<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 December 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 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 26,619,705
----------------------------------- -------------------------------
Class Number of shares Outstanding at
January 31, 1999
Exhibit Index is on Page 19
<PAGE>
PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1998 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 1998 and 1997. . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 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. . . . . 17
Item 6. Exhibits and Report on Form 8-K
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 17
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>
December 31, September 30,
1998 1998
----------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 55,399 $ 44,234
Short-term investments 14,383 27,063
Accounts receivable, net of allowances of $1,407 at
December 31, 1998 and $1,113 at September 30, 1998 29,515 28,446
Other current assets 6,523 7,120
--------- ---------
Total current assets 105,820 106,863
Other marketable securities 10,003 7,782
Property and equipment, net 13,573 13,244
Computer software costs, net 15,937 16,575
Goodwill and other intangible assets, net 12,061 12,693
Other assets 1,621 1,945
--------- ---------
Total assets $ 159,015 $ 159,102
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,759 $ 6,976
Payroll and related liabilities 5,866 7,294
Other accrued liabilities 9,882 8,524
Income taxes payable 5,232 6,926
--------- ---------
Total current liabilities 25,739 29,720
Long-term obligations 4,195 4,046
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 60,000 shares
authorized, 26,533 and 26,286 shares issued and
outstanding at December 31 and September 30, 1998 27 26
Additional paid-in capital 101,221 99,940
Retained earnings 26,171 25,269
Unrealized gain on available-for-sale securities 2,107 2,046
Accumulated translation adjustment (445) (1,945)
--------- ---------
Total stockholders' equity 129,081 125,336
--------- ---------
Total liabilities and stockholders' equity $ 159,015 $ 159,102
--------- ---------
--------- ---------
</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
December 31
----------------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
License fees $24,233 $24,642
Services 6,308 5,448
------- -------
Total revenue 30,541 30,090
Cost of revenue:
License fees 1,651 2,852
Services 4,649 3,536
------- -------
Total cost of revenue 6,300 6,388
------- -------
Gross margin 24,241 23,702
Operating expenses:
Research and development 10,067 9,220
Sales and marketing 7,250 6,312
General and administrative 4,883 4,076
Restructuring charge 1,944 -
------- -------
Total operating expenses 24,144 19,608
------- -------
Income from operations 97 4,094
Interest income, net 901 1,214
Other income, net 329 1,093
------- -------
Income before income taxes 1,327 6,401
Provision for income taxes 425 1,924
------- -------
Net income $ 902 $ 4,477
------- -------
------- -------
Earnings per share:
Basic $ 0.03 $ 0.18
------- -------
------- -------
Diluted $ 0.03 $ 0.16
------- -------
------- -------
Shares used in earnings per share calculation:
Basic 26,412 25,370
------- -------
------- -------
Diluted 27,780 27,396
------- -------
------- -------
</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>
Three Months Ended
December 31
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 902 $ 4,477
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 3,010 2,207
Effect of Award fiscal year conversion - (1,660)
Realized gain on sale of other marketable securities (112) (1,146)
Change in operating assets and liabilities:
Accounts receivable (777) 3,892
Prepaid expenses and other assets 1,348 (1,738)
Accounts payable (2,218) 470
Payroll and related liabilities (1,566) (576)
Other accrued liabilities 2,029 1,291
Income taxes payable (1,688) (1,323)
-------- --------
Total adjustments 26 1,417
-------- --------
Net cash provided by operating activities 928 5,894
Cash flows from investing activities:
Maturity of short-term and long-term investments 24,342 20,446
Purchases of short-term and long-term investments (13,780) (26,145)
Proceeds from sale of other marketable securities 117 1,193
Purchases of property and equipment (739) (1,480)
Additions to computer software costs (1,305) (1,608)
Proceeds from the sale of minority interest in Softbank
Content Group - 9,810
-------- --------
Net cash provided by investing activities 8,635 2,216
Cash flows from financing activities:
Proceeds from stock purchases under stock option and
stock purchase plans 1,121 844
Repurchases of common stock - (2,263)
-------- --------
Net cash provided by (used in) financing activities 1,121 (1,419)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 481 (342)
-------- --------
Net increase in cash and cash equivalents 11,165 6,349
Cash and cash equivalents at beginning of period 44,234 46,800
-------- --------
Cash and cash equivalents at end of period $ 55,399 $ 53,149
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid (refunded) during the period, net $ (296) $ 238
</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
(unaudited)
NOTE 1. BASIS OF PRESENTATION
Phoenix Technologies Ltd. ("Phoenix" or the "Company") designs, develops,
markets and supports standards-based system and chip-level software for
information platforms, including personal computers, servers, embedded systems,
information appliances and peripherals. 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, 1998.
