<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, 1999
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 24,947,548
------------------------------------ ---------------------------------------
Class Number of Shares Outstanding at
July 31, 1999
Exhibit Index is on Page 21
<PAGE>
PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and September 30, 1998................................3
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended June 30, 1999 and 1998..................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1999 and 1998............................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.............19
Item 6. Exhibits and Report on Form 8-K
Exhibits .........................................................19
Reports on Form 8-K................................................19
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>
June 30, September 30,
1999 1998
----------------- -----------------
Assets (unaudited) (1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,724 $ 44,234
Short-term investments 39,448 27,063
Accounts receivable, net of allowances of $1,198 at
June 30, 1999 and $1,113 at September 30, 1998 29,257 28,446
Other current assets 5,210 7,120
----------------- -----------------
Total current assets 106,639 106,863
Other marketable securities 5,614 7,782
Property and equipment, net 12,471 13,244
Computer software costs, net 13,512 16,575
Goodwill and other intangible assets, net 10,799 12,693
Other assets 1,513 1,945
----------------- -----------------
Total assets $ 150,548 $ 159,102
----------------- -----------------
----------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,519 $ 6,976
Payroll and related liabilities 8,528 7,294
Other accrued liabilities 17,004 8,524
Income taxes payable 5,532 6,926
----------------- -----------------
Total current liabilities 34,583 29,720
Long-term obligations 1,366 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, 24,931 and 26,286 shares issued and
outstanding at June 30, 1999 and September 30, 1998 25 26
Additional paid-in capital 91,358 99,940
Retained earnings 24,040 25,269
Accumulated other comprehensive income (loss) (824) 101
----------------- -----------------
Total stockholders' equity 114,599 125,336
----------------- -----------------
Total liabilities and stockholders' equity $ 150,548 $ 159,102
----------------- -----------------
----------------- -----------------
</TABLE>
- --------------------
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended September 30, 1998.
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,
------------------------------- ------------------------------
1999 1998 1999 1998
-------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 26,398 $ 26,921 $ 76,371 $ 77,422
Services 4,916 4,988 17,044 16,375
-------------- ---------------- -------------- --------------
Total revenue 31,314 31,909 93,415 93,797
Cost of revenue:
License fees 859 1,659 3,304 6,281
Services 4,858 3,766 13,691 11,309
Amortization of purchased technology 533 - 1,599 -
-------------- ---------------- -------------- --------------
Total cost of revenue 6,250 5,425 18,594 17,590
-------------- ---------------- -------------- --------------
Gross margin 25,064 26,484 74,821 76,207
Operating expenses:
Research and development 10,074 10,859 29,867 30,764
Sales and marketing 7,503 7,107 21,891 20,866
General and administrative 4,239 3,974 11,865 12,188
Amortization of goodwill and
acquired intangible assets 625 44 1,877 44
Restructuring charges 2,532 750 4,476 750
-------------- ---------------- -------------- --------------
Total operating expenses 24,973 22,734 69,976 64,612
-------------- ---------------- -------------- --------------
Income from operations 91 3,750 4,845 11,595
Interest and other income, net 4,628 1,411 6,472 4,883
-------------- ---------------- -------------- --------------
Income before income taxes 4,719 5,161 11,317 16,478
Provision for income taxes 1,510 1,618 3,622 5,083
-------------- ---------------- -------------- --------------
Net income $ 3,209 $ 3,543 $ 7,695 $ 11,395
-------------- ---------------- -------------- --------------
-------------- ---------------- -------------- --------------
Earnings per share:
Basic $ 0.12 $ 0.14 $ 0.29 $ 0.45
-------------- ---------------- -------------- --------------
-------------- ---------------- -------------- --------------
Diluted $ 0.11 $ 0.13 $ 0.28 $ 0.42
-------------- ---------------- -------------- --------------
