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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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
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PHOENIX TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2685985
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
</TABLE>
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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
PREFERRED STOCK PURCHASE RIGHTS
(Title of each Class)
------------------------
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 30, 1999, was $346,753,836 based upon the last
reported sales price of the Common Stock in the National Market System, as
reported by the stock market.
The number of shares of the registrant's Common Stock outstanding as of
November 30, 1999 was 24,122,006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant
to Regulation 14A in connection with the 2000 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including without limitation the Business section
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended. These statements include, but are
not limited to, statements concerning expected price erosion, our plans to make
acquisitions or strategic investments, our expectation of increased sales to
original equipment manufacturers, and our plans to improve and enhance existing
products and develop new products.
The forward-looking statements of the Company are subject to risks and
uncertainties. Some of the factors that could cause future results to materially
differ from our recent results or those projected in the forward-looking
statements include, but are not limited to, significant increases or decreases
in demand for our products, increased competition, lower prices and margins,
failure to successfully develop and market new products and technologies,
competitor introductions of superior products, continued industry consolidation,
instability and currency fluctuations in international markets, product defects,
failure to secure intellectual property rights, results of litigation, and
failure to retain and recruit key employees. For a more detailed discussion of
certain risks associated with our business, see the "Business Risks" section of
this Form 10-K. We undertake no obligation to update forward-looking statements
to reflect events or circumstances occurring after the date of this Form 10-K.
OVERVIEW
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is a global leader in
system-enabling software solutions for PCs and connected devices. We have three
operating divisions, each of which delivers leading products and professional
services that enable connected computing. Our platform-enabling software
provides critical functionality that links the hardware and operating systems of
tens of millions of PCs, embedded systems and information appliances sold
annually. In addition, we are a leading provider of communications intellectual
property designed into semiconductors for connected and other devices, and we
have recently launched an Internet business to deliver new value propositions to
original equipment manufacturers ("OEMs"), channel partners and end users of
connected PCs and other devices.
The global electronics industry is characterized by rapid technology
changes, including increasing processor speeds, hardware
miniaturization/portability, and new and improved ways to connect devices
(including the Internet). As these rapid changes evolve, computing hardware
manufacturers and software developers seek to rapidly bring products to market
that incorporate the latest features and functionality. We believe that our
products and services enable manufacturers of PCs, information appliances, and
semiconductors to bring leading-edge products to market more quickly and hence
increase competitiveness.
The Company was incorporated in the Commonwealth of Massachusetts in
September 1979, and was reincorporated in the State of Delaware in December
1986.
DESCRIPTION OF BUSINESS
Our three operating divisions are the Platform Enabling Division, the
inSilicon Division and the PhoenixNet Division.
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PLATFORM ENABLING DIVISION
The Platform Enabling Division of Phoenix has been instrumental in the
advancement of the PC architecture for the past twenty years. This division's
system enabling software, referred to as their Basic Input Output System
("BIOS") products, continue to play an essential role in the design of PCs and
other devices by providing the critical link between hardware platforms and
operating systems.
PC systems and other electronic devices consist of four basic components:
hardware, BIOS software, operating system software and applications software.
The BIOS is stored on a Read Only Memory ("ROM") chip that typically resides on
the device's motherboard, and is the software that is initially executed when
the system is turned on. It tests and initializes the hardware components,
initiates the operating system and then provides certain advanced interface
functions. We believe that the introduction of new hardware architectures,
microprocessors, peripheral equipment and operating systems within the PC
industry has increased the complexity, time and cost to develop new systems, and
that the system BIOS can help reduce these factors.
PRODUCTS. The Platform Enabling Division is currently offering or
developing the following BIOS products:
DESKTOP/SERVER
- PHOENIXBIOS 4.0. We provide various versions of PhoenixBIOS 4.0 as our
core systems firmware for desktop and server systems. We believe that the
success of this product is attributable to its reliability and advanced
features, including its fourth generation modular architecture and
advanced development tools and methodology.
- AWARDBIOS. The Platform Enabling Division also includes the products of
Award Software acquired in September 1998. We believe that the Award BIOS
products and engineering services enable customers to rapidly develop new
motherboard designs for state-of-the-art computer systems.
- IA-64 BIOS (UNDER DEVELOPMENT). We are working closely with Intel to
develop BIOS compatible with the forthcoming Intel 64-bit processor (IA-64
or Itanium). This 64-bit architecture is expected to deliver significantly
increased capability over current 32-bit processors, and is expected to be
designed initially into servers and high-end workstations. We have
developed an early adopter program entitled Ready64-TM- that has been sold
to several major OEMs. The Intel IA-64 processor is due to be released in
2000.
NOTEBOOK/PORTABLE
- NOTEBIOS 4.0 FOR PORTABLE SYSTEMS. We offer our NoteBIOS system software
for use with portable or notebook computers. The product adds extensive
power management capabilities, such as Save-to-Disk and smart batteries,
to the modular architecture of PhoenixBIOS 4.0.
INFORMATION APPLIANCE
- INDUSTRIAL BIOS. We developed the industrial BIOS for configuration and
control of information appliances, also referred to as embedded platforms.
The industrial BIOS as well as additional other informational appliance
products are designed using small form factors in order to meet the
requirements of embedded platforms.
CUSTOMERS AND SALES. We generate a significant proportion of our Platform
Enabling Division revenue from customers outside of the United States. See
discussion under "ITEM 7. MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--RESULTS OF OPERATIONS." We have licensed our BIOS technology to over
600 global technology leaders, including:
<TABLE>
<CAPTION>
PC SYSTEMS PC MOTHERBOARDS EMBEDDED SYSTEMS
- -------------------------------- ---------------- ----------------
<S> <C> <C> <C>
Acer IBM Asustek Force Computers
Compaq Samsung Gigabyte JVC
Fujitsu Siemens Nixdorf PC Chips Motorola
Hewlett-Packard Sony FIC NCR
Hitachi Toshiba GVC NEC
Radisys
</TABLE>
We license our BIOS products and provide professional services to major
OEMs of PCs, motherboards and other computing devices. In general, license fees
are generated on a per unit basis for each system shipped, and professional
service fees are generated based upon the amount of time expended. The Platform
Enabling Division utilizes a global direct sales force in North America, Asia
and Europe, and resellers and distributors on a limited, regional basis.
Some product modifications are generally required in order for the customer
to deploy our Platform Enabling Division products on specific hardware
platforms. To support our worldwide customer base, we employ over 170 deployment
engineers in field engineering offices in Germany, Japan, Korea, Taiwan,
California, Oregon and Massachusetts. We also provide support services by
telephone, via the Internet and on-site.
COMPETITION. The Platform Enabling Division competes primarily with
in-house research and development departments of PC manufacturers that may have
significantly greater financial and technical resources than those of the
Company. These companies include Acer Incorporated, Compaq Computer Corporation,
Dell Computer Corporation, IBM and Toshiba Corporation. We also compete for
system software business with other independent suppliers, ranging from small,
privately-held companies to Acer Softech, a division of Acer Labs, a major
Taiwan chip and motherboard supplier. We believe that OEM customers often
license the Company's system software products rather than develop these
products internally in order to: (1) enhance compatibility with the latest
industry standards, (2) improve time to market, (3) reduce product development
risks, (4) reduce product development and support costs, and/or to
(5) differentiate their system offerings with advanced features.
One of the functions performed by the BIOS is to handle system date changes
and calculations. See discussion under "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--YEAR 2000" below.
INSILICON DIVISION
Our inSilicon Division provides communications and connectivity solutions
that allow semiconductor and systems companies to focus their development
resources on the custom logic that will differentiate their products. This
reduces development cost and improves time to market in complex systems-on-chip
("SOC") designs, thus solving the design gap with reusable cores. We offer:
- PROVEN SOLUTIONS. More than 400 companies have implemented our cores in
more than 500 integrated circuit designs.
- A BROAD PORTFOLIO OF COMMUNICATIONS CORES FOR A WIDE RANGE OF
STANDARDS. We provide semiconductor and systems companies with a broad
portfolio of communication and connectivity cores.
- EXTENSIVE TEST AND VERIFICATION TOOLS. We provide our customers with
extensive verification and test modules to ensure the functionality of our
cores within their designs.
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- STANDARDS LEADERSHIP. We were the first to market with merchant
Semiconductor Intellectual Property ("SIP") solutions for many
communications standards including PCI, AGP, USB, IrDA and IEEE 1394, and
we are members of numerous industry standards bodies.
- PORTABILITY AND FLEXIBILITY. We design our cores to be foundry independent
and easy to use.
- INTEGRATED FIRMWARE AND CORES. For the USB and IEEE 1394 communications
standards, we provide the essential firmware and device drivers that allow
the operating systems to communicate with the USB and IEEE 1394 cores.
- MODULAR ARCHITECTURE. We have recently introduced modular VCI architecture
know as TymeWare-TM- that allows for integration of customer and
third-party SIP as well as system buses through the VCI SmartBridge-TM-, a
proprietary VCI-based configurable system busbridge.
We target our inSilicon products at high growth markets requiring high
performance, quick time to market, design flexibility and compliance to industry
standards. Examples of the markets and applications which use our products
include:
- TELECOMMUNICATIONS AND DATA COMMUNICATIONS--network switches and routers,
network adapters, concentrators, public switched telephone network central
office equipment, cable set top boxes and modems.
- CONSUMER ELECTRONICS--digital still cameras, digital video cameras, video
games, digital video cassette records and DVD players
- COMPUTATION--personal computers, workstations and servers
- PERIPHERALS--printers, scanners, keyboards, display terminals, pointing
devices, and mass storage devices such as hard disk drives, floppy disk
drives, removable media disk drives, tape drives and optical drives.
PRODUCTS. Our products include SIP and related silicon subsystems, together
with firmware stacks and drivers. Simulation models, test environments,
documentation and training support many of these products. Our communication
core products include a wide variety of standards based cores. Our silicon
subsystems vertically integrate many of these common cores into silicon
subsystems. Our systems software firmware stacks and drivers products provide
protocol translation technologies that allow the operating system to communicate
with the hardware. We supply core products as Verilog or VHDL source code, which
are the primary semiconductor design languages in use today. Semiconductor and
systems companies then integrate our cores into their overall semiconductor
designs using Semiconductor Related Tools ("SRT"), such as those provided by
Synopsys and Cadence. We use a modular approach that emphasizes silicon-proven
reusable, licensable cores and software technology that are compatible with a
wide range of processor designs.
inSilicon's products are outlined in the following chart, organized
alphabetically by industry standard:
<TABLE>
<CAPTION>
INDUSTRY
STANDARD DESCRIPTION INSILICON PRODUCT FAMILY DATE INTRODUCED
- --------- ------------------------------------- ------------------------------- ---------------
<S> <C> <C> <C>
AGP Accelerated Graphics Port is a bus AGP MASTER April 1997
standard used to create a dedicated, AGP HOST
high speed connection between a AGP SIMULATION MODELS
system CPU and a graphics processor.
Ethernet Ethernet is the most widely used 10/100 ETHERNET MEDIA ACCESS October 1998
local area networking communications CONTROLLER (MAC)
standard, transferring data at either
10 or 100 million bits per second.
</TABLE>
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<TABLE>
<CAPTION>
INDUSTRY
STANDARD DESCRIPTION INSILICON PRODUCT FAMILY DATE INTRODUCED
- --------- ------------------------------------- ------------------------------- ---------------
<S> <C> <C> <C>
IEEE 1394 Also known as FireWire-TM-, the 1394 SIMULATION MODEL October 1997
IEEE 1394 is a high-speed digital 1394 OHCI HOST CONTROLLER
serial interface standard which 1394 DEVICE CONTROLLER LINK
currently supports data transfers up 1394 CABLE PHY
to 400 million bits per second. 1394 ANALOG PHY
IrDA IrDA is a wireless serial data IRDA CORE, which supports all June 1998
specification defined by the Infrared three standard data
Data Association that allows a transmission rates
wireless signal to be sent from IrDA Simulation Model
handheld appliances across short
distances.