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-month period ended
December 31, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1999, or for any other
future period.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
NOTE 2. REVENUE RECOGNITION
Effective October 1, 1998, the Company adopted Statement of Position
97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's consolidated financial position or results of operations.
NOTE 3. CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of less
than three months are considered cash equivalents.
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 4. RESTRUCTURING CHARGES
In December 1998, the Company recorded a pre-tax restructuring charge of
approximately $1.9 million. This charge included the costs of employee
severance, facilities consolidations and streamlining certain field operations
and other functions. The restructuring included closing the Company's offices
in Texas and France, and the elimination of 38 positions in engineering, sales,
marketing, and administration.
Of the $8.9 million of restructuring and out-of-pocket merger and
acquisition costs incurred and charged to operations in fiscal 1998 and the
three-month period ended December 31, 1998, $2.7 million was unpaid as of
December 31, 1998, most of which will be paid in fiscal 1999.
NOTE 5. EARNINGS PER SHARE
The following table presents the calculations of basic and diluted
earnings per share under Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Numerator:
Net income $ 902 $4,477
------ ------
------ ------
Denominator:
Weighted average common shares outstanding -
denominator for basic earnings per share 26,412 25,370
Effect of dilutive securities using treasury stock method:
Stock options 1,235 1,588
Warrants 133 438
------ ------
Total dilutive securities 1,368 2,026
------ ------
Weighted average common and equivalent shares outstanding -
denominator for diluted earnings per share 27,780 27,396
------ ------
------ ------
Earnings per share:
Basic $ 0.03 $ 0.18
------ ------
------ ------
Diluted $ 0.03 $ 0.16
------ ------
------ ------
</TABLE>
Page 7
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. COMPREHENSIVE INCOME (LOSS)
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net loss or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which are reported separately in
stockholders' equity, to be included in comprehensive income.
Following are the components of comprehensive income or loss (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------
1998 1997
------ --------
<S> <C> <C>
Net income $ 902 $ 4,477
Foreign currency translation adjustments 1,500 (991)
Unrealized gain (loss) on securities, net of tax:
Unrealized holding gain (loss) arising during the period 116 (9,088)
Less: reclassification adjustment for gains realized
in net income (55) (928)
------ --------
Other comprehensive income (loss) 1,561 (11,007)
------ --------
Comprehensive income (loss) $2,463 $ (6,530)
------ --------
------ --------
</TABLE>
Page 8
<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 WITHIN THE MEANING OF SECTION 21E AND
SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. 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, 1998, 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, servers, embedded
systems, information appliances and peripherals. The Company's software
provides compatibility, connectivity and manageability of the various
components and technologies used in such devices. The Company provides these
products primarily to platform and peripheral manufacturers (collectively,
"OEMs") that range from large PC manufacturers to small system integrators.
Phoenix also provides training, consulting, maintenance and engineering
services to its customers. The Company markets and licenses its products and
services primarily through a direct sales force, but also through regional
distributors and sales representatives.
The Company's operations include the following divisions:
PLATFORM ENABLING: Develops and markets foundation software and related
services to information platform OEMs and system integrators. Foundation
software includes BIOS (Basic Input Output System) and related products.
PICO AND PC ENHANCING: Provides system enhancing software for PCs as
well as industrial, handheld, and consumer platforms in the emerging
information appliance market. Examples include software products that manage
system diagnostics, system security, power consumption and internet
foundations.
SEMICONDUCTOR IP (previously Interconnect): Provides synthesizable cores,
related tools and firmware that help semiconductor manufacturers quickly
incorporate industry standard interfaces into chip designs.