-------------- ---------------- -------------- --------------
Shares used in earnings per share calculation:
Basic 26,144 25,584 26,534 25,423
-------------- ---------------- -------------- --------------
-------------- ---------------- -------------- --------------
Diluted 27,945 27,227 27,924 26,898
-------------- ---------------- -------------- --------------
-------------- ---------------- -------------- --------------
</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,
-----------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,695 $ 11,395
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 8,764 5,717
Effect of Award fiscal year conversion - (1,660)
Write-off of capitalized software 1,616 -
Realized gain on sale of other marketable securities (4,034) (1,385)
Change in operating assets and liabilities:
Accounts receivable (725) 204
Other assets 1,775 (2,884)
Accounts payable (3,446) 321
Payroll and related liabilities 1,156 881
Other accrued liabilities (274) 409
Income taxes payable (307) (2,445)
----------------- ----------------
Total adjustments 4,525 (842)
----------------- ----------------
Net cash provided by operating activities 12,220 10,553
Cash flows from investing activities:
Maturity of short-term and long-term investments 31,842 40,770
Purchases of short-term and long-term investments (45,335) (52,918)
Proceeds from sale of other marketable securities 4,073 1,436
Purchases of property and equipment (2,801) (3,785)
Additions to computer software costs (2,276) (4,202)
Proceeds from the sale of minority interest in Softbank
Content Group - 9,810
----------------- ----------------
Net cash used in investing activities (14,497) (8,889)
Cash flows from financing activities:
Proceeds from issuance of common stock - 525
Proceeds from stock purchases under stock option and
stock purchase plans 5,043 1,976
Repurchases of common stock (14,800) (3,553)
----------------- ----------------
Net cash used in financing activities (9,757) (1,052)
----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 524 (873)
----------------- ----------------
Net decrease in cash and cash equivalents (11,510) (261)
Cash and cash equivalents at beginning of period 44,234 46,800
----------------- ----------------
Cash and cash equivalents at end of period $ 32,724 $ 46,539
----------------- ----------------
----------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the period, net $ 474 $ 1,273
</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") is a provider
of system enabling solutions for PCs and the connected computing market. Its
products and services play a critical role in linking computing and
communications technologies for OEMs and Internet service and content
providers. The accompanying condensed consolidated financial statements of
Phoenix Technologies Ltd. and its subsidiaries have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and 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 and nine-month periods ended
June 30, 1999, 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.
During December 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. The SOP is effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
adoption of SOP 98-9 is not expected to have a significant impact on the
Company's consolidated financial statements.
NOTE 3. CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of
less than three months are considered cash equivalents.
NOTE 4. RESTRUCTURING CHARGES
In June 1998, the Company implemented a restructuring plan 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
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
restructuring resulted in a charge to operations of approximately $0.8
million for employee severance and severance related items. As of June 30,
1999, all $0.8 million was paid.
In December 1998, the Company recorded a restructuring charge of
approximately $1.9 million. This charge included the costs of employee severance
and facilities consolidations associated with closing the Company's offices in
Texas and France, and the elimination of 38 positions in engineering, sales,
marketing, and administration. As of June 30, 1999, $0.6 million was unpaid.
In June 1999, the Company recorded a restructuring charge of $2.5
million. This charge included the costs of employee severance and the write-off
of certain capitalized software associated with the discontinuance of the PICO
and PC Enhancing Division. As of June 30, 1999, $0.8 million was unpaid.
