<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 June 30, 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 Number)
incorporation or organization)
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 16,879,000
- -------------------------------- --------------------------------------
Class Number of shares Outstanding at
July 31, 1998
Exhibit Index is on Page 18
Page 1
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PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997........................ 3
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended June 30, 1998 and 1997.......... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 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.................. 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.... 16
Item 5. Other Information...................................... 16
Item 6. Exhibits and Report on Form 8-K
Exhibits.................................................... 16
Reports on Form 8-K......................................... 16
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Jun. 30, Sep. 30,
1998 1997
------------ ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,107 $ 22,169
Short-term investments 39,535 25,368
Accounts receivable, net of allowances of $498 at
June 30, 1998 and $608 at September 30, 1997 22,790 23,172
Prepaid expenses and other current assets 6,539 15,823
--------- ---------
Total current assets 88,971 86,532
Other marketable securities 8,879 26,524
Property and equipment, net 11,207 9,607
Computer software costs, net 5,303 4,880
Other assets 2,616 1,268
--------- ---------
Total assets $ 116,976 $ 128,811
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,156 $ 2,707
Payroll and related liabilities 4,207 3,434
Other accrued liabilities 4,603 5,377
Income taxes payable 3,463 6,047
--------- ---------
Total current liabilities 15,429 17,565
Long-term obligations 2,145 7,519
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares authorized,
none issued -- --
Common stock, $.001 par value, 40,000 shares authorized,
16,862 and 16,895 shares issued and outstanding at
June 30, 1998 and September 30, 1997, respectively 17 17
Additional paid-in capital 72,085 71,131
Retained earnings 25,289 20,366
Unrealized gain on available-for-sale securities 3,193 12,570
Accumulated translation adjustment (1,182) (357)
--------- ---------
Total stockholders' equity 99,402 103,727
--------- ---------
Total liabilities and stockholders' equity $ 116,976 $ 128,811
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 21,381 $ 16,987 $ 59,283 $ 50,849
Services 4,326 3,521 14,372 9,235
--------- --------- --------- ---------
Total revenue 25,707 20,508 73,655 60,084
Cost of revenue:
License fees 1,427 1,415 4,568 3,498
Services 3,527 2,905 10,653 7,255
--------- --------- --------- ---------
Total cost of revenue 4,954 4,320 15,221 10,753
--------- --------- --------- ---------
Gross margin 20,753 16,188 58,434 49,331
Operating expenses:
Research and development 9,282 6,605 25,725 19,698
Sales and marketing 5,312 4,500 15,813 13,027
General and administrative 3,029 2,752 9,188 8,597
Cost of restructuring 750 - 750 -
--------- --------- --------- ---------
Total operating expenses 18,373 13,857 51,476 41,322
--------- --------- --------- ---------
Income from operations 2,380 2,331 6,958 8,009
Interest income, net 839 683 2,572 2,267
Other income, net 250 1,073 1,357 1,720
--------- --------- --------- ---------
Income before income taxes 3,469 4,087 10,887 11,996
Provision for income taxes 1,110 1,295 3,484 3,825
--------- --------- --------- --------
Net income $ 2,359 $ 2,792 $ 7,403 $ 8,171
--------- --------- --------- --------
--------- --------- --------- --------
Earnings per share:
Basic $ 0.14 $ 0.16 $ 0.44 $ 0.48
--------- --------- --------- --------
--------- --------- --------- --------
Diluted $ 0.14 $ 0.16 $ 0.43 $ 0.45
--------- --------- --------- --------
--------- --------- --------- --------
Weighted average number of shares:
Basic 16,793 17,001 16,821 16,876
--------- --------- --------- --------
--------- --------- --------- --------
Diluted 17,429 17,630 17,353 18,053
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,403 $ 8,171
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 5,170 4,734
Realized gain on sale of other marketable securities (1,385) (1,859)
Change in operating assets and liabilities:
Accounts receivable (371) (4,282)
Prepaid expenses and other assets (2,182) (863)
Accounts payable 460 (312)
Payroll and related liabilities 881 67
Other accrued liabilities 988 (851)
Income taxes payable (2,445) (665)
Discontinued operations (135) (1,159)
-------- ------
Total adjustments 981 (5,190)
-------- ------
Net cash provided by operating activities 8,384 2,981
Cash flows from investing activities:
Maturity of short-term and long-term investments 40,770 44,723