In September 1998, Award Software International, Inc. ("Award") was
merged with a wholly-owned subsidiary of the Company. Award is a leading
provider of system enabling and management software that includes a suite of
BIOS products for designers and manufacturers of motherboards, PC systems and
other microprocessor-based (or embedded) devices. In the merger, each share
of Award common stock was exchanged for 1.225 shares of Phoenix common stock,
(an aggregate of approximately 8.8 million shares of Phoenix common stock).
In addition, outstanding Award employee stock options and warrants were
converted at the same exchange ratio into options and warrants to purchase
approximately 2.3 million and 0.5 million shares of Phoenix common stock,
respectively. The transaction was accounted for as a pooling of interests
for financial reporting purposes, and was structured to qualify as a tax-free
reorganization. The consolidated statement of income for the three months
ended December 31, 1997, has been restated to include the combined results of
operations of Phoenix and Award.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Also in September 1998, Phoenix completed the acquisition of Sand
Microelectronics, Inc. ("Sand"), a supplier of synthesizable cores for the
computer industry. Synthesizable cores are pre-packaged circuit descriptions
used as building blocks for system-level application specific integrated
circuits ("ASICs"). These ASICs are used to connect computers and peripheral
devices using PCI, USB, IEEE 1394, IrDA and other emerging industry standard
protocols. The purchase price consisted of $18.6 million in cash, 464,000
shares of Phoenix common stock, stock options to purchase approximately 264,000
shares of Phoenix common stock (in exchange for Sand stock options), and up to
$3.7 million payable through fiscal 2001 subject to achievement of certain
performance objectives. The acquisition was accounted for using the purchase
method of accounting.
REVENUE
The Company's products are generally designed into personal computer
systems, information appliances and semiconductors. License fee and service
revenue by platform for the three-month periods ended December 31, 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>
PC systems $21,128 $22,866 (8%) 69% 76%
Information appliances 4,063 4,478 (9%) 13% 15%
Semiconductor 5,069 1,782 184% 17% 6%
Other 281 964 (71%) 1% 3%
------- ------- --- ---
Total revenue $30,541 $30,090 1% 100% 100%
------- ------- --- ---
------- ------- --- ---
</TABLE>
The decline in PC systems revenue in the first quarter of fiscal 1999
was due to the impact of the loss of a major customer (who was acquired by a
third party that now uses an internally developed BIOS) and a decline in
average selling prices, primarily on desktop products. These decreases were
partially offset by increased revenue generated by notebook products due to
growth of the notebook PC market.
The decrease in revenue from information appliances license fees and
services was due to the timing of license fee payments and the discontinuance
of certain Award products. Semiconductor revenue increased by nearly 200% due
to the acquisition of Sand and continued demand for outsourced circuit
intellectual property. The Company's USB and IEEE 1394 products contributed
to most of this growth.
The decline in other revenue for the first quarter of fiscal 1999 was due
to $0.8 million of revenue generated in the first quarter of fiscal 1998 from
shipments of a network management product which was subsequently discontinued.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue by geographic region for the three-month periods ended December
31, 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>
North America $10,008 $ 9,632 4% 33% 32%
Japan 8,358 8,263 1% 27% 27%
Asia (excluding Japan) 9,104 8,903 2% 30% 30%
Europe 3,071 3,292 (7%) 10% 11%
------- ------- --- ---
Total revenue $30,541 $30,090 1% 100% 100%
------- ------- --- ---
------- ------- --- ---
</TABLE>
North America revenue increased in the first quarter of fiscal 1999, as
increased notebook and semiconductor IP revenue offset a decline in revenue due
to the loss of a significant North American desktop customer (due to
acquisition). Revenue in Europe decreased as a result of the timing of certain
license fee payments. The Company's growth rate in PC revenue is expected to be
impacted in future quarters by the significant customer loss and by lower PC
prices.
No customer accounted for more than 10% of revenue during the three months
ended December 31, 1998 or 1997.
Service revenue in the first quarter of fiscal 1999 increased 16% over
the comparable period in fiscal 1998 due to two factors. Maintenance revenue
increased due to the growing base of Semiconductor IP customers, and the
Company's agreement with Intel was amended in fiscal 1998 such that a higher
proportion of revenue relates to services.