PCI Peripheral Component Interconnect is Over 100 variations of PCI May 1995
a connection bus that connects the PC cores for various performance
to its peripherals. requirement and PCI
simulation models
PCI-X The latest revision of the PCI PCI-X Cores September 1999
standard. It is over twice as
powerful as the PCI and works with
existing PCI applications as well
USB Universal Serial Bus is a serial data USB OHCI Host Controller April 1997
standard designed to simplify USB Hub April 1997
personal computer connections to USB Device Controller April 1997
peripheral devices. USBAccess December 1998
VCI Virtual Component Interface is a TYMEWARE-TM- VCI December 1999
hardware "socket" designed to
simplify the mix-and-match of SIP.
</TABLE>
CUSTOMERS AND SALES. We license inSilicon products to our customers under
non-exclusive licenses with a per chip design license fee and/or per unit
royalty.
We focus our inSilicon sales efforts in the following areas: direct sales;
indirect sales through Application Specific Integrated Circuit, or ASIC,
manufacturers, software resellers and design house programs; and Internet sales.
We maintain a direct worldwide sales force consisting of sales representatives
and field applications engineers in the following locations: Austin; Boston;
Irvine; San Jose; Geneva, Switzerland; London, England; Munich, Germany; and
Tokyo, Japan. We also use the following indirect sales channels:
- ASIC MANUFACTURERS. ASIC manufacturers, such as Toshiba, have access to
our technology, and when designing an ASIC for a direct customer, are able
to implement our intellectual property into the chips and directly license
our technology to the customer.
- DESIGN HOUSE PROGRAM. Our design house program provides access to our
communications cores and training to enable design houses, such as
Cadence, to develop an expertise with our products. This encourages design
houses to incorporate our products each time they design custom
semiconductors for third parties.
- INTERNET SALES. In addition, we allow semiconductor designers to download
and test, via the Internet, an encrypted SIP core prior to committing to a
commercial license. In the future, our strategy will be enhanced to allow
customers to buy or license some of our products directly over the
Internet.
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COMPETITION. The SIP industry is very competitive and is characterized by
constant technological change, rapid rates of product obsolescence, and
frequently emerging new suppliers. Our existing competitors include other
merchant SIP suppliers, such as the Mentor Graphics' Inventra Division,
Synopsys, Enthink and VAutomation; suppliers of ASIC semiconductors, such as LSI
Logic, and the ASIC divisions of IBM Microelectronics, Lucent, Toshiba and NEC;
and to a lesser degree suppliers of Field Programmable Gate Array, or FPGA,
semiconductors, such as Altera, Xilinx, Actel and Quicklogic. We also compete
with the internal development organizations of large, vertically integrated
semiconductor and systems companies, such as Intel, Motorola, Cisco and HP. In
these companies, SIP developed for an individual project sometimes is subject to
efforts by the company to re-use the SIP in multiple projects. Companies whose
principle business is providing design services as work-for-hire, such as
Intrinsix, Sican, and the service division of Cadence also provide competition.
We believe that important competitive factors in our market are length of
development cycle, price, compatibility with prevailing design methodologies,
product ease of use, reputation for successful designs and installed base,
technical service and support, technical training, configurability of products
for specific designs, regional sales and technical support, and protection of
products by effective utilization of licenses and intellectual property laws.
PHOENIXNET DIVISION
PhoenixNet-TM- is our Internet division, which was initially announced as
ebetween in June 1999. PhoenixNet provides ongoing customized services to
individuals worldwide to maximize the potential of their PC.
SERVICES. PhoenixNet provides best-of-breed, free, customized software
services to support PC hardware and software and to turn the PC into a powerful
tool for communication, entertainment, education or business. PhoenixNet
services are enabled by the PhoenixNet Internet Launch System-TM-("ILS"). The
PhoenixNet ILS is a patent-pending technology built into the PC firmware to
enable online PC users worldwide to communicate with PhoenixNet, and to
automatically receive ongoing free, customized PhoenixNet services. In addition,
PhoenixNet will feature a new graphical launch screen, which will display
valuable system information that previously was not readily available to the
average PC user. We expect to begin delivering PhoenixNet services to end-users
via PhoenixNet-enabled PCs in the first quarter of 2000.
CUSTOMERS AND SALES. We expect many of our major motherboard manufacturer
customers to integrate PhoenixNet's ILS into their motherboards next year. These
customers signed a Letter of Intent with us in June 1999.
In addition, PhoenixNet will initially include services of partners signed
in June 1999 as well as six new partners as of December 1999:
<TABLE>
<CAPTION>
JUNE 1999 DECEMBER 1999
----------- -------------
<S> <C>
CNET Adobe
Earthlink Driveway
Excite FireTalk
Lycos MySimon
Snap.com NetRadio.com
Trend Micro RocketTalk
YAHOO!
</TABLE>
COMPETITION. There are many distribution vehicles for our partners to reach
PC end users, including PC OEM companies, PC and hardware registration companies
and Internet web sites. Many have greater resources than us.
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ACQUISITIONS
In September 1998, we acquired all of the outstanding common stock of Award
Software International, Inc. ("Award"), a developer and publisher of system
enabling and management software. Award established itself as a leading provider
of BIOS products in the fast-growing Asian market, which currently represents a
significant percentage of the worldwide commercial PC motherboard production.
The Award transaction was accounted for as a pooling-of-interests, and thus the
historical accounts of the Company include the operations of Award for all
periods presented.
In September 1998, we acquired Sand Microelectronics, Inc. ("Sand"), a
leading supplier of silicon-proven semiconductor IP. Sand's products include PCI
and USB synthesizable cores, Ethernet datacom cores, SOC integration products,
and complementary IEEE-1394 technology. Sand also provides limited design
integration services to speed system OEM time-to-market. Sand was integrated
with Virtual Chips in the inSilicon Division. The Sand transaction was accounted
for as a purchase, and thus the operating results of Sand were combined with the
accounts of the Company as of the date of acquisition.
KEY RELATIONSHIPS
Our relationships with industry leaders such as Compaq, Intel, and Microsoft
give us early access to new technology requirements, which we believe
facilitates the development of our products. By building upon its core
technology base, we are able to tailor our system software products to conform
to the specific requirements of its OEM customers, allowing them to integrate
new technologies and introduce their products to market more effectively.
In fiscal 1997, we entered into a Common Stock and Warrant Purchase
Agreement with Intel whereby Intel purchased 894,971 shares of our common stock
and warrants to purchase an additional 1,073,965 shares. These warrants vest
over a four-year period and expire in April 2001.
We have entered into a number of major initiatives with industry leaders and
standards-setting organizations to develop next generation technology standards.
These initiatives include: (1) working with Intel, HP, and Dell on the Wired for
Management specification, (2) co-authoring the Reserved Area BIOS Boot
specification with GSI, (3) developing IEEE-1394 Boot capabilities with Seagate
and Quantum (4) working with Intel and leading OEMs on the SMBIOS specification,
and (5) working on industry standards or serving on several committees including
the IEEE-1394 Specification Working Group, IEEE-1394 Trade Association, PCI SIG
Steering Committee, several USB Class Driver Committees, NCITS T13 Committee,
the On-chip Bus Committee of the VSI Alliance, and the USB Implementers Forum.
Demand for our BIOS software products in the future will depend on (1) PC
manufacturers licensing rather than developing their own BIOS, (2) the success
of the products of our OEM customers in the market, (3) our ability to continue
to offer up-to-date functions and features in our products compared to those of
our competitors, and (4) the continued market demand for PCs and other devices
that utilize BIOS support. In addition, the growth rate of sales in the personal
computer industry fluctuates from time-to-time based on numerous other factors,
including general economic conditions, capital spending levels, new product
introductions and shortages of key components.
INVESTMENTS
In fiscal 1994, we sold a division to Xionics Document Technologies, Inc.
("Xionics") in return for a promissory note and shares of Xionics common stock.
In September 1996, we participated in Xionics' initial public offering (NASDAQ:
XION) and sold 500,000 shares. In fiscal 1998 and 1997, we sold 156,500 and
250,000 shares of Xionics stock for gains of $1.5 million and $3.2 million,
respectively. In fiscal 1999, we sold 1,048,881 shares (all of its remaining
ownership interest) of Xionics stock and recorded a gain of $4.0 million.
8
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In fiscal 1994, we sold 80% of its Publishing Division to Softbank
Corporation of Japan ("Softbank"). In September 1997, we sold the remaining 20%
to Softbank for $7.5 million.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely primarily on U.S. and foreign patents, trade secrets, trademarks,
copyrights and contractual agreements to establish and maintain proprietary
rights in its technology. We have an active program to file applications for and
obtain patents in the U.S. and in selected foreign countries where a potential
market for our products exists. At September 30, 1999, we had been issued
seventeen patents in the U.S. and had more than eighty-five patent applications
in process in the United States Patent and Trademark Office. There can be no
assurance that any of these patents would be upheld as valid if challenged.
Our general policy has been to seek patent protection for those inventions
and improvements likely to be incorporated in its products or otherwise expected
to be of value. We protect the source code of our products as trade secrets and
as unpublished copyrighted works and initiate litigation where appropriate to
protect our rights in that intellectual property. We license the source code for
our products to our customers for limited uses. Wide dissemination of our
software products makes protection of our proprietary rights difficult,
particularly outside the United States. Although it is possible for competitors
or users to make illegal copies of our products, we believe the rate of
technology change and the continual addition of new product features lessen the
impact of illegal copying.
In recent years, there has been a marked increase in the number of patents
applied for and issued with respect to software products. Although we believe
that our products do not infringe on any copyright or other proprietary rights
of third parties, we have no assurance that third parties will not obtain, or do
not have, intellectual property rights covering features of our products, in
which event we or our customers might be required to obtain licenses to use such
features. If an intellectual property rights holder refuses to grant a license
on reasonable terms or at all, we may be required to alter certain products or
stop marketing them.
EMPLOYEES
As of September 30, 1999, we employed 705 persons worldwide, of whom 445
were in research and development and customer engineering, 159 were in sales and
marketing, and 101 were in general and administration.
ITEM 2. PROPERTIES
Our corporate headquarters are located in an 86,000 square foot facility in
San Jose, California, which we lease pursuant to a lease agreement expiring in
November 2003. In fiscal 1997, we entered into a five-year lease agreement for a
63,000 square foot facility in Irvine, California. We also lease smaller office
facilities in other locations including: Norwood, Massachusetts; Beaverton,
Oregon; Houston and Austin, Texas; Taipei, Taiwan; Hong Kong, China; Tokyo,
Japan; Seoul, Korea; Munich, Germany; and Surrey, England. These offices
generally provide sales and technical support to our customers.
We consider our leased properties to be in good condition, well-maintained,
and generally suitable and adequate for their present and foreseeable future
needs.
ITEM 3. LEGAL PROCEEDINGS
We, from time to time, become involved in litigation claims and disputes in
the ordinary course of business. There is currently no material pending legal
proceeding to which either we or any of our subsidiaries are a party.
9
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the National Market System under the symbol
PTEC. The following table presents the quarterly high and low bid quotations in
the over-the-counter market, as quoted by the National Market System. These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999:
Fourth quarter............................................ $18.00 $ 9.75
Third quarter............................................. 18.19 7.25
Second quarter............................................ 9.50 7.25
First quarter............................................. 8.69 5.00
YEAR ENDED SEPTEMBER 30, 1998:
Fourth quarter............................................ $12.88 $ 5.59
Third quarter............................................. 13.50 8.88
Second quarter............................................ 14.75 11.13
First quarter............................................. 18.38 11.63
</TABLE>
We had 324 shareholders of record as of September 30, 1999. To date, we have
paid no cash dividends on our common stock. We currently intend to retain all
earnings for use in our business and do not anticipate paying any dividends in
the foreseeable future. In addition, our line of credit agreement restricts the
payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below include business combinations described in
Note 7 of the Notes to Consolidated Financial Statements, included herein. The
tables in Part II include selected unaudited quarterly consolidated data for
fiscal 1999 and 1998. This information was derived from our unaudited
consolidated financial statements that, in the opinion of management, reflect
all recurring adjustments necessary to fairly present this information, when
read in conjunction with our annual Consolidated Financial Statements. The
results of operations for any period are not necessarily indicative of the
results to be expected for any future period.