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 Nine Months Ended
June 30, June 30,
------------------------------ ----------------------------
1999 1998 1999 1998
--------------- -------------- ------------- --------------
Numerator:
<S> <C> <C> <C> <C>
Net income $ 3,209 $ 3,543 $ 7,695 $ 11,395
--------------- -------------- ------------- --------------
--------------- -------------- ------------- --------------
Denominator:
Weighted average common shares
outstanding - denominator for basic
earnings per share 26,144 25,584 26,534 25,423
Effect of dilutive securities (using the treasury
stock method):
Stock options 1,661 1,382 1,254 1,096
Warrants 140 261 136 379
--------------- -------------- ------------- --------------
Total dilutive securities 1,801 1,643 1,390 1,475
--------------- -------------- ------------- --------------
Weighted average common and equivalent
shares outstanding - denominator
for diluted earnings per share 27,945 27,227 27,924 26,898
--------------- -------------- ------------- --------------
--------------- -------------- ------------- --------------
Earnings per share:
Basic $ 0.12 $ 0.14 $ 0.29 $ 0.45
--------------- -------------- ------------- --------------
--------------- -------------- ------------- --------------
Diluted $ 0.11 $ 0.13 $ 0.28 $ 0.42
--------------- -------------- ------------- --------------
--------------- -------------- ------------- --------------
</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 Nine Months Ended
June 30, June 30,
---------------------------- -------------------------------
1999 1998 1999 1998
---------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net income $ 3,209 $ 3,543 $ 7,695 $ 11,395
Foreign currency translation adjustments 99 (566) 1,121 (1,002)
Unrealized loss on securities, net of tax (1,722) (575) (2,046) (9,377)
---------------------------- -------------------------------
Other comprehensive loss (1,623) (1,141) (925) (10,379)
---------------------------- -------------------------------
Comprehensive income $ 1,586 $ 2,402 $ 6,770 $ 1,016
---------------------------- -------------------------------
---------------------------- -------------------------------
</TABLE>
NOTE 7. SUBSEQUENT EVENTS
In July 1999, the Company announced that restructuring and other
charges of approximately $7 to $9 million will be recorded in the quarter
ending September 30, 1999. These costs are associated with the realignment of
the business into three product groups, certain anticipated facilities
consolidations, certain facilities or position eliminations, and other
contingencies.
In August 1999, the Board of Directors approved the repurchase of up
to 1 million common shares at per share prices not to exceed $12.50.
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. 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 is a provider of system enabling solutions for PCs and
the connected computing market. Its software provides compatibility,
connectivity, security, 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.
In June 1999, the Company announced an Internet strategy with the
formation of EBETWEEN, a new subsidiary that will leverage Phoenix's core
technology to allow Internet service and content providers to better reach,
register and retain online users and subscribers. Phoenix will utilize
available system ROM (Read Only Memory) to provide a unique link between
Internet service and content providers and end-users. The Company's new
Virtual Bundling Technology (VBT) products will provide Internet companies
the potential to increase consumer reach, accelerate Internet user sign-up,
and reinforce user loyalty and retention. Phoenix's VBT has the ability to
rapidly reach an unprecedented number of potential Internet users, allowing
them to personalize their Internet experience and deliver user-directed
services and content directly to the PC.
The Company's operations include the following operating segments:
PLATFORM ENABLING: Develops and markets system enabling software, also
known as BIOS, that is designed into tens of millions of PCs shipped annually.
This software allows information platform manufacturers to increase design
flexibility, shorten design cycles and lower overall manufacturing costs.
SEMICONDUCTOR IP (PREVIOUSLY INTERCONNECT): Provides a robust range of
embedded communications software to semiconductor manufacturers for leading edge
chip designs. The Semiconductor IP division's products enable a new generation
of connected information platforms through simplified access to embedded
communications intelligence.
EBETWEEN: Delivers unique, user-friendly solutions that enrich the
out-of-box and online computing experiences by guiding users to valuable,
personalized Internet content and services.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 statements of income for the three and nine months ended June 30,
1998, have been restated to include the combined results of operations of
Phoenix and Award.
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, AGP, 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 the achievement of
certain performance objectives. The acquisition was accounted for using the
purchase method of accounting, and the results of operations of Sand subsequent
to the date of acquisition have been included in the consolidated results of
operations of the Company.