GROSS MARGIN
Gross margin as a percentage of revenue was 79% for both three-month
periods ended December 31, 1998 and 1997. License fee gross margin increased
to 93% in the first quarter of fiscal 1999 from 88% in the comparable quarter
of fiscal 1998 due mostly to lower third-party royalty costs. The decline in
third-party royalty costs was primarily due to the discontinuance of a network
management product in fiscal 1998. Service gross margin as a percentage of
revenue declined largely as a result of an amendment to the Intel agreement,
which generated lower margins, and the timing of certain NRE revenue recognized
in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended
December 31, 1998, increased $0.8 million (9%) to $10.1 million from the
comparable period in fiscal 1998. The increase was primarily due to
additional personnel resulting from the Sand acquisition and a reduction in
the amount of internal development costs that were capitalized. The Company
capitalized $0.6 million of internal software development costs for the
three-month period ended December 31, 1998, as compared to $1.4 million for
the same period in fiscal 1998. The decrease in capitalization of development
costs was due to a higher proportion of costs being incurred on
non-capitalizable projects, including the development of foundation software
related to Intel's next-generation architecture, IA-64, and tools associated
with the deployment of the Company's products.
The Company believes that continued investment in new and evolving
technologies is essential to meet rapidly changing industry requirements.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three-month period ended December
31, 1998 increased $0.9 million (15%) from the comparable period in fiscal
1998. The increase was primarily due to expanded participation in major
tradeshows and industry events and increased spending on public relations
activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
December 31, 1998, increased $0.8 million (20%) from the comparable period in
the prior year. This increase was principally due to amortization of goodwill
associated with the purchase of Sand and an increase in the Company's
provision for uncollectible accounts.
COST OF RESTRUCTURING
In December 1998, the Company recorded a pre-tax restructuring charge of
approximately $1.9 million. This charge included the costs of employee
severance, facilities consolidations and streamlining certain field operations
and other functions. The restructuring included closing the Company's offices
in Texas and France, and the elimination of 38 positions in engineering, sales,
marketing and administration.
INTEREST AND OTHER INCOME, NET
Net interest income for the three-month period ended December 31, 1998,
decreased $0.3 million (26%) from the comparable period in fiscal 1998. This
decrease was primarily due to lower average cash balances, as $18.6 million
was paid for the acquisition of Sand.
Other income (net) for the three-month period ended December 31, 1998,
decreased $0.8 million (70%) from the comparable period in fiscal 1998. The
decrease was due to the sale of fewer shares of Xionics Document Technologies,
Inc. ("Xionics") common stock at lower selling prices. The Company sold 28,000
common shares of Xionics stock at an average price of $4.00 per share in the
first quarter of 1999 as compared to 89,000 shares at an average selling price
of $12.88 per share in the first quarter of fiscal 1998. At December 31, 1998,
the Company owned approximately 1,021,000 shares of Xionics stock with a market
value of approximately $3.5 million.
PROVISION FOR INCOME TAXES
The Company recorded an income tax provision of $0.4 million (32%
effective tax rate) for the three-month period ended December 31, 1998, as
compared to $1.9 million (30% effective tax rate) for the comparable period in
fiscal 1998. The effective tax rate increased due to the nondeductible
amortization of goodwill from the Sand acquisition, offset by favorable tax
benefits of the Company's Foreign Sales Corporation. The Company's effective
tax rate has been lower than the U.S. combined Federal and state statutory
rate due to various federal and state tax credits and lower tax rates imposed
on foreign earnings in certain jurisdictions.
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity include cash, cash equivalents,
short-term investments, other marketable securities and a $10 million revolving
credit facility with a commercial bank that expires in March 1999. There were
no borrowings outstanding under the credit facility at December 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.
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 three months ended
December 31, 1998 was $0.9 million after the payment of approximately $3.7
million in merger-related costs which were accrued in the quarter ended
September 30, 1998. Net cash provided by investing activities in the
three-month period was $8.6 million. This consisted primarily of net proceeds
received from the sale of short-term and long-term investments of $10.5
million, partially offset by purchases of property and equipment of $1.3
million, and additions to computer software costs of $0.7 million. Cash
generated from financing activities during the first three months of fiscal
1999 was $1.1 million from the exercise of common stock options and issuance
of stock under the Company's employee stock purchase plan.