Purchases of short-term and long-term investments (52,918) (44,507)
Proceeds from sale of other marketable securities 1,436 1,897
Purchases of property and equipment (3,445) (5,313)
Additions to computer software costs (3,728) (4,046)
Proceeds from the sale of minority interest in Softbank
Content Group 9,810 -
Other investing activities - (366)
-------- -------
Net cash used in investing activities (8,075) (7,612)
Cash flows from financing activities:
Proceeds from stock purchases under stock option and
stock purchase plans 1,976 3,039
Repurchases of common stock (3,553) (3,181)
-------- -------
Net cash used in financing activities (1,577) (142)
-------- -------
Effect of exchange rate changes on cash and cash equivalents (794) (297)
Net decrease in cash and cash equivalents (2,062) (5,070)
Cash and cash equivalents at beginning of period 22,169 25,752
-------- -------
Cash and cash equivalents at end of period $ 20,107 $20,682
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period, net of refunds $ 1,883 $ 3,626
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 5
<PAGE>
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 and chip level software for personal computers
and information appliances.
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, results of operations and cash flows for the interim
periods presented. All significant intercompany accounts and transactions have
been eliminated. The operating results for the three and nine-month periods
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the fiscal 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 June 30, 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
available-for-sale. The unrealized gain on the Xionics investment, less
related deferred income taxes,
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 June 30, 1998, the Company held approximately 1.1 million shares of
Xionics stock with a market value of $4.94 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 June 30, 1998 and
September 30, 1997, the fair value of such securities approximated amortized
cost and gross unrealized holding gains were not material.
NOTE 4. COST OF RESTRUCTURING
In June 1998, the Company implemented a restructuring plan in to reduce
costs. The Company's restructuring actions consisted primarily of the
elimination of approximately 20 positions in engineering, sales, marketing,
and administration. The elimination of positions was the result of
consolidating certain functions and eliminating certain management positions.
The restructuring resulted in a charge to operations of approximately
$750,000 for employee severance and severance related items, of which
$433,000 had been paid through June 30, 1998.
NOTE 5. 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):
Page 7
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 2,359 $ 2,792 $ 7,403 $ 8,171
-------- -------- -------- --------
-------- -------- -------- --------
Denominator:
Weighted average common shares
outstanding - denominator for basic
earnings per share 16,793 17,001 16,821 16,876
Effect of dilutive securities:
Stock options 636 619 532 1,048
Warrants - 10 - 129
-------- -------- -------- --------
Total dilutive securities 636 629 532 1,177
Weighted average common and equivalent
shares outstanding - denominator
for diluted earnings per share 17,429 17,630 17,353 18,053
-------- -------- -------- --------
Earnings per share:
Basic $ 0.14 $ 0.16 $ 0.44 $ 0.48
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.14 $ 0.16 $ 0.43 $ 0.45
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE 6. STOCK REPURCHASE PROGRAM
In fiscal 1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of outstanding common stock under a share repurchase program.
The Company repurchased and retired approximately 645,000 shares at a cost of
approximately $8.6 million until the program was terminated in April 1998.
NOTE 7. 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.
Page 8
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PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also made various equity and other investments in Softbank,
Inc., a joint venture company, which were subsequently exchanged for a non-
interest bearing $2,310,000 note receivable from Softbank Holdings, Inc. This
note was included in other current assets at September 30, 1997, and was
subsequently collected in October 1997.
NOTE 8. PENDING MERGER
On April 15, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Award Software
International, Inc. ("Award"), a publicly-held company that develops and
markets system-enabling software. Under the terms of the Reorganization
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 regulatory approval. The Department of Justice ("DOJ") is
reviewing the companies' application for approval of the merger as required
under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended.