REVENUE
The Company's platform enabling and semiconductor IP products are
generally designed into personal computer systems, information appliances and
semiconductors. License fee and service revenue by platform for the three and
nine-month periods ended June 30, 1999 and 1998, were as follows (DOLLARS IN
THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Three months ended June 30: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Platform enabling $ 27,162 $ 29,966 (9%) 87% 94%
Semiconductor IP 4,152 1,943 114% 13% 6%
-------------- ------------- ------------- -------------
Total revenue $ 31,314 $ 31,909 (2%) 100% 100%
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Nine months ended June 30: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Platform enabling $ 79,055 $ 87,537 (10%) 85% 93%
Semiconductor IP 14,360 6,260 129% 15% 7%
-------------- ------------- ------------- -------------
Total revenue $ 93,415 $ 93,797 0% 100% 100%
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The declines in platform enabling revenue in the third quarter and
first nine months of fiscal 1999 from the comparable periods last year were
due to the loss of a significant North American desktop customer (due to
acquisition), declines in average selling prices, and the discontinuation of
the PICO and PC Enhancing division and some of its products in the quarter
ended June 30, 1999.
Semiconductor IP revenue increased in the third quarter and the first
nine months of fiscal 1999 due to the acquisition of Sand and the continued
demand for outsourced circuit intellectual property.
Revenue by geographic region for the three and nine-month periods ended
June 30, 1999 and 1998, were as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
----------------------------- ---------------------------
1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30:
North America $ 10,478 $ 14,179 (26%) 34% 44%
Asia 18,933 14,947 27% 60% 47%
Europe 1,903 2,783 (32%) 6% 9%
-------------- ------------- ------------- -------------
Total revenue $ 31,314 $ 31,909 (2%) 100% 100%
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
----------------------------- --------------------------
1998 1999 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Nine months ended June 30:
North America $ 31,668 $ 35,283 (10%) 34% 38%
Asia 53,952 48,660 11% 58% 52%
Europe 7,795 9,854 (21%) 8% 10%
-------------- ------------- ------------- -------------
Total revenue $ 93,415 $ 93,797 0% 100% 100%
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
Asian revenue increased while North American and European revenue
declined in the three and nine-month periods due to the outsourcing of PC system
design and manufacturing to Asian PC and motherboard manufacturers and to
increased Japan PC shipments. The Company's growth rate in platform enabling
revenue is expected to be impacted in future quarters by the significant North
American desktop customer loss mentioned above and lower average selling prices
due in part to the transition of manufacturing to Asia.
One customer accounted for 11% of revenue during the three-month
periods ended June 30, 1999 and 1998, respectively. No customer accounted for
more than 10% of revenue during the nine-month periods ended June 30, 1999 or
1998.
Service revenue in the three and nine-month periods ended June 30,
1999, decreased 1% and increased 4% over the comparable periods in fiscal 1998,
respectively. The third quarter decrease was mostly due to a slowdown in the
release of new Intel chipset technologies. The increase in the nine-month period
was due to increased maintenance revenue from the growing base of semiconductor
IP customers.
GROSS MARGIN
Gross margin as a percentage of revenue was 80% and 83% for the
three-month periods ended June 30, 1999 and 1998, respectively. Gross margin as
a percentage of revenue was 80% and 81% for the nine-month periods ended June
30, 1999 and 1998, respectively. Service gross margin as
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
a percentage of revenue declined to 1% and 20%, respectively, in the three
and nine-month periods ended June 30, 1999, from 25% and 31% in the
comparable periods of fiscal 1998. These decreases were largely as a result
of the timing of certain Non-recurring Engineering revenue generated in
fiscal 1998, and an amendment to the Company's agreement with a major
customer such that a higher proportion of revenue relates to services that
have lower gross margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended June
30, 1999, decreased $0.8 million (7%) from the comparable period in fiscal 1998.
This decrease was primarily due to decreased personnel resulting from the
consolidation of operations with Phoenix and Award and to reductions in
development spending on PICO and PC Enhancing products. Research and development
expenses for the nine months ended June 30, 1999 decreased $0.9 million (3%),
primarily due to decreased personnel and lower recruiting and relocation costs.