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SELECTED ANNUAL CONSOLIDATED DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
License fees............................... $103,326 $100,344 $89,884 $75,366 $51,521
Services................................... 22,500 22,541 15,612 10,841 7,550
-------- -------- ------- ------- -------
Total revenue............................ 125,826 122,885 105,496 86,207 59,071
Gross margin................................. 97,506 98,833 86,857 70,485 48,853
Merger, acquisition and restructuring
charges.................................... 14,454 14,730 -- 889 --
Income (loss) from operations................ (4,661) (431) 16,407 14,637 10,131
Income from continuing operations............ 1,804 722 20,335 11,932 9,980
Net income................................... 1,804 722 20,335 15,684 9,980
Diluted earnings per share:
Income from continuing operations.......... $ 0.07 $ 0.03 $ 0.74 $ 0.48 $ 0.46
Net income................................. $ 0.07 $ 0.03 $ 0.74 $ 0.63 $ 0.46
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments................ $55,592 $71,297 $72,168 $80,287 $39,442
Working capital................................ 52,929 77,143 96,383 87,328 43,438
Total assets................................... 141,998 159,102 163,192 141,959 71,473
Long-term obligations.......................... 1,546 4,046 7,689 8,716 70
Stockholders' equity........................... 98,922 125,336 133,539 114,668 57,587
</TABLE>
SELECTED UNAUDITED QUARTERLY CONSOLIDATED DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL 1999, QUARTERS ENDED
-----------------------------------------
DEC 31 MAR 31 JUN 30 SEP 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................. $30,541 $31,560 $31,314 $32,411
Gross margin............................................ 24,241 25,516 25,064 22,685
Merger, acquisition and restructuring charges........... 1,944 -- 2,532 9,978
Income (loss) from operations........................... 97 4,657 91 (9,506)
Net income (loss)....................................... 902 3,584 3,209 (5,891)
Earnings (loss) per share--basic........................ $ 0.03 $ 0.13 $ 0.12 $ (0.24)
Earnings (loss) per share--diluted...................... $ 0.03 $ 0.13 $ 0.11 $ (0.24)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998, QUARTERS ENDED
-----------------------------------------
DEC 31 MAR 31 JUN 30 SEP 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................ $30,090 $31,798 $31,909 $ 29,088
Gross margin........................................... 23,702 26,021 26,484 22,626
Merger, acquisition and restructuring charges.......... -- -- 750 13,980
Income (loss) from operations.......................... 4,094 3,751 3,750 (12,026)
Net income (loss)...................................... 4,477 3,375 3,543 (10,673)
Earnings (loss) per share--basic....................... $ 0.18 $ 0.13 $ 0.14 $ (0.41)
Earnings (loss) per share--diluted..................... $ 0.16 $ 0.13 $ 0.13 $ (0.41)
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a global leader in system-enabling software solutions for PCs and
connected digital devices. Our software provides compatibility, connectivity,
security, and manageability of the various components and technologies used in
such devices. We provide these products primarily to platform and peripheral
manufacturers (collectively, "OEMs") that range from large PC manufacturers to
small system integrators. We also provide training, consulting, maintenance and
engineering services to our customers. We market and license products and
services primarily through a direct sales force, but also through regional
distributors and sales representatives.
Our operations include the following operating divisions:
PLATFORM ENABLING: Develops and markets system-enabling software, also
known as BIOS, that is designed into tens of millions of PCs and other devices
shipped annually. This software allows information platform manufacturers to
increase design flexibility, shorten design cycles and lower overall
manufacturing costs.
INSILICON: Provides communications semiconductor intellectual property, or
SIP, that is used by semiconductor and systems companies to design the complex
semiconductors called systems-on-a-chip, or SOCs, which are critical components
of digital devices. inSilicon provides SIP cores, related silicon subsystems and
firmware to over 400 customers that use these technologies in hundreds of
digital devices ranging from network routers to wireless phones.
PHOENIXNET: Delivers unique Internet solutions that enrich the out-of-box
and online computing experiences by providing valuable, personalized Internet
content and services to users.
In September 1998, Award Software International, Inc. ("Award") was merged
with a wholly-owned subsidiary of Phoenix. Award was 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 our common stock (an aggregate of
approximately 8.8 million shares of our 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 our 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. All prior period
financial statements have been restated as if the merger took place at the
beginning of such periods.
Also in September 1998, we completed the acquisition of 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 our common stock, stock options to
purchase approximately 264,000 shares of our 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 our
consolidated results of operations.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table includes Consolidated Statement of Operations data for
the years ended September 30, 1999, 1998 and 1997, as a percentage of total
revenue:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees.......................................... 82% 82% 85%
Services.............................................. 18 18 15
--- --- ---
Total revenue....................................... 100 100 100
Cost of revenue:
License fees.......................................... 6 7 8
Services.............................................. 15 13 10
Amortization of purchased technology.................. 2 -- --
--- --- ---
Total cost of revenue............................... 23 20 18
--- --- ---
Gross margin............................................ 77 80 82
Operating expenses:
Research and development.............................. 32 33 31
Sales and marketing................................... 23 22 21
General and administrative............................ 13 13 14
Amortization of goodwill and acquired intangible
assets.............................................. 2 -- --
Merger, acquisition and restructuring charges......... 11 12 --
--- --- ---
Total operating expenses............................ 81 80 66
--- --- ---
Income (loss) from operations........................... (4) -- 16
Interest income, net.................................... 3 4 3
Other income, net....................................... 3 1 9
--- --- ---
Income before income taxes.............................. 2 5 28
Provision for income taxes.............................. 1 4 9
--- --- ---
Net income.............................................. 1% 1% 19%
=== === ===
</TABLE>
REVENUE
Revenue by geographic region for the three years ended September 30, 1999,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
% CHANGE % OF REVENUE
--------------------------- ------------------------------------
1999 1998 1997 1999 1998 1999 1998 1997
(DOLLARS IN THOUSANDS) -------- -------- -------- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US...................... $ 40,907 $ 49,021 $ 40,878 -16.6% 19.9% 32.5% 39.9% 38.7%
Asia.................... 73,423 62,209 54,605 18.0% 13.9% 58.4% 50.6% 51.8%
Europe.................. 11,496 11,655 10,013 -1.4% 16.4% 9.1% 9.5% 9.5%
-------- -------- -------- ----- ----- -----
Total revenue........... $125,826 $122,885 $105,496 2.4% 16.5% 100.0% 100.0% 100.0%
======== ======== ======== ===== ===== =====
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In fiscal 1999, U.S. and European revenue declined while Asian revenue
increased primarily due to the increased insourcing by U.S. and European PC
OEMs of systems from Asia and to increased Japan PC shipments. Our European
revenue is expected to continue to decline in future quarters due to increased
insourcing of PC systems and components by European PC OEMs.
Revenue (licensing and service revenue) by division for the three years
ended September 30, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
% CHANGE % OF REVENUE
--------------------------- ------------------------------------
1999 1998 1997 1999 1998 1999 1998 1997
(DOLLARS IN THOUSANDS) -------- -------- -------- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Platform Enabling....... $106,872 $114,093 $100,385 -6.3% 13.7% 84.9% 92.8% 95.2%
inSilicon............... 18,954 8,792 5,111 115.6% 72.0% 15.1% 7.2% 4.8%
-------- -------- -------- ----- ----- -----
Total revenue........... $125,826 $122,885 $105,496 2.4% 16.5% 100.0% 100.0% 100.0%
======== ======== ======== ===== ===== =====
</TABLE>
Platform Enabling revenue decreased by $7.2 million (or 6%) in fiscal 1999
due to declines in average selling prices due to PC price declines, the loss of
a significant North American customer due to acquisition and the discontinuation
of the PICO and PC Enhancing Division and some of its products. inSilicon
revenue increased by $10.2 million (or 116%) in fiscal 1999 due to the
acquisition of Sand and the continued demand for outsourced circuit IP. Platform
Enabling revenue increased by $13.7 million (or 14%) in fiscal 1998 due to
growing PC unit shipments and additional BIOS market demand. inSilicon revenue
increased by $3.7 million (or 72%) in fiscal 1998 due to growing acceptance of
semiconductor IP and maintenance fees from the growing installed based of
inSilicon customers.
Service revenue increased $6.9 million (or 44%) in fiscal 1998 due to a
number of chipset generation changes, the introduction of new PC standards and
the focus of a higher proportion of field engineering resources on
revenue-generating projects.
No customer accounted for more than 10% of revenue in fiscal 1999, 1998 or
1997.
GROSS MARGIN
Gross margin as a percent of revenue was 77%, 80% and 82% for fiscal 1999,
1998 and 1997, respectively. The decrease in gross margin in fiscal 1999 from
fiscal 1998 was attributable to the amortization of purchased technology related
to the acquisition of Sand of $2.1 million and an increase in end-user support
costs of $3.2 million. The decrease in gross margin in fiscal 1998 from fiscal
1997 was due to an increase in service revenue, on which a lower margin was
earned.
License fee gross margin as a percentage of license fee revenue was 92%, 92%
and 91% in fiscal 1999, 1998 and 1997, respectively. The increase in license fee
gross margin in fiscal 1998 was primarily due to the decrease in amortization of
capitalized software. Amortization of capitalized software development costs
charged to cost of revenue in fiscal 1999, 1998 and 1997, was $4.8 million,
$4.3 million, and $5.0 million, respectively.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $39.9 million, $40.5 million and
$32.9 million in fiscal 1999, 1998 and 1997, respectively. As a percent of
revenue, these expenses represented 32%, 33% and 31%, respectively. In fiscal
1999, research and development expenses decreased $0.6 million (or 1%) due to
decreased personnel resulting from the consolidation of operations with our
Company and Award and to reductions in development spending on PICO and PC
Enhancing products. In fiscal 1998, research and development expenses increased
$7.6 million (or 23%) due to additions in engineering personnel, primarily for
the increased development of information appliance and interconnect products and
for the feature enhancement of existing PC systems software.
We capitalized approximately $2.4 million, $5.2 million and $6.8 million of
software development costs in fiscal 1999, 1998 and 1997, respectively. These
decreases were due to a higher proportion of costs being incurred on
non-capitalizable projects, which have not yet reached technological
feasibility, and the development of tools associated with the development and
deployment of our products. We believe that continued investments in new and
evolving technologies are essential to meet the rapidly changing industry
requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $29.0 million, $27.8 million and
$22.4 million in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999, sales
and marketing expenses increased $1.2 million (or 4%) due to increased branding
and marketing activities associated with the establishment of the PhoenixNet
Division. In fiscal 1998, sales and marketing expenses increased $5.4 million
(or 24%) due mainly to additions in sales personnel to support its Platform
Enabling and inSilicon Divisions, higher product marketing costs and the
addition of international field offices in Hong Kong and Japan.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, net of amortization of goodwill, were
approximately $16.3 million, $16.1 million and $15.2 million in fiscal 1999,
1998 and 1997, respectively, and represented 13%, 13% and 14% of total revenue,
respectively. The cost increase in fiscal 1998 was primarily due to additions in
staff and facilities that were required to support our growth. Amortization of
goodwill was $2.2 million in fiscal 1999 related to the purchase of Sand.
MERGER, ACQUISITION AND RESTRUCTURING COSTS
Merger, acquisition and restructuring charges during the years ended
September 30, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Out-of-pocket merger and acquisition costs......... $ -- $ 5,677 $ --
Severance and other exit costs..................... 7,108 3,434 --
Asset write-offs................................... 7,346 1,369 --
In-process research and development................ -- 4,250 --
------- ------- ----
$14,454 $14,730 $ --
======= ======= ====
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
1999 CHARGES
The charges in fiscal 1999 were related to realigning the business into
three operating divisions, the consolidation of certain facilities and
operations, and steps to integrate Award and Sand.
Included in the fourth quarter of fiscal 1999 was a restructuring charge of
$10.0 million associated with streamlining certain operations, facilities
consolidations (including closing the office in the United Kingdom), and
discontinuing or de-emphasizing certain products of the Company's inSilicon
Division. The restructuring plan included $3.6 million in severance benefits
associated with the elimination of approximately 54 positions in engineering,
sales, marketing, and administration from various product divisions, field
operations including field engineering and sales, and management (primarily in
the United Kingdom and North America), $5.7 million of asset write-offs (mostly
capitalized software of the inSilicon division), $0.6 million in facilities
abandonment, and $0.9 million of other business exit costs pursuant to the re-
organization plan. The Company also reversed $0.8 million of severance charges
from prior restructuring plans as a result of the decision to retain certain
positions. Of the 54 terminations, approximately 39 have been completed as of
September 30, 1999.