The DOJ has requested additional information and materials, which the companies
submitted on June 23, 1998. The merger was approved by both companies'
shareholders on June 29, 1998. 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.
Page 9
<PAGE>
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 information appliances. 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 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
LICENSE FEES
Revenue by product line for the three and nine-month periods ended June
30, 1998 and 1997, was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------- ---------------------
1998 1997 % CHANGE 1998 1997
-------- ---------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Three months ended June 30:
PC systems $19,977 $15,813 26.3% 77.7% 77.1%
Information appliances 3,862 3,202 20.6% 15.0% 15.6%
Interconnect 1,868 1,493 25.1% 7.3% 7.3%
------- ------- ------ ------
Total revenue $25,707 $20,508 25.4% 100.0% 100.0%
------- ------- ------ ------
------- ------- ------ ------
Nine months ended June 30:
PC systems $56,109 $47,021 19.3% 76.2% 78.3%
Information appliances 11,449 8,537 34.1% 15.5% 14.2%
Interconnect 6,097 4,051 50.5% 8.3% 6.7%
Other - 475 - - 0.8%
------- ------- ------ ------
Total revenue $73,655 $60,084 22.6% 100.0% 100.0%
------- ------- ------ ------
</TABLE>
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The increases in PC systems revenue in the third quarter and the first
nine months of fiscal 1998 were primarily due to increased customer shipments
of the Company's notebook reflecting overall growth in the notebook PC market.
The increases in information appliances revenue in the third quarter and
the first nine months of fiscal 1998 were primarily due to growth of the
information appliance market. The increases in interconnect revenue in the
third quarter and the first nine months of fiscal 1998 reflects growing
acceptance of outsourcing circuit intellectual property in the form of
synthesizable cores ("chip level software"). The growth for the quarter for
both product lines was lower than for the nine months. A number of contract
proposals and negotiations were delayed at the end of the quarter, reflecting
customer caution on new product development.
The decline in other revenue for the first nine months of fiscal 1998
was due to the discontinuance in fiscal 1997 of the Company's application
products.
Revenue by geographic region was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
------------------------- ------------------------
1998 1997 % CHANGE 1998 1997
----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Three months ended June 30:
North America $ 11,944 $ 8,017 49.0% 46.5% 39.1%
Japan 8,371 6,520 28.4% 32.6% 31.8%
Asia (excluding Japan) 3,059 3,753 (18.5)% 11.9% 18.3%
Europe 2,333 2,218 5.2% 9.0% 10.8%
--------- -------- ------ ------
Total revenue $ 25,707 $ 20,508 25.4% 100.0% 100.0%
--------- -------- ------ ------
--------- -------- ------ ------
Nine months ended June 30:
North America $ 29,578 $ 22,589 30.9% 40.2% 37.6%
Japan 24,287 19,292 25.9% 33.0% 32.1%
Asia (excluding Japan) 12,094 11,486 5.3% 16.4% 19.1%
Europe 7,696 6,717 14.6% 10.4% 11.2%
--------- -------- ------ ------
Total revenue $ 73,655 $ 60,084 22.6% 100.0% 100.0%
--------- -------- ------ ------
--------- -------- ------ ------
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
North America revenue increased in the third quarter and first nine
months of fiscal 1998 across all major product lines. The Company's North
American growth rate in PC revenue is expected to be lower in future periods
as a result of PC unit growth, price declines and the loss of a significant
customer, which has been acquired.
The increases in Japan revenue in the third quarter and first nine
months of fiscal 1998 were mostly due to increased demand for notebook
products. Service revenues declined in both periods in Japan, however, as
fewer new system designs have been initiated by customers thus far in
fiscal 1998. Revenue decreased in Asia for the three months ended June 30,
1998 from the comparable period due the impact of the Asian economic decline
on customer unit volumes. Revenue for the nine months ended June 30, 1998
increased in Europe primarily from growth in the market for information
appliances and PC systems.