The Company capitalized $0.4 million and $1.9 million of internal
software development costs for the three and nine-month periods ended June
30, 1999, respectively, as compared to $0.9 million and $3.0 million for the
same periods in fiscal 1998. These decreases in capitalization of development
costs were due to a higher proportion of costs being incurred on
non-capitalizable projects, which have not yet reached technological
feasibility, 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 the rapidly changing industry requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three-month period ended June 30,
1999, increased $0.4 million (6%) from the comparable period in fiscal 1998 due
to increased branding and marketing activities associated with the establishment
of the EBETWEEN division. Sales and marketing expenses for the nine-month period
ended June 30, 1999, increased $1.0 million (5%) from the comparable period in
fiscal 1998. This increase was primarily due to marketing expenses associated
with the new EBETWEEN division and the expanded participation in major
tradeshows and industry events.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and nine-month
periods ended June 30, 1999, increased $0.3 million (7%) and decreased $0.3
million (3%), respectively, from the comparable periods in the prior year. The
increase in the three-month period was primarily due to increased patent costs
associated with the EBETWEEN division. The decrease in the nine-month period
ended June 30, 1999 was primarily due to decreased personnel as a result of the
Phoenix and Award consolidation, partially offset by increased outside services
for the new EBETWEEN division and Hungarian subsidiary.
COST OF RESTRUCTURING
In June 1998, the Company implemented a restructuring plan 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 $0.8
million for employee severance and severance related items. As of June 30,
1999, all $0.8 million was paid.
In December 1998, the Company recorded a restructuring charge of
approximately $1.9 million. This charge included the costs of employee severance
and facilities consolidations associated with closing the Company's offices in
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Texas and France, and the elimination of 38 positions in engineering, sales,
marketing and administration.
In July 1999, the Company announced that restructuring and other
charges of approximately $7 to $9 million will be recorded in the quarter
ending September 30, 1999. These costs are associated with the realignment of
the business into three product groups, certain anticipated facilities
consolidations and other contingencies.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, for the three and nine-month periods
ended June 30, 1999, increased $3.2 million (228%) and $1.6 million (33%),
respectively, from the comparable periods in fiscal 1998. These increases were
due to the increased sales of shares of Xionics Document Technologies, Inc.
("Xionics") common stock. The Company sold 1,048,881 shares (all of its
remaining ownership interest) of Xionics stock at an average price of $3.85 per
share in the nine-month period ended June 30, 1999, as compared to 127,500
shares at an average selling price of $10.81 per share in the comparable period
of the prior year.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $1.5 million and $3.6
million for the three and nine-month periods ended June 30, 1999,
respectively, as compared to $1.6 million and $5.1 million for the comparable
periods in fiscal 1998. The fiscal 1999 provisions for income taxes reflect
an effective tax rate of 32% as compared to 31% in the respective periods in
the prior fiscal year. The effective tax rate increased due to the
nondeductible amortization of goodwill from the Sand acquisition, partially
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity include cash, cash
equivalents, short-term investments, and other marketable securities. 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 April 1999, the Company's Board of Directors authorized the
repurchase of up to $25 million of outstanding common stock at a maximum price
per share of $10. In May 1999, the Company's Board of Directors increased the
maximum share price for repurchases to $12.50 per share. As of June 30, 1999,
the Company repurchased and retired approximately 1,537,800 shares at a cost of
approximately $14.9 million. Subsequent to June 30, 1999, an additional 964,972
shares were repurchased at an average price of $10.46 per share. Also subsequent
to June 30, the Company's Board of Directors approved the repurchase of an
additional one million shares at prices not to exceed $12.50 per share.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities in the nine months ended
June 30, 1999 and 1998, were $12.2 million and $10.6 million, respectively,
resulting primarily from cash provided by net income, adjusted for non-cash
items. Net cash used in investing activities in the nine-month period ended June
30, 1999, was $14.5 million. It consisted primarily of $9.4 million of net
purchases of short-term and long-term investments and marketable securities,
$2.8 million in purchases of property and equipment, and $2.3 million in
additions to computer software costs. Net cash used in investing activities in
the nine-month period ended June 30, 1998, was $8.9 million. This consisted
primarily of net purchases of short-term and long-term investments and
marketable securities of $10.7 million, purchases of property and equipment of
$3.8 million, additions to computer software costs of $4.2 million, and proceeds
from the sale of a minority interest in Softbank Content Group for $9.8 million.