YEAR 2000
Many software and firmware products and internally developed applications
used two digits to designate the year instead of four digits. This may result
in the interpretation of the year 00 as 1900 or other dates instead of
correctly interpreting it as 2000. Such failure could disrupt processing
transactions or even cause certain systems to fail. This possibility affects
the Company's products and its information technology and other internal
systems as well as the Company's customers and vendors. The PC industry has
also defined the Year 2000 ("Y2K") issue to include proper handling of leap
year calculations. Significant uncertainty exists in the software industry
concerning the potential effects associated with the Year 2000 problem.
The Company's Year 2000 compliance effort covers the Company's products,
internal systems and services provided by others.
PHOENIX PRODUCTS
HISTORY. Since the Company's inception, the Company has sold or licensed
various products, including BIOS products, semiconductor intellectual property
and consumer software.
The Company's BIOS products are in different stages of Y2K compliance.
BIOS-related products sold or licensed after fiscal 1995 are designed to
automatically handle Year 2000 date changes and leap year calculations. The
Company's BIOS products prior to that date are manually compliant, which means
that end users must change the date on their system at or after the December
31, 1999 in order for the system date to be proper. The Company has identified
one
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
version of BIOS licensed for a period of approximately 12 months by Award
Software during 1994 and 1995 that was not manually compliant.
The Company's semiconductor IP product lines do not handle date-related
functions and accordingly do not appear to have Year 2000 issues. The Company
discontinued its consumer software product lines in 1996. Accordingly, the
Company does not believe that a significant number of these products will
remain in use as of December 31, 1999. The Company has developed a list of all
products it sold and licensed and has begun assessing the level of compliance
of these products. This effort is expected to be completed in the second
quarter of the Company's 1999 fiscal year.
REMEDIAL STEPS. The Company sells and licenses its products directly to
OEMs, and therefore does not have direct customer relationships with end users
of PCs or information appliances. Nonetheless, for any products deemed to be
less than fully compliant, the Company will make available to end users
software upgrades, fixes or patches. These solutions will be available to
users through the Company's web site and by mail, if necessary. The Company
will also make these solutions available to OEM customers for placement by
those customers on their respective web sites or distribution by other means,
as they deem appropriate. Where appropriate, the Company will undertake other
efforts to inform and deliver solutions to end users. However, there can be
no assurance that end users of products containing software sold or licensed
by the Company will take steps to download these solutions from the Internet,
or that such end users will have Internet access, which will require the
Company to find other means of delivery. The Company believes that the
incremental costs of providing these solutions to customers will not be
significant.
EXPOSURE. The Company continues to identify and assess the state of Y2K
compliance of those products it sold or licensed that remain in use. There can
be no assurance that the Company will be able to identify all compliance issues
for each of the products it has sold or licensed during its history.
INFORMATION TECHNOLOGY AND OTHER SYSTEMS
The Company's plans for dealing with the Year 2000 include surveying and
testing or certifying all of the hardware and software used in the Company for
compliance, performing remediation where necessary and developing a
contingency plan for the Year 2000.
CURRENT STATUS. The Company's internal systems are generally based on
commercially available software and operated on personal computers, PC servers
and Unix workstations and servers. The vast majority of the Company's hardware,
including networking hardware, is three years old or less. Software products
in use range in age generally from several months to approximately ten years
old. The Company uses Oracle Financials for its primary financial system,
which has been upgraded recently and which Oracle represents is Y2K compliant.
The Company is in the process of implementing a replacement for the code
management system used in product development and deployment. The system is
Y2K compliant.
The Company has developed a Y2K project plan, approved by the Board of
Directors, and is in the process of testing its hardware and software. A key
element of the plan is to assure that all firmware and software is identified
and tested. Most of the computers, and the applications thereon,
Page 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
can be tested over the Company's wide area network. However there are also
embedded firmware and software in other systems, such as building access and
temperature control systems, which will require individual testing and
possibly remediation. The project plan is targeted for completion in June
1999. To date, less than 50% of all project tasks have been completed.
All employees have been alerted to the Y2K issues.
TEST, CERTIFICATION AND REMEDIATION. Third party software is being used
to test each of the computer systems and inventory all applications in use.