For the three months ended June 30, 1998, two customers each accounted
for approximately 13% of revenue. For the nine months ended June 30, 1998,
one customer accounted for approximately 10% of revenue. For the three months
ended June 30, 1997, one customer accounted for approximately 11% of revenue
and another customer accounted for approximately 16% of revenue.
SERVICES
The increases in service revenue in the third quarter and the first
nine months of fiscal 1998, from the comparable periods in fiscal 1997, were
primarily due to increased system design and implementation work related to
the growth in the number of PC systems incorporating the Company's products.
The growth slowed in the third quarter of fiscal 1998.
GROSS MARGIN
Gross margin as a percentage of revenue for the three and nine-month
periods ended June 30, 1998 were 80.7% and 79.3%, respectively, compared to
78.9% and 82.1% for the comparable periods in fiscal 1997. The increase in
gross margin for the three-month period was primarily due to the decrease in
amortization of capitalized software caused by lower capitalization of
development costs associated with PC products in recent quarters. This lower
capitalization was due to a greater proportion of PC product line development
efforts in fiscal 1998 which were devoted to improving and enhancing
previously released products. For the three-month periods ended June 30,
1998 and 1997, amortization of capitalized software costs were $0.9 million
and $1.2 million, respectively.
The decrease in gross margin for the nine-month period was primarily due
to the growth of service revenue, which have lower gross margins, as a
percentage of total revenue in the first six months of fiscal year 1998. For
the nine-month periods ended June 30, 1998 and 1997, amortization of
capitalized software costs was $3.0 million and $2.8 million, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and nine-month periods
ended June 30, 1998 increased $2.7 million (40.5%) and $6.0 million (30.6%),
respectively, from the comparable periods in fiscal 1997. The increases were
primarily due to additions in the Company's engineering staff. The 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 as a strategic investment to
enhance the features and functionality of its PC systems software.
The Company capitalized $0.9 million and $3.0 million of internal software
development costs for the three and nine-month periods ended June 30, 1998,
respectively, as compared to $1.2 million and
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
$3.0 million for the same periods in fiscal 1997. 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 nine-month periods ended
June 30, 1998 increased $0.8 million (18.0%) and $2.8 million (21.4%),
respectively, from the comparable periods in fiscal 1997. In fiscal 1998, the
Company added sales personnel, particularly in the information appliance and
interconnect areas. Also contributing to the increase for the nine months were
expanded participation in sales seminars and increases in product marketing
costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and nine-month periods
ended June 30, 1998 increased $0.3 million (10.0%) and $0.6 million (6.9%),
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.
COST OF RESTRUCTURING
In June of 1998, the Company implemented a restructuring plan in to
reduce costs. The Company's restructuring actions consisted primarily of the
elimination of approximately 20 positions in engineering, sales, marketing,
and administration. The elimination of positions was the result of
consolidating certain functions and eliminating certain management positions.
The restructuring resulted in a charge to operations of approximately
$750,000 for employee severance and severance related items, of which
$433,000 had been paid through June 30, 1998.
INTEREST INCOME, NET
Interest income, net, for the three and nine-month periods ended June 30,
1998 increased $156,000 (22.8%) and $305,000 (13.5%), respectively, from the
comparable periods in fiscal 1997. The increases were primarily due to an
increase in cash available for investment during the periods.
OTHER INCOME, NET
Other income, net, for the three and nine month-periods ended June 30,
1998 decreased $823,000 (76.7%) and $363,000 (21.1%), respectively, from the
comparable periods in fiscal 1997. The decreases were primarily due to the
sale of fewer shares of Xionics stock at lower average sales price, when
compared to the comparable periods in fiscal 1997.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $1.1 million and $3.5
million for the three and nine-month periods ended June 30, 1998, respectively,
as compared to $1.3 million and $3.8 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.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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, other marketable securities and a $10.0
million revolving credit facility with a commercial bank. There were no
borrowings outstanding under the credit facility at June 30, 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.