Included in the third quarter of fiscal 1999 was a restructuring charge of
$2.5 million associated with the discontinuation of the PICO and PC Enhancing
Division and severance related to certain management positions. Of the
$2.5 million, $1.6 million were associated with the write-off of PICO and PC
Enhancing related capitalized software, $0.8 million for severance benefits for
a management position, and $0.1 million for other general administrative
expenses.
In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $1.9 million related to the facilities consolidations and streamlining
certain field operations and other functions, including closing the offices in
Texas and France. The restructuring charge included $1.8 million of severance
benefits associated with the elimination of approximately 38 positions in
engineering, sales, marketing, and administration from various product
divisions, field operations, and general administrative functions, as well as
$0.1 million related to facilities abandonment.
Approximately $3.7 million of the fiscal 1999 restructuring charges were
unpaid as of September 30, 1999, most of which will be paid in fiscal 2000.
1998 CHARGES
Included in the fourth quarter of fiscal 1998 was a charge of $14.0 million
related to the acquisitions of Award and Sand. The charge consisted of
$5.7 million of out-of-pocket costs, $3.4 million of asset write-offs,
$0.5 million in severance benefits associated with the elimination of 4
positions in North America in various departments, $0.1 million in facilities
abandonment, and a $4.3 million of in-process research and development charge.
Included in the third quarter of 1998 is a restructuring charge of $0.8 million
related to the severance benefits for eliminating approximately 20 positions in
engineering, sales, marketing, and administration from various divisions as a
result of the consolidation of certain functions and the elimination of certain
management positions.
Out-of-pocket merger and acquisition costs of $5.7 million in fiscal 1998
include legal, accounting and investment banking fees associated with the
acquisition of Award. Asset write-offs of $3.4 million include the carrying
value of assets that were determined to be redundant as a result of either
merger or restructuring activities. As of September 30, 1999, substantially all
fiscal 1998 restructuring charges have been paid.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The in-process research and development charge in fiscal 1998 was an
allocation of a portion of the purchase price for Sand for projects that were
not yet capitalizable under the provisions of Statement of Financial Accounting
Standards No. 86, "COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED."
The allocation was based upon an independent appraisal. The appraised value was
determined by estimating the future net cash flows from such projects and
discounting the net cash flows back to their present value. The discount rate
applied includes a factor that takes into account the uncertainty surrounding
the successful development of the purchased in-process technology. If these
projects are not successfully developed, future revenue and profitability of the
Company may be adversely affected. Additionally, the value of other intangible
assets acquired may become impaired.
INTEREST AND OTHER INCOME, NET
Interest income is primarily derived from cash, short- and long-term
investments and marketable securities. The income generated each period is
highly dependent on available cash and fluctuations in government interest
rates. The average interest rate earned in fiscal 1999 was approximately 4.9%.
In addition, certain trade balances are denominated in foreign currencies, and
therefore are subject to fluctuations in foreign currency exchange rates.
Net interest income was $3.4 million, $4.7 million and $4.0 million in
fiscal 1999, 1998 and 1997, respectively. The decrease in fiscal 1999 was
primarily due to the decrease in the average cash balances available for
investment as a result of cash payments related to the acquisition of Sand and
stock repurchases.
Net other income increased from $1.5 million in fiscal 1998 to $4.0 million
in 1999, mainly due to the sale of additional shares of Xionics Document
Technologies, Inc. ("Xionics") common stock. We recorded a gain of $4.0 million
on the sale of 1,048,881 shares (all of our remaining ownership interest) of
Xionics common stock in fiscal 1999, as compared to a gain of $1.5 million on
the sale of 156,500 shares of Xionics common stock in fiscal 1998 and a gain of
$3.2 million on the sale of 250,000 shares of Xionics common stock in fiscal
1997.
PROVISION FOR INCOME TAXES
We recorded income tax provisions of $0.9 million, $5.0 million and
$9.5 million in fiscal 1999, 1998 and 1997, respectively. Excluding
non-deductible in-process research and development and transaction costs related
to the acquisitions of Award and Sand in fiscal 1998, our effective tax rate was
32% in fiscal 1999, 1998 and 1997. Our effective tax rate (excluding
non-deductible acquisition charges and transaction costs) has been lower than
the statutory rate due to various federal and state tax credits and lower tax
rates imposed on foreign earnings in certain jurisdictions.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, we adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "REPORTING COMPREHENSIVE INCOME," and Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION." SFAS 130 establishes standards for
the reporting of comprehensive income, and requires our Company to disclose
comprehensive income to supplement the current reporting of income. SFAS 131
sets forth standards for the disclosure of certain information by segments, such
as products or services, geographic regions or major customers. The adoption of
SFAS 130 and SFAS 131 did not have a material impact on our consolidated
financial position or results of operations.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
We adopted Statement of Position 97-2, "SOFTWARE REVENUE RECOGNITION,"
("SOP 97-2"), and Statement of Position 98-4, "DEFERRAL OF THE EFFECTIVE DATE OF
A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION," ("SOP 98-4"), as of
October 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue
on software transactions and supersede Statement of Position 91-1, "SOFTWARE
REVENUE RECOGNITION," ("SOP 91-1").The adoption of SOP 97-2 and SOP 98-4 did not
have a material impact on our consolidated financial results. However, full
implementation guidelines for these standards have not been issued. Once
available, the current revenue recognition accounting practices may need to
change and such changes could affect our future revenues and results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and in June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. SFAS 137 deferred for one year the effective date of SFAS 133. We
are required to adopt this statement in fiscal 2001 and have not determined the
effect, if any, that adoption will have on our consolidated financial position
or results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The tables in Part II, Item 6 of this Form 10-K include selected unaudited
quarterly consolidated data for fiscal 1999 and 1998. This information was
derived from our unaudited consolidated financial statements that, in the
opinion of management, reflect all recurring adjustments necessary to fairly
present this information, when read in conjunction with our annual Consolidated
Financial Statements. The results of operations for any period are not
necessarily indicative of the results to be expected for any future period.
Our future operating results may vary substantially from period to period.
The timing and amount of our license fees are subject to a number of factors
that make estimating revenue and operating results prior to the end of a quarter
uncertain. While we receive recurring revenue on royalty-based license
agreements and some agreements contain minimum quarterly royalty commitments, a
significant amount of license fees in any quarter is dependent on signing
agreements and delivering the licensed software in that quarter. Generally, we
have experienced a pattern of recording 50% or more of our quarterly revenue in
the third month of the quarter. We have historically monitored our revenue
bookings through regular, periodic worldwide forecast reviews within the
quarter. These reviews keep management informed of areas where additional
selling effort may be needed in order to meet the internal plans and market
expectations. There can be no assurances that this process will result in our
meeting revenue expectations. Operating expenses for any year are normally based
on the attainment of planned revenue levels for that year and are incurred
ratably throughout the year. As a result, if revenue were less than planned in
any period while expense levels remain relatively fixed, our operating results
would be adversely affected for that period. In addition, unplanned expenses
could adversely affect operating results for the period in which such expenses
were incurred.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
BUSINESS RISKS
The additional following factors should be considered carefully when
evaluating our Company and our business.
PRODUCT DEVELOPMENT
Our long-term success will depend on our ability to enhance existing
products and to introduce new products timely and cost-effectively that meet the
needs of customers in present and emerging markets. There can be no assurance
that we will be successful in developing new products or in enhancing existing
products or that new or enhanced products will meet market requirements. Delays
in introducing new products can adversely impact acceptance and revenue
generated from the sale of such products. We have, from time to time,
experienced such delays. Our software products and their enhancements contain
complex code that may contain undetected errors and/or bugs when first
introduced. There can be no assurance that new products or enhancements will not
contain errors or bugs that will adversely affect commercial acceptance of such
new products or enhancements.
PROTECTION OF INTELLECTUAL PROPERTY
We rely on a combination of patent, trade secret, copyright, and trademark
laws and contractual provisions to protect its proprietary rights in our
software products. There can be no assurance that these protections will be
adequate or that competitors will not independently develop technologies that
are substantially equivalent or superior to our technology. In addition,
copyright and trade secret protection for our products may be unavailable or
unreliable in certain foreign countries. We have been issued seventeen patents
with respect to our current product offerings and have more than eighty-five
patent applications pending with respect to certain of the products we market.
We maintain an active internal program designed to identify internally developed
inventions worthy of being patented. There can be no assurance that any of the
applications pending will be approved and patents issued or that our engineers
will be able to develop technologies capable of being patented. As the number of
software patents increases, we believe that software developers may become
increasingly subject to infringement claims.
There can be no assurance that a third party will not assert that its
patents or other proprietary rights are violated by products offered by us. Any
such claims, whether or not meritorious, may be time consuming and expensive to
defend, can trigger indemnity obligations owed by us to third parties, and may
have an adverse effect on our business, results of operations and financial
condition. Infringement of valid patents or copyrights or misappropriation of
valid trade secrets, whether alleged against us, or our customers, and
regardless of whether such claims have merit, could also have an adverse effect
on our business, results of operations and financial condition.
IMPORTANCE OF MICROSOFT AND INTEL
For a number of years, we have worked closely with Microsoft Corporation and
Intel Corporation in developing standards for the PC industry. In addition, we
supply our system level software technology to Intel. We remain optimistic
regarding its relationships with these two industry leaders. However, there can
be no assurance that either Microsoft or Intel will not develop alternative
product strategies that could conflict with our product plans and marketing
strategies. Such action by either Intel or Microsoft may adversely impact our
business and results of operations. Presently, there is little overlap or
conflict in our product offerings and strategies and those of Intel. Windows NT
and Windows CE (Microsoft's operating systems for hand held PDA devices)
incorporate some functionality that has traditionally resided in the BIOS. Both
Intel and Microsoft, in their endeavors to add value, incorporate features or
functions provided by us in silicon or in the operating system, respectively.
Therefore, we must continually create
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
new features and functions to sustain, as well as increase, our software's added
value to OEMs. There can be no assurances that we will be successful in these
efforts.
ATTRACTION AND RETENTION OF KEY PERSONNEL
We believe we employ more BIOS engineers than any other company in the PC
industry. Semiconductor IP and Internet products are based on new and emerging
technologies that are different from BIOS technologies. Our ability to achieve
our revenue and operating performance objectives will depend in large part on
our ability to attract and retain technically qualified engineers. The available
pool of engineering talent is limited for all three operating divisions.
Accordingly, failure to attract, retain and grow our research and development
teams could adversely affect our business and operating results.
DEPENDENCE ON KEY CUSTOMERS; CONCENTRATION OF CREDIT RISK
The loss of any key customer and our inability to replace revenue provided
by a key customer may have a material adverse effect on our business and
financial condition. Our customer base includes large OEMs in the PC,
semiconductor and Internet markets. As a result, we maintain individually
significant receivable balances due from them. If these customers fail to meet
our guaranteed minimum royalty payments and other payment obligations, our
operating results could be adversely affected. As of September 30, 1999, our
largest receivable balance represented approximately 9% of total accounts
receivable.
COMPETITION
The market for our BIOS products is very competitive, resulting in downward
pricing pressure. In marketing our BIOS products, we compete primarily with
in-house research and development departments of PC manufacturers that may have
significantly greater financial and technical resources than ours. These
companies include Acer Incorporated, Compaq Computer Corporation, Dell Computer
Corporation, International Business Machines Corporation and Toshiba
Corporation. We also compete for system software business with other independent
suppliers, ranging from small, privately-held companies to Acer Softech, a
division of Acer Labs, a major Taiwan chip and motherboard supplier. There can
be no assurance that we will continue to compete successfully with our current
competitors or potential new competitors. There can be no assurance that intense
competition in the industry and particular actions of our competitors will not
have an adverse effect on our business, operating results and financial
condition. Due to the competitive nature of the business and the overall price
pressures within the PC market, we expect that prices on many of our products
may decrease in the future and that such price decreases could have an adverse
impact on our results of operations or financial condition.