The application information will be compared to vendor or other published
databases with Y2K compliance information. Remedial action, where necessary,
which usually involves acquiring and implementing an upgrade, will be
performed in groups based on the level of priority. For those applications
not found in the published Y2K information, the vendors will be contacted, and
where necessary, upgrades will be acquired and implemented. There will be
some applications where the vendor no longer exists, in which case a
determination will be made, based on the importance of the application, to
test and, if necessary, modify it internally, replace it or ignore it.
COST OF COMPLIANCE TESTING AND REMEDIATION. The Company has spent
approximately $50,000 in testing and upgrades to date. The new code management
system is expected to cost approximately $2 million for software,
implementation assistance and training, excluding the cost of Phoenix personnel
involved in the project. The Company's Information Technology personnel
estimates that they will spend approximately 15% of their time over the next
fiscal year on Y2K issues at an approximate cost of $250,000. Software
purchases and certain other vendor costs are generally capitalized and
depreciated, while costs specific to Y2K are charged directly to expense.
Total anticipated Y2K expenditures are being funded through operating cash
flows and are not expected to be material to the Company's financial condition.
However, there can be no assurance that additional and material unanticipated
costs will not arise during the course of testing, certification and
remediation. In addition, there can be no assurance that the estimates of time
and cost contained herein will be achieved, and actual results could differ
materially from those anticipated.
THIRD-PARTY SYSTEMS
The Company has relationships with various third parties and the failure
of these third parties to achieve Year 2000 compliance could have a material
impact on the Company's business, operating results and financial condition.
The Company is making inquiries of its major vendors and suppliers, such as
banks, payroll service and equipment vendors about their Y2K readiness. While
responses to date or their published Y2K readiness have been satisfactory, the
Company has information on less than 50% of the significant vendors. Further,
there can be no assurance that unanticipated processing or supply problems
will not occur at the turn of the century.
The Company does not currently have any information concerning the Y2K
readiness of its customers. In the event that the Company's significant
customers do not successfully and timely achieve Y2K compliance, the Company's
business or operations could be adversely affected.
Page 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
WORST CASE SCENARIO AND CONTINGENCY PLANS
The most reasonably likely worst case scenario would include significant
costs and business interruptions associated with: 1) previously undetected
errors in the Company's products, 2) Year 2000 litigation, as currently being
experienced by other software vendors, 3) a significant disruption of the
Company's internal information systems and 4) the failure of infrastructure
services provided by government agencies and other third parties (e.g., air
travel, banking, utilities, etc.). Third-party litigation regarding Y2K
compliance could require a significant amount of management time and Company
resources to defend itself. The Company does not currently have a contingency
plan for the Year 2000, but plans to develop one during fiscal 1999. The plan
will cover rapid response to customer and end-user problems as well as manual
or other temporary remedies in the event of failure of Company or third party
systems. In addition, the plan will include comprehensive tests of internal
systems. There can be no assurance that the actions being taken, as described
above, will prevent any Y2K problems. In addition, there can be no assurance
that the contingency plans will be sufficient to counteract such problems,
which could result in a material adverse effect upon the Company's business,
operating results and financial condition.
Page 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index beginning on page 19 hereof.
(b) REPORTS ON FORM 8-K.
On November 25, 1998, the Registrant filed a Current Report on Form 8-K/A
amending the 8-K filing to include unaudited, pro forma financial statements of
the Registrant and Award.
Page 17
<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: February 15, 1999 By: /s/ WILLIAM E. MEYER
------------------------------
William E. Meyer
Vice President, Finance and
Chief Accounting Officer
Page 18
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule.
Page 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 55,399
<SECURITIES> 14,383
<RECEIVABLES> 30,922
<ALLOWANCES> 1,407
<INVENTORY> 0
<CURRENT-ASSETS> 105,820
<PP&E> 23,265
<DEPRECIATION> 9,692
<TOTAL-ASSETS> 159,015
<CURRENT-LIABILITIES> 25,739
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 129,054
<TOTAL-LIABILITY-AND-EQUITY> 159,015
<SALES> 30,541
<TOTAL-REVENUES> 30,541
<CGS> 6,300
<TOTAL-COSTS> 6,300
<OTHER-EXPENSES> 24,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 1,327
<INCOME-TAX> 425
<INCOME-CONTINUING> 902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 902
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