Cash used in financing activities during the nine months ended June 30,
1999, was $9.8 million, consisted primarily of $14.8 million used to repurchase
common stock of the Company, partially offset by $5.0 million generated from the
exercise of common stock options and the issuance of stock under the Company's
employee stock purchase plan. Cash used in financing activities in the
comparable period in fiscal 1998 was $1.1 million, consisted primarily of $3.6
million to repurchase common stock of the Company, partially offset by $2.0
million generated from the exercise of common stock options and the issuance of
stock under the Company's employee stock purchase plan.
NEW ACCOUNTING PRONOUNCEMENT
During December 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. The SOP is effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
adoption of SOP 98-9 is not expected to have a significant impact on the
Company's consolidated financial statements.
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 has established two Year 2000 task forces to address the
impact of the Year 2000 date transition on its operations, products and services
globally. In 1998, the Company established these teams to coordinate a number of
existing projects and put in place a formal, structured Year 2000 process.
Page 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Each team has a dedicated Program Manager who reports directly to the
Company's senior management, and the status is reported to the Company's
Board of Directors. The efforts of these teams cover the Company's products,
internal systems and services provided by others.
PHOENIX PRODUCTS
HISTORY. Since its inception, the Company has sold or licensed various
products, including BIOS products, semiconductor intellectual property and
consumer software. BIOS software performs, among other functions, certain date
related changes for PC systems.
The Company's BIOS products fall into differing definitions of Y2K
compliance. BIOS-related products sold or licensed after fiscal 1995 are
generally designed to automatically handle millennium 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 December 31, 1999 in order for the system date to be
proper. The Company has identified one version of Award BIOS released by the
Company during a one year period that was not manually compliant.
The Company's semiconductor IP product lines do not handle date-related
functions and accordingly do not implicate Year 2000 issues. The Company has
identified certain of its discontinued consumer software products that are not
Year 2000 compliant. However, the Company discontinued its consumer software
product lines in 1996 and accordingly, the Company does not believe that a
significant number of these products remain in use today. The Company has
developed a list of all products it sold and licensed and continues to assess
the level of compliance of these products. The Company expects to complete its
assessment and finalize its contingency plan relative to these products in the
fourth 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
non-compliant, the Company will make available to end users software upgrades,
fixes or patches. These solutions will be available to users through a variety
of distribution methods, including the Company's web site and by mailing
diskettes containing required software fixes, if necessary. The Company will
also make these solutions available to OEM customers for placement by those
customers on their respective web sites. 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. 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. Known or
unknown errors or defects in our products may result in:
- - Delay or loss of revenue;
- - Diversion of development resources;
- - Damage to our reputation;
- - Claims, demands or litigation; or
Page 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- - Increased service and warranty costs.
The occurrence of any of the foregoing could seriously harm our business,
operating results, or financial condition.
Accordingly, the Company is not able to estimate the cost of obtaining
compliance of its products at this time, nor can the Company accurately predict
the cost and consequences for the Company if it is determined that its products
are not compliant.
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 beginning of the millennium.
CURRENT STATUS. The Company's internal systems are generally based on
purchased software and operated on personal computers, PC servers and Unix
workstations and servers. The vast majority of hardware, including networking
hardware, is three years old or less. Software products in use range in age
generally from the latest upgrade to approximately ten years old. The Company
uses Oracle for its primary financial system, which has been upgraded recently
and which Oracle represents is Y2K compliant. The Company has selected a
replacement for the source code management system used in product development
and deployment and has taken steps to ensure that the replacement, as all new
software purchases, is Y2K compliant.
The Company has developed a project plan, approved by its Board of
Directors, and is in the process of testing its internal use hardware and
software. A key element of the plan is to assure that all firmware and software
is identified and tested, and various elements have been assigned to specific
individuals. Most of the computers, and the applications thereon, can be tested
over the Company's wide area network. The software and hardware part of the plan
is targeted for completion in October 1999; to date, more than 50% of all
project tasks have been completed.