In fiscal 1997, the Board of Directors authorized the repurchase of up
to 1,000,000 shares of outstanding common stock under a share repurchase
program. The Company repurchased and retired approximately 645,000 shares at
a cost of approximately $8.6 million until the program was terminated in
April 1998.
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities in the nine months ended
June 30, 1998 was $8.4 million, resulting primarily from cash provided by net
income. Net cash used by investing activities in the nine-month period was
$8.1 million, which consisted primarily of net purchases of short-term and
long-term investments of $12.1 million, purchases of property and equipment
of $3.4 million, and
Page 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
additions to computer software costs, including purchased software costs of
$3.7 million. These decreases were partially offset by proceeds from the sale
of the Company's minority interest in Softbank Content Group for $9.8 million
and the proceeds from the sale of marketable securities of $1.4 million. Cash
used for financing activities during the first nine months of fiscal 1998 was
$1.6 million, resulting from $3.6 million used for the repurchase of common
stock, partially offset by $2.0 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 approximately 1.1 million shares of Xionics stock at
June 30, 1998. The market price per share of Xionics stock decreased from
$17.38 per share on September 30, 1997 to $4.94 per share on June 30, 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 income taxes), and unrealized gain on
available-for-sale securities of $17.6 million, $5.4 million and $9.4
million, respectively.
Page 15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on June 29, 1998, at
which the following occurred:
Approval of Merger with Award Software International, Inc.: The stockholders
approved the issuance of shares of the Company's Common Stock to Stockholders
of Award, pursuant to the Reorganization Agreement. Under the agreement,
each Award shareholder will receive 1.225 shares of the Company's stock. The
vote on the matter was as follows:
FOR 8,789,064
ABSTAIN 6,231,365
WITHHELD 147,452
Approval of the Company's Restated Certificate of Incorporation: The
stockholders approved the amendment to the Company's Restated Certificate of
Incorporation, which includes an increase to the number of authorized shares
of the Company's Common Stock to 60 million shares. The vote on the matter
was as follows:
FOR 14,631,618
ABSTAIN 28,425
WITHHELD 507,838
ITEM 5. OTHER INFORMATION
Pursuant to Securities and Exchange Commission Rule 14a-4, unless a
Stockholder proposal for the Company's 1999 Annual Meeting of Stockholders is
submitted to the Company prior to November 15, 1998, management may use its
discretionary voting authority to vote management proxies on the stockholder
proposal without any discussion of the matter in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index beginning on page 18 hereof.
(b) REPORTS ON FORM 8-K.
The Company filed two reports on form 8-K during the
third quarter ended June 30, 1998. On April 24, 1998, a
report was filed for and reported on the April 1998 merger
agreement with Award Software International. On May 12,
1998, a report was filed for the restatement of selected
financial data as prescribed by the adoption of Financial
Accounting Standards Board Statement of Accounting Standards
No. 128, Earnings per Share.
Page 16
<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: August 13, 1998 By: /s/ ROBERT J. RIOPEL
-----------------------------
Robert J. Riopel
Vice President, Finance and
Chief Financial Office
Page 17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Phoenix
Technologies dated as of June 29, 1998 - filed as Exhibit 3.1 to the May
26, 1998 Form S-4 and incorporated herein by this reference.
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")).
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.
10.21 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 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.
Page 18
<PAGE>
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).
10.31 Loan Agreement dated as of March 27, 1998 by and between Silicon Valley
Bank and Phoenix Technologies Ltd. - filed as Exhibit 10.31 to the
Company's Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by the reterence.
10.32 1998 Stock Plan, as amended June 4, 1996 - filed as Exhibit 99.1 to
the 1998 Stock Plan and Amended 1991 Employee Stock Purchase Plan and
incorporated herein by this reference.
10.33 Amended and Restated Employee Stock Purchase Plan, as amended June 4,
1998 - filed as Exhibit 99.2 to the 1998 Stock Plan and Amended 1991
Employee Stock Purchase Plan S-8 and incorporated herein by this
reference.
27 Financial Data Schedule.
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Page 19
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<PERIOD-END> JUN-30-1998 JUN-30-1998
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