The SIP industry is very competitive and is characterized by constant
technological change, rapid rates of product obsolescence, and frequently
emerging new suppliers. Our existing competitors include other merchant SIP
suppliers, such as the Mentor Graphics' Inventra Division, Synopsys, Enthink and
VAutomation; suppliers of ASIC semiconductors, such as LSI Logic, and the ASIC
divisions of IBM Microelectronics, Lucent, Toshiba and NEC; and to a lesser
degree suppliers of Field Programmable Gate Array, or FPGA, semiconductors, such
as Altera, Xilinx, Actel and Quicklogic. We also compete with the internal
development organizations of large, vertically integrated semiconductor and
systems companies, such as Intel, Motorola, Cisco and HP. In these companies,
SIP developed for an individual project sometimes is subject to efforts by the
company to re-use the SIP in multiple projects. Companies whose principle
business is providing design services as work-for-hire, such as Intrinsix,
Sican, and the service division of Cadence also provide competition.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In the Internet business, there are many distribution vehicles for our
partners to reach PC end users, including PC OEM companies, PC and hardware
registration companies and Internet web sites. Many have greater resources than
us.
INTERNATIONAL SALES AND ACTIVITIES
Revenue derived from our international operations comprises a majority of
total revenue. There can be no assurances that we will not experience
significant fluctuations in international revenue. While the major portion of
our license fee or royalty contracts are U.S. dollar denominated, we are
entering into an increasing number of contracts denominated in local currencies.
We have sales and engineering offices in Germany, Japan, Korea and Taiwan and
use a software engineering firm in India. Our operations and financial results
may be adversely affected by factors associated with international operations,
such as changes in foreign currency exchange rates, uncertainties relative to
regional economic circumstances, political instability in emerging markets,
difficulties in attracting qualified employees, and language, cultural and other
difficulties managing foreign operations.
YEAR 2000
The Year 2000 ("Y2K") issue may pose significant operational problems for
computer systems used internally by us. We have incurred internal staff costs as
well as consulting and other expenses related to upgrades, replacements and
modifications necessary to address Y2K issues within internal systems. There can
be no assurance that we have identified and addressed all Y2K issues within our
internal systems that may have a material impact on our operations. Furthermore,
there can be no assurance that the systems of other companies with which we deal
and on which our systems rely will also be timely converted or that any such
failure to convert by another company would not have a material impact on our
operations.
The Y2K issue may also pose significant operational problems for us as a
result of products we have sold or licensed. We have made available to our
customers and end users test utilities and fixes to certain of our products that
we have determined are not Y2K compliant. These fixes make older products Y2K
operational. Despite these efforts, we cannot predict the extent to which we
will be required to provide support to end users or whether systems used by end
users will be impacted by products that are not fully compliant. Accordingly, we
cannot predict whether we will be named as a defendant in claims or complaints
regarding the Y2K issue, nor can we anticipate the number of such claims or
complaints if we are so named. If we are so named, the cost of defending and
resolving such claims may have a material impact on us. Depending on the nature
of the claims asserted, the remedy imposed or the cost of defense, even one such
suit could represent a material exposure to us. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION--YEAR 2000."
VOLATILE MARKET FOR PHOENIX STOCK
The market for our stock is highly volatile. The trading price of our common
stock has been, and will continue to be, subject to fluctuations in response to
operating and financial results, announcements of technological innovations, new
products or customer contracts by us and our competitors, changes in our or our
competitors' product mix or product direction, changes in our revenue mix and
revenue growth rates, changes in expectations of growth for the PC industry, as
well as other events or factors which we may not be able to influence or
control. Statements or changes in opinions, ratings or earnings estimates made
by brokerage firms and industry analysts relating to the market in which we do
business, companies with which we compete or relating to us specifically could
have an immediate and adverse effect on the market price of our stock. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations that have particularly affected the market price for many
small capitalization,
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
high-technology companies and that often have been unrelated to the operating
performance of these companies.
CERTAIN ANTI-TAKEOVER EFFECT
Our Certificate of Incorporation, Bylaws and Stockholder Rights Plan and the
Delaware General Corporation Law include provisions that may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that
stockholders might consider in their best interests. These include provisions
under which members of the Board of Directors are divided into three classes and
are elected to serve staggered three-year terms. The Stockholder Rights Plan
permits holders of our common stock to purchase shares of Series A Junior
participating preferred stock in the event of the acquisition by a third party
of 15% or more of our outstanding common stock or if a third party announces its
tender offer for at least 15% of our outstanding common stock. If we are
acquired in a merger or other business combination, each right will entitle its
holder to purchase a number of shares of our common stock that equals twice the
exercise price ($75.00). In addition, in connection with the February 1996 sale
of shares representing 6% of our outstanding common stock and of a warrant to
purchase an additional 7%, we granted Intel Corporation certain rights in the
event of solicited or unsolicited offers to acquire us.
RAPID CHANGE WITH THE INTERNET
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility, quality of service,
potential tax or other government regulation, may affect the use of the Internet
as a medium to distribute or support our software products and the functionality
of some of our products. If we are unsuccessful in timely assimilating changes
in the Internet environment in our business operations and product development
efforts, our future net revenue and operating results could be adversely
affected.
BUSINESS DISRUPTIONS
While we have not been the target of software viruses specifically designed
to impede the performance of our products, such viruses could be created and
deployed against our products in the future. Similarly, experienced computer
programmers or hackers may attempt to penetrate our network security or the
security of our web site from time to time. A hacker who penetrates our network
or web site could misappropriate proprietary information or cause interruptions
of our services. We might be required to expend significant capital and
resources to protect against or to alleviate, problems caused by virus creators
and/or hackers.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our primary sources of liquidity included cash, cash
equivalents and short-term investments of $55.6 million, and available
borrowings under a bank credit facility of $10.0 million. There were no
borrowings outstanding under the bank credit facility at September 30, 1999. We
believe that our existing sources of liquidity will be sufficient to satisfy our
cash requirements for at least the next twelve months.
In fiscal 1999, we repurchased and retired approximately 3.3 million shares
of our common stock at a cost of $34.1 million. In fiscal 1998, we repurchased
approximately 300 thousand shares at a cost of $3.6 million.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities during fiscal 1999 was
$21.6 million, resulting primarily from cash provided by net income, adjusted
for non-cash items. Net cash used in investing activities was $13.7 million,
which consisted primarily of $6.2 million of net purchases of short-term and
long-term investments and marketable securities, $5.8 million in purchases of
property and equipment, and $2.4 million in additions to computer software
costs. Cash used for financing activities during fiscal 1999 was $28.3 million,
consisting primarily of $34.1 million to repurchase our common stock, partially
offset by $5.8 million generated from the exercise of common stock options and
the issuance of stock under our employee stock purchase plan.
YEAR 2000
Significant uncertainty exists in the software industry concerning the
potential effects associated with the Y2K problem. 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. The PC
industry has also defined the Y2K issue to include proper handling of leap year
calculations. A Y2K issue could disrupt processing transactions or even cause
certain systems to fail. This possibility affects our products and our
information technology and other internal systems as well as our customers and
vendors.
Our Y2K compliance effort covers our products, internal systems and services
provided by others.
PHOENIX PRODUCTS
HISTORY. Since our inception, we have sold or licensed various products,
including BIOS products, semiconductor intellectual property and consumer
software.
Our BIOS products fall into differing definitions of Y2K compliance. Most
BIOS-related products sold or licensed after fiscal 1995 were designed to
automatically handle millennium date changes. Most of our BIOS products prior to
that date are manually compliant, which means that end users must change the
date once on their system after December 31, 1999 in order for the system date
to be proper. We have identified one product line that was not compliant at
various shipment dates, and have made test utilities and fixes available on our
web site to allow end users to test and update their system's operation and
automatically provide a fix if it is not Y2K compliant.
Our semiconductor IP product lines do not generally handle date-related
functions and accordingly do not cause Y2K issues. We discontinued consumer
software product lines in 1996. Accordingly, we do not believe that a material
number of these products will remain in use after January 1, 2000. We have
developed a list of all products we sold and licensed and have assessed the
level of compliance of these products. This effort was completed in the second
quarter of our 1999 fiscal year.
REMEDIAL STEPS. We sell and license our products directly to OEMs and
manufacturers of motherboards, and therefore do not have direct customer
relationships with end users of PCs or information appliances. Nonetheless, for
any products deemed to be less than fully compliant, we will make available to
end-users software upgrades, fixes or patches. These solutions have been made
available to users through our web site and a contracted call support center. We
will also make these solutions available to OEM customers for placement by those
customers on their respective web sites and delivery to their customers. Where
appropriate, we 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 us will become aware of the
non-compliance of their software, will take steps to download these solutions
from the Internet, or that such end users will have Internet access. We have
estimated
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
incremental costs of providing these solutions and other end user support and
estimated costs to be approximately $3.3 million and have accrued this amount in
the fourth quarter of fiscal 1999.
EXPOSURE. We continue to identify and assess the state of Y2K compliance of
those products sold or licensed and the number of those products remaining in
use. There can be no assurance that we will be able to identify all compliance
issues for each of the products we have sold or licensed during our history.
Accordingly, our estimate of the cost of obtaining compliance and providing end
user support is subject to change.
INFORMATION TECHNOLOGY AND OTHER SYSTEMS
Our plans for dealing with Y2K have included surveying and testing or
certifying all of the hardware and software used for compliance, performing
remediation where necessary, and developing contingency plans for possible
failure scenarios occurring after December 31, 1999.
CURRENT STATUS. Our 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. We use Oracle as our primary
financial system, which has been upgraded recently to a version, which Oracle
represents is Y2K compliant. We have selected a replacement for the code
management system used in product development and deployment. This code
management system was purchased in fiscal 1999 and the manufacturer represents
that it is Y2K compliant.
We executed a project plan, approved by our Board of Directors, and tested
our hardware and software. A key element of the plan was to identify and test
all firmware and software, including embedded firmware and software in other
systems, such as building access and temperature control systems. All tests and
necessary remediation have been completed.
TEST, CERTIFICATION AND REMEDIATION. Third party software was used to test
each of the computer systems and inventory all applications in use. The
application information was compared to vendor or other published databases with
Y2K compliance information. Remedial action was performed where necessary, which
usually involved acquiring and implementing an upgrade. For those applications
not found in the published Y2K information, the vendors were contacted, and
where necessary, upgrades were acquired and implemented. Where the vendor no
longer existed, a determination was 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. We spent approximately $350,000
in testing, remediation and upgrades. The new code management system is expected
to cost approximately $2 million for software, implementation assistance and
training, excluding the cost of our personnel involved in the project. Our
Information Technology personnel spent approximately 15% of their time during
the fiscal 1999 on Y2K issues at an approximate cost of $260,000. Software
purchases and certain other related costs have been capitalized and depreciated
while other costs are charged directly to expense. Y2K expenses are being funded
through operating cash flows. Total anticipated Y2K expenditures are not
material to our financial condition or results of operations. However there can
be no assurance that additional and material unanticipated costs will not arise,
and actual results could differ materially from those anticipated.
THIRD-PARTY SYSTEMS
We have relationships with various third parties and the failure of these
third parties to achieve Y2K compliance could have a material impact on our
business, operating results and financial condition. We
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
have made inquiries of our major vendors and suppliers, such as banks, payroll
service and equipment vendors about their Y2K readiness. We have determined that
responses to date have been satisfactory for determining the readiness of these
vendors. Nevertheless, there can be no assurance that unanticipated processing
or supply problems will not occur after the turn of the year.
We do not currently have any information concerning the Y2K readiness of our
customers. In the event that our significant customers do not successfully
achieve Y2K compliance in a timely manner, our business or operations could be
adversely affected.
WORST CASE SCENARIO AND CONTINGENCY PLANS
The worst case scenario would include significant costs and business
interruptions associated with: 1) previously undetected errors in our products,
2) Y2K litigation, as currently being experienced by other software vendors,
3) a significant disruption of our 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 purporting to represent a class of PC or other product users
containing our products, independent of the merits of such claims, could require
a significant amount of management time and resources to defend ourselves. We
developed comprehensive contingency plans, covering rapid response to customer
and end-user problems as well as manual or other temporary remedies in the event
of failure of our or third party systems. There can be no assurance that the
actions being taken by us, as described throughout this Y2K section, 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 our business, operating results and
financial condition.