The Company has undertaken efforts to certify the compliance of all the
facilities in which it operates, including testing of the embedded firmware and
software in systems, such as building access and temperature control systems.
This plan was completed during the Company's third fiscal quarter. Y2K
compliance letters have been received from suppliers and are considered
sufficient. There will be no testing of the utility power and building systems
such as HVAC and fire alarms.
All employees have been alerted to the Y2K issues.
TEST, CERTIFICATION AND REMEDIATION. Third-party software is being used
to audit 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 importance, to test and, if necessary, modify, replace or ignore the
application.
Page 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COST OF COMPLIANCE TESTING AND REMEDIATION. The Company has spent
approximately $150,000 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 will spend approximately
15% of their time over the current fiscal year on Y2K issues at an approximate
cost of $250,000. Software purchases and certain other vendor costs are
capitalized and depreciated while other costs are charged directly to expense.
Year 2000 expenses are being funded through operating cash flows. Total
anticipated Y2K expenditures are not 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 not received information from all 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 and does not intend to seek such information. If the
Company's significant customers suffer adverse financial or operational
consequences as a result of their failure to successfully and timely achieve Y2K
compliance, the Company's business or operations could be adversely affected.
CONTINGENCY PLANNING AND WORST CASE SCENARIO. Draft contingency plans
are prepared, but are not yet final. Mission critical systems have been
identified and worksheets are being developed for each system. All contingency
plans are targeted to be finalized during the Company's fourth fiscal quarter.
Despite the Company's efforts, there can be no assurance that all contingencies
will be or can be anticipated, or that the Company can adequately provided for
such contingencies. If Phoenix is required to implement any of these contingency
plans, doing so could have a material adverse effect on the Company's financial
condition and results of operations. Phoenix's ability to achieve Year 2000
Compliance and the level of incremental associated costs, could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, various parties' ability to modify proprietary software, and
unanticipated problems identified in the ongoing compliance review. Such
failures could have a material adverse affect on Phoenix's business, financial
condition and results of operations.
The above discussion regarding costs, risks and estimated completion
dates for Year 2000 preparation is based on the Company's best estimates given
information that is currently available, and is subject to change. As we
continue to progress with this initiative, we may discover that actual results
will differ materially from these estimates.
Page 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
EURO
The Company is addressing the issues raised by the introduction of the
Single European Currency ("Euro") on January 1, 1999 and during the transition
period through January 1, 2002. The Company's internal systems that are affected
by the initial introduction of the Euro have been made Euro capable without
material system modification costs. Further internal systems changes will be
made during the three-year transition phase in preparation for the ultimate
withdrawal of the legacy currencies in July 2002, and the costs of these changes
are not expected to be material. The Company does not presently expect that
introduction and use of the Euro will materially affect the Company's foreign
exchange activities, or will result in any material increase in costs to the
Company.
Page 18
<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 21 hereof.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during
the quarter ended June 30, 1999.
Page 19
<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, 1999 By: /s/ William E. Meyer
--------------- --------------------
William E. Meyer
Vice President, Finance and
Chief Financial Officer
Page 20
<PAGE>
EXHIBIT INDEX
EXHIBIT
27 Financial Data Schedule.
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,724
<SECURITIES> 39,448
<RECEIVABLES> 30,455
<ALLOWANCES> 1,198
<INVENTORY> 0
<CURRENT-ASSETS> 106,639
<PP&E> 24,096
<DEPRECIATION> 11,625
<TOTAL-ASSETS> 150,548
<CURRENT-LIABILITIES> 34,583
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 114,599
<TOTAL-LIABILITY-AND-EQUITY> 150,548
<SALES> 31,314
<TOTAL-REVENUES> 31,314
<CGS> 6,250
<TOTAL-COSTS> 6,250
<OTHER-EXPENSES> 24,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 4,719
<INCOME-TAX> 1,510
<INCOME-CONTINUING> 3,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,209
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
