, California - filed
as Exhibit 10.20 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by this reference.
10.28 Industrial Lease (Single Tenant; Net) dated as of October 1, 1996 by and
between The Irvine Company and Phoenix Technologies Ltd. for that
certain property located at 135 Technology Drive, Irvine, California -
filed as Exhibit 10.28 to the 1996 form 10-K and incorporated herein by
this reference.
10.29 1996 Equity Incentive Plan, as amended through December 12, 1996
incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-20447).
10.30 Loan Agreement dated as of February 28, 1997 by and between Silicon
Valley Bank and Phoenix Technologies Ltd. - filed as Exhibit 10.30 to
the Company's Report on Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by this reference.
10.31 Loan Agreement dated as of March 27, 1998 by and between Silicon Valley
Bank and Phoenix Technologies Ltd.
27 Financial Data Schedule.
Page 17
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 27, 1998, by
and between Phoenix Technologies, Ltd. ("Borrower") whose address is 411 E.
Plumeria Drive, San Jose, CA 95134, and Silicon Valley Bank ("Bank") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, a Loan Agreement, dated February 29, 1996 (the "Loan
Agreement"), as may be amended from time to time. The Loan Agreement provided
for, among other things, a Committed Line in the original principal amount of
Ten Million and 00/100 Dollars ($10,000,000.00). Defined terms used but not
otherwise defined herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness".
2. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO LOAN AGREEMENT.
1. The defined term "Maturity Date" is hereby amended to mean March
26, 1999.
2. Section 5.8 entitled "Debt-Net Worth Ratio" is hereby deleted in
its entirety.
3. Section 5.9 entitled "Tangible Net Worth" is hereby amended in
its entirety to read as follows:
Borrower shall maintain, as of the last day of each fiscal
quarter, a Tangible Net Worth of not less than Eighty Million and
00/100 Dollars ($80,000,000.00).
4. Section 5.10 entitled "Profitability" is hereby deleted in its
entirety.
3. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
4. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
5. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank to make any future modifications to the
Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Bank and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Bank in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement.
The terms of this paragraph apply not only to this Loan Modification Agreement,
but also to all subsequent loan modification agreements.
<PAGE>
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
PHOENIX TECHNOLOGIES, LTD. SILICON VALLEY BANK
By: /s/ ROBERT J. RIOPEL By: /s/ JAMES R. MARSHALL
---------------------- ------------------------
Name: Robert J. Riopel Name: James R. Marshall
--------------------- -----------------------
Title: Vice President of Finance, Title: Vice President
and Chief Financial Officer ----------------------
--------------------
2
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