EURO
We are addressing the issues raised by the introduction of the Single
European Currency ("Euro") on January 1, 1999 and will monitor this issue
throughout the transition period ending January 1, 2002. Our internal systems
that are affected by the initial introduction of the Euro have been updated
without material system modification costs. Further internal systems changes may
be made during the three-year transition phase in preparation for the ultimate
withdrawal of the legacy currencies in July 2002. The costs of these potential
changes are not expected to be material. We do not presently expect that the
introduction and use of the Euro will materially affect our foreign exchange
activities, or will result in any material increase in costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. Our investments are in debt instruments
of the U.S. Government and its agencies, and in high-quality corporate issuers
and, by policy, limit the amount of credit exposure to any one issuer. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
there is a decline in interest rates. Due in part to these factors, our future
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<PAGE>
investment income may fall short of expectations, or we may suffer a loss in
principal if we are forced to sell securities, which have declined in market
value due to changes in interest rates.
FOREIGN CURRENCY RISK
International revenues from our foreign subsidiaries were 67%, 60% and 61%
of total revenues in fiscal 1999, 1998 and 1997, respectively. International
sales are primarily from our foreign sales subsidiaries in their respective
countries and are typically denominated in the local currency of each country.
These subsidiaries incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency. Our international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors. Our exposure to foreign exchange rate fluctuations arises in part
from intercompany accounts in which costs incurred in the United States are
charged to our foreign sales subsidiaries. These intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the United
States. We are also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability. The
effect of foreign exchange rate fluctuations on us in fiscal 1999 was not
material.
INVESTMENT RISK
We invest in equity instruments of privately-held, information technology
companies for business and strategic purposes. These investments are included in
other long-term assets and are accounted for under the cost method when
ownership is less than 20%. For these non-quoted investments, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. We identify and record
impairment losses on long-lived assets when events and circumstances indicate
that such assets might be impaired. To date, no such impairment has been
recorded. If certain of these investments in privately-held companies became
marketable equity securities when the investees completed initial public
offerings in the future, then they are subject to significant fluctuations in
fair market value due to the volatility of the stock market, and are recorded as
long-term investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to our Company's
directors will be contained in our definitive proxy statement to be filed
pursuant to Regulation 14A in connection with the 2000 annual meeting of its
stockholders (the "Proxy Statement") and is incorporated herein by this
reference. The information required by this item with respect to our executive
officers is contained in Part I in the section captioned, "EXECUTIVE
COMPENSATION."
The executive officers of the Company, each of whom serve at the discretion
of the Board of Directors, as of the filing date of this Form 10-K are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Albert E. Sisto................ 50 President and Chief Executive Officer
Wayne C. Cantwell.............. 34 President and Chief Executive Officer, inSilicon Division
David Everett.................. 56 Senior Vice President and General Manager, Platform Enabling
Division
Harry Gierhart................. 50 Senior Vice President and General Manager, PhoenixNet
Division
George C. Huang................ 57 Senior Vice President, Strategic Planning
William E. Meyer............... 37 Vice President, Finance, Chief Financial Officer and
Treasurer
Linda V. Moore................. 53 Vice President, General Counsel and Secretary
</TABLE>
Mr. Sisto joined the Company as President and Chief Executive Officer in
June 1999. He was formerly Chief Operating Officer of RSA Data Security, Inc.
from 1997 to 1999. Prior to that, he served as President, Chairman and CEO of
DocuMagix, Inc. from 1994 to 1997, which was merged into efax.com. From 1989 to
1994, he was the President and CEO of PixelCraft, Inc. Mr. Sisto also serves on
the Boards of Directors of Insignia Solutions, Hi/fn Inc., efax.com, Tekgraf,
and the Company. Mr. Sisto earned a Bachelor of Science in engineering from the
Stevens Institute of Technology.
Mr. Cantwell became President and Chief Executive Officer of inSilicon, a
wholly owned subsidiary of the Company, in November 1999. He was Vice President
and General Manager, North American Operations of the Company from March 1998 to
October 1998; Vice President Asia/America Operations from September 1997 to
March 1998; and General Manager Asia Operations from January 1996 to August
1997. Prior to that, Mr. Cantwell held various sales, sales management and
general management roles with the Company since joining in 1991. Mr. Cantwell
received a B.S. in Electrical Engineering from DeVry Institute of Technology.
Mr. Everett rejoined the Company as Senior Vice President and General
Manager of the Platform Enabling Division in April 1999. Prior to rejoining the
Company, he was CEO of 3D Labs, Inc. In September 1997, he became President and
CEO of Dynamic Pictures, Inc. In January 1996, he joined the Company as Vice
President, Worldwide Field Operations. Mr. Everett has also worked for SyQuest
Technology as Executive Vice President, Sales and Marketing, and for Wyse
Technology as Senior Vice President, Sales and Corporate Marketing. Mr. Everett
earned a B.A. in Business from Michigan State University.
Mr. Gierhart joined the Company as Senior Vice President and General Manager
of the PhoenixNet Division in October 1999. Mr. Gierhart has also founded and
managed software companies that have been acquired by Sterling Software,
Computer Associates and Adobe Systems. He currently serves on the Boards of
Directors of Television Computer and Digital Grid LLC. Mr. Gierhart earned a
Bachelor's degree from Westminster.
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Dr. Huang joined the Company as Senior Vice President of Strategic Planning
in September 1998. Prior to the merger of Award Software and the Company, he was
President, CEO and Chairman of the Board of Directors of Award Software. He is
also Chair of GCH Systems, Inc., a company that develops and markets embedded
controllers, application-specific integrated circuits and PC systems. From 1984
to 1994, he was CEO of GCH. Dr. Huang holds a BS in Electrical Engineering from
the National Taiwan University, a M.S. in Electrical Engineering from Washington
State University and a Ph.D. from the University of Washington.
Mr. Meyer joined the Company as Corporate Controller in February 1998. He
was promoted to Vice President, Finance, in December 1998, and Chief Financial
Officer in May 1999. For over two years prior to joining the Company, Mr. Meyer
was Vice President and Controller for Microprose, a publicly held developer of
entertainment software. From 1992 to 1995, he was Vice President of Finance and
Chief Financial Officer for SBT Accounting Systems, a developer of accounting
software applications; from 1986 to 1992, he held various positions with Arthur
Andersen & Co., including two years as Audit Manager. He is a Certified Public
Accountant. Mr. Meyer holds a B.S. from California State University, Sacramento.
Ms. Moore joined the Company in November 1999. Prior to joining the Company
she was Vice President and General Counsel of NHancement Technologies, Inc., a
distributor of computer-telephony products based in Fremont, California. From
1989 to 1998, she served as General Counsel and Secretary of Jabil
Circuit, Inc., an electronics contract manufacturer headquartered in St.
Petersburg, Florida. She has also served as a consultant to Internet start-ups
and has 6 years experience in equipment leasing. Ms. Moore received a B.A. from
the University of Michigan, an M.A. from Eastern Michigan University and a J.D.
from Detroit College of Law at Michigan State University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the information contained in the section captioned, "EXECUTIVE COMPENSATION" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information contained in the section captioned, "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information contained in the section captioned, "CERTAIN TRANSACTIONS" in
the Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of our Company and our
subsidiaries are filed as part of this report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 34
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... 35
Consolidated Balance Sheets as of September 30, 1999 and
1998...................................................... 36
Consolidated Statements of Income for the years ended
September 30, 1999, 1998 and 1997......................... 37
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999, 1998 and 1997............. 38
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997......................... 39
Notes to Consolidated Financial Statements.................. 40
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto. The consolidated financial statements and financial
statement schedules follow the signature page hereto.
(b) REPORTS ON FORM 8-K
On September 29, 1998, we filed a Current Report on Form 8-K reporting our
completion of the merger with Award Software International ("Award"). On
October 7, 1998, we filed a Form 8-K reporting the acquisition of Sand. On
November 25, 1998, the Registrant filed a Current Report on Form 8-K/A amending
the September 29, 1998 Form 8-K filing to include unaudited, pro forma financial
statements of the Registrant and Award.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated April 15, 1998,
among Phoenix, Portland Acquisition Corporation and Award
(incorporated herein by this reference to Exhibit 2.1 to
the Registration Statement on Form S-4 filed with the SEC
on May 26, 1998).
2.2 Agreement of Merger between Award and Portland Acquisition
Corporation (incorporated herein by this reference to
Exhibit 2.2 to the Registration Statement on Form S-4
filed with the SEC on May 26, 1998).
3.1 Amended and Restated Certificate of Incorporation of Phoenix
dated June 29, 1998 (incorporated herein by this reference
to Exhibit 3.1 to the Registration Statement on Form S-4
filed with the SEC on May 26, 1998).
3.2 By-laws of Phoenix as amended through February 6, 1995
(incorporated herein by reference to Exhibit 4.2 to
Phoenix's Registration Statement on Form S-8, Registration
No. 333-03065).
3.6 Certificate of Ownership (incorporated herein by reference
to Exhibit 3.6 to Phoenix's 1988 Annual Report on
Form 10-K).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
4.1 Rights Agreement dated as of October 31, 1989 between
Phoenix and The First National Bank of Boston
(incorporated herein by reference to Exhibit 4.1 to
Phoenix's Form 8-K filed on October 31, 1989).
10.4 Employment Agreement dated June 9, 1994 between Phoenix and
Jack Kay (incorporated herein by reference to
Exhibit 10.9 to Phoenix's Quarterly Report on Form 10-Q
filed on August 15, 1994).
10.15 1994 Equity Incentive Plan, as amended through February 28,
1996 (incorporated herein by reference to Exhibit 10.17 to
Phoenix's Report on Form 10-K for the fiscal year ended
September 30, 1995 (the "1995 10-K")).
10.21 Amended and Restated Lease Agreement dated March 15, 1995
between The Prudential Insurance Company of America and
Phoenix with respect to certain facilities located at 846
University Avenue, Norwood, MA (incorporated herein by
reference to Exhibit 10.23 to the 1995 10-K).
10.22+ Agreement dated December 18, 1995 between Intel Corporation
and Phoenix (incorporated herein by reference to
Exhibit 10.24 to Phoenix'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")).
10.23 Common Stock and Warrant Purchase Agreement dated
December 18, 1995 by and between Phoenix and Intel
Corporation (incorporated herein by reference to
Exhibit 10.25 to the December 1995 10-Q).
10.24 Warrant to Purchase Shares of Common Stock of Phoenix dated
February 15, 1996 (incorporated herein by reference to
Exhibit 2 to the Schedule 13D of Intel Corporation dated
February 23, 1996 with respect to the purchase by Intel of
shares of Phoenix's common stock and of a warrant to
purchase shares of Phoenix's common stock (the "Intel
Schedule 13D")).
10.25 Investor Rights Agreement dated December 18, 1995 between
Phoenix and Intel Corporation (incorporated herein by
reference to Exhibit 3.2 to the Intel Schedule 13D).
10.26 Standard Industrial Lease--Full Net between The Equitable
Life Assurance Society of the United States as Landlord
and Phoenix as Tenant dated as of May 15, 1996 for that
certain property located at 411 E. Plumeria Drive,
San Jose, California (incorporated herein by reference to
Exhibit 10.20 to Phoenix's Report on Form 10-Q for the
quarter ended June 30, 1996).
10.28 Industrial Lease (Single Tenant; Net) dated October 1, 1996
by and between The Irvine Company and Phoenix for that
certain property located at 135 Technology Drive, Irvine,
California (incorporated herein by reference to
Exhibit 10.28 to the 1996 Form 10-K).
10.29 1996 Equity Incentive Plan, as amended through December 12,
1996 (incorporated herein by reference to Exhibit 4.2 to
Phoenix's Registration Statement on Form S-8 filed on
January 27, 1997 (Registration No. 333-20447)).
10.31 Loan Agreement dated March 27, 1998 by and between Silicon
Valley Bank and Phoenix (incorporated herein by reference
to Exhibit 10.31 to Phoenix's Report on Form 10-Q for the
quarter ended March 31, 1998).
10.32 1998 Stock Plan, as amended June 4, 1996 (incorporated
herein by reference to Exhibit 99.1 to the 1998 Stock
Plan and Amended 1991 Employee Stock Purchase Plan).
10.33 Amended and Restated Employee Stock Purchase Plan, as
amended June 4, 1998 (incorporated herein by reference to
Exhibit 99.2 to the 1998 Stock Plan and Amended 1991
Employee Stock Purchase Plan S-8).
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.34 Form of Indemnity Agreement to be entered into between
Phoenix and its directors and officers, with related
schedule (incorporated herein by reference to
Exhibit 10.1 to the Registration Statement on Form S-1,
File No. 333-05107, filed by Award Software International,
Inc. on June 3, 1996, as amended).
10.35 Lease dated January 1, 1996 between GCH Systems, Inc. and
Phoenix (incorporated herein by reference to Exhibit 10.7
to the Registration Statement on Form S-1, File
No. 333-05107, filed by Award on June 3, 1996, as
amended).
10.36 Summary of Leases dated March 1, 1996 between Sun
Corporation, GSS Corporation and the Registrant
(incorporated herein by reference to Exhibit 10.8 to the
Registration Statement on Form S-1, File No. 333-05107,
filed by Award Software International, Inc. on June 3,
1996, as amended).
10.37 Voting Agreement dated January 12, 1996 between Phoenix and
certain persons named therein (incorporated herein by
reference to Exhibit 10.9 to the Registration Statement on
Form S-1, File No. 333-05107, filed by Award on June 3,
1996, as amended).
10.38 Investors' Rights Agreement among Phoenix and certain other
persons named therein dated January 12, 1996 (incorporated
herein by reference to Exhibit 10.10 to the Registration
Statement on Form S-1, File No. 333-05107, filed by Award
on June 3, 1996, as amended).
10.39 Warrant issued to Synnex Information Technologies, Inc.
(incorporated herein by reference to Exhibit 10.11 to the
Registration Statement on Form S-1, File No. 333-05107,
filed by Award on June 3, 1996, as amended).
10.40 Warrant issued to Vobis Microcomputer AG (incorporated
herein by reference to Exhibit 10.12 to the Registration
Statement on Form S-1, File No. 333-05107, filed by Award
on June 3, 1996, as amended).
10.41 Warrant issued to Venrock Associates (incorporated herein by
reference to Exhibit 10.13 to the Registration Statement
on Form S-1, File No. 333-05107, filed by Award on
June 3, 1996, as amended).
10.42 Warrant issued to Venrock Associates II, L.P. (incorporated
herein by reference to Exhibit 10.14 to the Registration
Statement on Form S-1, File No. 333-05107, filed by Award
on June 3, 1996, as amended).
10.43 Warrant issued to Walden Capital Partners II, L.P.
(incorporated herein by reference to Exhibit 10.15 to the
Registration Statement on Form S-1, File No. 333-05107,
filed by Award on June 3, 1996, as amended).
10.44 Warrant issued to Walden Technology Ventures II, L.P.
(incorporated herein by reference to Exhibit 10.16 to the
Registration Statement on Form S-1, File No. 333-05107,
filed by Award on June 3, 1996, as amended).
10.45+ Technology Development and Support Agreement dated June 28,
1996 between Phoenix and Advanced Micro Devices, Inc.
(incorporated herein by reference to Exhibit 10.17 to the
Registration Statement on Form S-1, File No. 333-05107,
filed by Award Software International, Inc. on June 3,
1996, as amended).
10.46 Common Stock Purchase Agreement by and among Award, Sun
Corporation and Axis Corporation dated April 13, 1998
(incorporated herein by reference to Exhibit 10.1 of the
10-Q of Award for the quarter ended June 30, 1998).
10.47 Support Agreement by and between Award and Vobis
Microcomputer AG dated April 15, 1998 (incorporated
herein by reference to Exhibit 10.2 of the 10-Q of Award
for the quarter ended June 30, 1998).
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.48+ Memorandum of Understanding by and among Sun Corporation,
Axis Corporation and Phoenix (incorporated herein by
reference to Exhibit 10.25 of the 10-Q of Award for the
quarter ended June 30, 1997).
10.49 Commercial Lease dated January 5, 1996 by and between
Unicore Software, Inc. and 114 Realty Trust, as amended on
May 30, 1997 and September 1, 1997 (incorporated herein by
reference to Exhibit 10.26 of the 10-K of Award for the
year ended December 31, 1997).
10.50 Executive Severance Benefits Agreement dated September 24,
1998 between Phoenix and George C. Huang (incorporated
herein by reference to Exhibit 10.27 of the 10-K of Award
for the year ended December 31, 1997).
10.51 Executive Severance Benefits Agreement dated April 14, 1998
between Phoenix and Laurent K. Gharda (incorporated herein
by reference to Exhibit 10.34 of the 10-K of Award for the
year ended December 31, 1997).
10.52 Promissory Note dated March 1, 1998 issued by Pierre A.
Narath to Phoenix (incorporated herein by reference to
Exhibit 10.35 of the 10-K of Award for the year ended
December 31, 1997).
10.53 Letter Agreement dated March 1, 1998 between Pierre A.
Narath and Phoenix (incorporated herein by reference to
Exhibit 10.36 of the 10-K of Award for the year ended
December 31, 1997).
10.54+ Master Original Equipment Manufacturer (OEM) Software
License Agreement, dated September 10, 1997, between
Phoenix and Intel Corporation (incorporated herein by
reference to Exhibit 10.37 of the 10-K of Award for the
year ended December 31, 1997).
10.55 Executive Severance Benefits Agreement dated January 31,
1999 between Phoenix and George Adams.
10.56 Executive Severance Benefits Agreement dated January 21,
1999 between Phoenix and Jack Kay.
10.57 Executive Severance Benefits Agreement dated August 13, 1999
between Phoenix and David Frodsham.
10.58 Executive Severance Benefits Agreement dated December 18,
1998 between Phoenix and Robert J. Riopel.
10.59 Employment Agreement dated June 8, 1999 between Phoenix and
Albert E. Sisto.
10.60 Phoenix Preferred Share Purchase Rights Plan dated
October 28, 1999 (incorporated herein by reference to
Exhibit 1 of Form 8-A as filed on October 28, 1999).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24 Power of Attorney. See signature page.
27 Financial Data Schedule.
</TABLE>
- ------------------------
+ The Securities and Exchange Commission has granted confidential treatment
for portions of this document.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
PHOENIX TECHNOLOGIES LTD.
By: /s/ ALBERT E. SISTO
-----------------------------------------
Albert E. Sisto
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 17, 1999
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ ALBERT E. SISTO /s/ WILLIAM E. MEYER
- ------------------------------------------- -------------------------------------------
Albert E. Sisto William E. Meyer
Director and Principal Executive Officer Principal Finance and Accounting Officer
Date: December 17, 1999 Date: December 17, 1999
/s/ JACK KAY /s/ GEORGE C. HUANG
- ------------------------------------------- -------------------------------------------
Jack Kay George C. Huang
Director Director
Date: December 17, 1999 Date: December 17, 1999
/s/ RONALD D. FISHER /s/ ANTHONY SUN
- ------------------------------------------- -------------------------------------------
Ronald D. Fisher Anthony Sun
Director Director
Date: December 17, 1999 Date: December 17, 1999
/s/ ANTHONY P. MORRIS
- -------------------------------------------
Anthony P. Morris
Director
Date: December 17, 1999
</TABLE>
33
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the accompanying consolidated balance sheets of Phoenix
Technologies Ltd. as of September 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1999. Our audits also
included the financial statement schedule listed in Part IV, Item 14(a). These
consolidated financial statements and schedules are the responsibility of the
management of Phoenix Technologies Ltd. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. In
September 1998, Phoenix Technologies Ltd. merged with Award Software
International, Inc. in a transaction, which was accounted for as a pooling of
interests. We did not audit the financial statements of Award Software
International, Inc. for the years prior to the year ended September 30, 1998,
which statements reflect revenues constituting 22% of 1997 consolidated total
revenues. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Award Software International, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Phoenix
Technologies Ltd. at September 30, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
[/S/ ERNST & YOUNG LLP]
San Jose, California
October 20, 1999
34
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Award Software International, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Award Software
International, Inc., and its subsidiaries (not presented separately herein) at
December 31, 1997, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS, LLP
San Jose, California
January 29, 1998
35
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,873 $ 44,234
Short-term investments.................................... 30,719 27,063
Accounts receivable, net of allowances of $1,460 and
$1,113 at September 30, 1999 and 1998................... 30,105 28,446
Deferred income taxes..................................... 5,881 2,759
Other current assets...................................... 2,881 4,361
-------- --------
Total current assets.................................... 94,459 106,863
Other marketable securities................................. 8,684 6,944
Property and equipment, net................................. 12,588 13,244
Computer software costs, net................................ 7,471 16,575
Goodwill and other intangible assets, net................... 10,165 12,693
Other assets................................................ 8,631 2,783
-------- --------
Total assets................................................ $141,998 $159,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,810 $ 6,976
Payroll and related liabilities........................... 10,612 7,294
Deferred revenue.......................................... 5,414 2,321
Other accrued liabilities................................. 14,147 6,203
Income taxes payable...................................... 7,547 6,926
-------- --------
Total current liabilities............................... 41,530 29,720
Long-term obligations....................................... 1,546 4,046
-------- --------
Total liabilities......................................... 43,076 33,766
Commitments -- --
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares authorized,
none issued or outstanding.............................. -- --
Common stock, $.001 par value, 60,000 shares authorized,
24,036 and 26,286 shares issued and outstanding at
September 30, 1999 and 1998............................. 24 26
Additional paid-in capital................................ 89,194 99,940
Retained earnings......................................... 10,573 25,269
Accumulated other comprehensive income (loss)............. (869) 101
-------- --------
Total stockholders' equity.............................. 98,922 125,336
-------- --------
Total liabilities and stockholders' equity.................. $141,998 $159,102
======== ========
</TABLE>
See notes to consolidated financial statements
36
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees.............................................. $103,326 $100,344 $ 89,884
Services.................................................. 22,500 22,541 15,612
-------- -------- --------
Total revenue........................................... 125,826 122,885 105,496
Cost of revenue:
License fees.............................................. 7,844 7,828 7,795
Services.................................................. 18,344 16,224 10,844
Amortization of purchased technology...................... 2,132 -- --
-------- -------- --------
Total cost of revenue................................... 28,320 24,052 18,639
-------- -------- --------
Gross margin................................................ 97,506 98,833 86,857
Operating expenses:
Research and development.................................. 39,910 40,476 32,920
Sales and marketing....................................... 29,020 27,771 22,363
General and administrative................................ 16,287 16,137 15,167
Amortization of goodwill and acquired intangible assets... 2,496 150 --
Merger, acquisition and restructuring charges............. 14,454 14,730 --
-------- -------- --------
Total operating expenses................................ 102,167 99,264 70,450
-------- -------- --------
Income (loss) from operations............................... (4,661) (431) 16,407
Interest income, net........................................ 3,361 4,659 4,049
Other income, net........................................... 3,954 1,505 9,348
-------- -------- --------
Income before income taxes.................................. 2,654 5,733 29,804
Provision for income taxes.................................. 850 5,011 9,469
-------- -------- --------
Net income.................................................. $ 1,804 $ 722 $ 20,335
======== ======== ========
Earnings per share:
Basic..................................................... $ 0.07 $ 0.03 $ 0.80
======== ======== ========
Diluted................................................... $ 0.07 $ 0.03 $ 0.74
======== ======== ========
Weighted average number of shares used in computation:
Basic..................................................... 25,966 25,543 25,293
======== ======== ========
Diluted................................................... 27,250 27,009 27,464
======== ======== ========
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY INCOME (LOSS)
-------- -------- ---------- -------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996....... 24,646 $ 25 $ 89,590 $12,243 $ 12,810 $114,668
Stock purchases under option and
purchase plans.................. 871 -- 4,275 -- -- 4,275
Effect of pooling of interests.... 268 -- 35 (490) -- (455)
Tax benefit on exercise of stock
options......................... -- -- 1,160 -- -- 1,160
Repurchase of common stock........ (386) -- (1,612) (3,402) -- (5,014)
Deferred stock-based
compensation.................... -- -- 140 -- -- 140
Comprehensive income:
Net income...................... -- -- -- 20,335 -- 20,335 $ 20,335
Change in unrealized gain on
investments................... -- -- -- -- (528) (528) (528)
Translation adjustment.......... -- -- -- -- (1,042) (1,042) (1,042)
--------
Comprehensive income.......... $ 18,765
------ ---- -------- -------- -------- -------- ========
BALANCE, SEPTEMBER 30, 1997....... 25,399 25 93,588 28,686 11,240 133,539
Stock purchases under option and
purchase plans.................. 681 1 3,055 -- -- 3,056
Issuance of common shares and
stock options related to
purchase of Sand................ 464 -- 4,372 -- -- 4,372
Effect of Award fiscal year
conversion...................... -- -- -- (1,660) -- (1,660)
Note receivable from
stockholder..................... -- -- (123) -- -- (123)
Repurchase of common stock........ (258) -- (1,074) (2,479) -- (3,553)
Deferred stock-based
compensation.................... -- -- 122 -- -- 122
Comprehensive loss:
Net income...................... -- -- -- 722 -- 722 $ 722
Change in unrealized gain on
investments................... -- -- -- -- (10,524) (10,524) (10,524)
Translation adjustment.......... -- -- -- -- (615) (615) (615)
--------
Comprehensive loss............ $(10,417)
------ ---- -------- -------- -------- -------- ========
BALANCE, SEPTEMBER 30, 1998....... 26,286 26 99,940 25,269 101 125,336
Stock purchases under option and
purchase plans.................. 1,028 2 5,334 -- -- 5,336
Stock warrants exercised.......... 49 -- 40 -- -- 40
Repurchase of common stock........ (3,327) (4) (17,565) (16,537) -- (34,106)
Stock-based compensation.......... -- -- 1,101 -- -- 1,101
Tax benefit on exercise of stock
options......................... -- -- 186 -- -- 186
Purchase of minority interest in
Award Japan..................... -- -- 158 37 -- 195
Comprehensive income:
Net income...................... -- -- -- 1,804 -- 1,804 $ 1,804
Change in unrealized gain on
investments................... -- -- -- -- (2,046) (2,046) (2,046)
Translation adjustment.......... 1,076 1,076 1,076
--------
Comprehensive income.......... $ 834
------ ---- -------- -------- -------- -------- ========
BALANCE, SEPTEMBER 30, 1999....... 24,036 $ 24 $ 89,194 $10,573 $ (869) $ 98,922
====== ==== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,804 $ 722 $ 20,335
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 12,558 8,124 8,210
Effect of Award fiscal year conversion.................. -- (1,660) --
Asset write-offs related to merger and restructuring
activities............................................. 7,346 3,434 --
Write-off of in-process research and development........ -- 4,250 --
Realized gain on sale of marketable securities.......... (4,034) (1,507) (3,217)
Gain on sale of equity investment....................... -- -- (6,247)
Stock Compensation...................................... 1,101 -- --
Deferred income taxes................................... (8,570) (4,123) (1,450)
Other non-cash charges.................................. -- -- 268
Change in operating assets and liabilities:
Accounts receivable................................... (1,193) (256) (7,365)
Related party receivable.............................. -- -- 449
Other current assets and other assets................. 2,210 (1,545) (1,989)
Accounts payable...................................... (3,167) 2,455 276
Payroll and other related liabilities................. 3,130 1,265 188
Other accrued liabilities............................. 9,827 2,845 426
Income taxes payable.................................. 610 (691) 2,152
Discontinued operations............................... -- (135) (1,200)
-------- -------- --------
Total adjustments................................... 19,818 12,457 (9,499)
-------- -------- --------
Net cash provided by operating activities............... 21,622 13,179 10,836
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term and long-term
investments............................................. 50,227 58,430 56,156
Purchases of short-term and long-term investments......... (60,533) (58,085) (55,813)
Proceeds from sale of marketable securities............... 4,073 1,570 3,217
Purchases of property and equipment....................... (5,003) (5,454) (7,731)
Additions to computer software costs...................... (2,423) (5,198) (6,825)
Acquisition of Sand, net of cash acquired................. -- (15,573) --
Proceeds from sale of equity investment................... -- 7,500 --
Proceeds from collection of note receivable............... -- 2,310 --
Other investing activities................................ -- -- (511)
-------- -------- --------
Net cash used in investing activities................... (13,659) (14,500) (11,507)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... -- -- 482
Net proceeds from stock purchases under option plans,
purchase plans and warrants............................. 5,376 2,930 4,331
Repurchase of common stock................................ (34,106) (3,553) (5,014)
Other financing activities................................ 383 -- (390)
-------- -------- --------
Net cash used in financing activities................... (28,347) (623) (591)
-------- -------- --------
Effect of exchange rate changes on cash and equivalents..... 1,023 (622) (938)
-------- -------- --------
Decrease in cash and cash equivalents....................... (19,361) (2,566) (2,200)
Cash and cash equivalents at beginning of fiscal year....... 44,234 46,800 49,000
-------- -------- --------
Cash and cash equivalents at end of fiscal year............. $ 24,873 $ 44,234 $ 46,800
======== ======== ========
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF OPERATIONS
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is a global leader in
system-enabling software solutions for PCs and connected digital devices. Its
software provides compatibility, connectivity, security, and manageability of
the various components and technologies used in such devices. Phoenix 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. It markets and licenses its products and services primarily
through a direct sales force, as well as through regional distributors and sales
representatives.
The Company's operations include the following operating divisions:
PLATFORM ENABLING: Develops and markets system-enabling software, also
known as BIOS, that is designed into tens of millions of PCs and other devices
shipped annually. This software allows information platform manufacturers to
increase design flexibility, shorten design cycles and lower overall
manufacturing costs.
INSILICON: Provides communications semiconductor intellectual property, or
SIP, that is used by semiconductor and systems companies to design the complex
semiconductors called systems-on-a-chip, or SOCs, which are critical components
of digital devices. inSilicon provides SIP cores, related silicon subsystems and
firmware to over 400 customers that use these technologies in hundreds of
digital devices ranging from network routers to wireless phones.
PHOENIXNET: Delivers unique, Internet solutions that enrich the out-of-box
and online computing experiences by providing valuable, personalized Internet
content and services to users.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries after the
elimination of all significant intercompany balances. Certain amounts in the
prior years' financial statements have been reclassified to conform to the
fiscal 1999 presentation.
FOREIGN CURRENCY TRANSLATION. The Company has determined that the
functional currency of its foreign operations is the local currency. Therefore,
assets and liabilities are translated at year-end exchange rates and income
statement transactions are translated at average exchange rates prevailing
during each period.
USE OF ESTIMATES. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Such estimates include, but are not limited to, the allowance for
doubtful accounts, sales returns and customer credits, net realizable value of
capitalized computer software costs, accrued user support costs, restructuring
charges, and the valuation allowance on deferred tax assets.
REVENUE RECOGNITION. The Company adopted Statement of Position 97-2,
"SOFTWARE REVENUE RECOGNITION," ("SOP 97-2"), and Statement of Position 98-4,
"DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION," ("SOP 98-4"), as of October 1, 1998. SOP 97-2 and SOP 98-4 provide
guidance for recognizing revenue on software transactions and supersede
Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION," ("SOP 91-1"). The
adoption of SOP 97-2 and SOP 98-4 did not
40
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have a material impact on the Company's consolidated financial results. However,
full implementation guidelines for these standards have not been issued. Once
available, the current revenue recognition accounting practices may need to
change and such changes could affect the Company's future revenues and results
of operations.
The Company licenses software under non-cancellable license agreements and
provide services including training, non-recurring engineering and maintenance,
consisting of product support services and periodic updates. License fee
revenues are generally recognized when a non-cancellable license agreement has
been signed, the software product has been shipped, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable. For customer license agreements which meet
these recognition criteria, the portion of the fees related to software licenses
are generally recognized in the current period, while the portion of the fees
related to services is recognized as the services are performed. When the
Company enters into a license agreement with a customer requiring significant
customization of the software products, it recognizes revenue related to the
license agreement using contract accounting. Revenues form maintenance
agreements are recognized ratably over the maintenance period, which in most
instances is one year.
Customers entering into license agreements with the Company for engineering
services are typically charged fees that vary according to the amount of
engineering work performed. Engineering fees are recognized as revenue on a time
and materials basis or when contractual milestones are met. Maintenance revenue
is generally recognized ratably over the contract period, which in most cases is
one year.
Provisions are made for doubtful accounts, estimated returns and customer
credits.
No customer accounted for more than 10% of revenue in fiscal 1999, 1998 or
1997.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity of
less than three months are considered cash equivalents.
SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES. Short-term
investment securities consist of U.S. government agency obligations, bankers'
acceptances, corporate debt securities, certificates of deposit and commercial
paper with original maturities generally ranging from three months to one year.
Short-term investments are classified as held-to-maturity, as Phoenix has the
intent and the ability to hold them until maturity. Such investments are
recorded at amortized cost. At September 30, 1999, 1998 and 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 shares of marketable equity
securities and U.S. government agency obligations and corporate debt securities
with maturities greater than one year. For debt securities other than those
classified as short-term, maturities range from one to five years and are
considered held-to-maturity. The shares of marketable equity securities are
recorded at fair value based on quoted market prices and are classified as
available-for-sale. Unrealized gains, less deferred income taxes, are recorded
as a separate component of stockholders' equity.
The U.S. government agency obligations and corporate debt securities are
recorded at amortized cost, as the Company has the intent and ability to hold
them until maturity. At September 30, 1999 and 1998, the fair value of such
securities approximated amortized cost and gross unrealized holding gains were
not material.
41
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of the Company's
financial instruments, including accounts receivable, accounts payable and
accrued liabilities, approximate their fair values due to their short
maturities. The estimated fair values may not be representative of actual values
of the financial instruments that could be realized as of the period end or that
will be realized in the future.
CREDIT RISK. Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company places its cash investments with high credit qualified
financial institutions. The Company extends credit on open accounts to its
customers and does not require collateral. The Company performs ongoing credit
evaluations of all customers and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. At September 30, 1999, no customer accounted for
10% of accounts receivable, whereas at September 30, 1998, one customer
accounted for 10% of accounts receivable.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of the
assets, which is typically three to five years. Leasehold improvements are
recorded at cost and amortized over the lesser of the useful life of the assets
or the remaining term of the related lease.
COMPUTER SOFTWARE COSTS. Computer and software costs consist of internally
developed and purchased software capitalizable under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 86, "COMPUTER SOFTWARE TO BE
SOLD, LEASED OR OTHERWISE MARKETED" ("SFAS 86"). Costs incurred in the research
and development of new software products and enhancements to existing products
are expensed as incurred until technological feasibility (beta test version) has
been established, at which time, such costs are capitalized. Capitalized
computer software costs are amortized over the economic life of the product,
generally three to six years, using the straight-line method or a ratio of
current revenue to total anticipated revenue.
The Company evaluates the net realizable value and amortization periods of
computer software costs on an ongoing basis and records charges to reduce
carrying value to net realizable value, as necessary. In assessing net
realizable value, the Company relies on a number of factors including operating
results, business plans, budgets and economic projections. In addition, the
Company's evaluation considers non-financial data such as market trends and
customer relationships, buying patterns and product development cycles.
GOODWILL. Goodwill is amortized using the straight-line method over the
estimated life of the assets, which is typically five to seven years. Goodwill
was $8.0 million and $9.9 million, net, as of September 30, 1999 and 1998,
respectively. Accumulated amortization amounted to $3.7 million at
September 30, 1999, and $1.3 million at September 30, 1998.
INCOME TAXES. Income taxes are accounted for in accordance with SFAS
No. 109 "ACCOUNTING FOR INCOME TAXES" ("SFAS 109"). Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of enactment.
42
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" ("APB 25"). The Company adopted the disclosure only criteria,
described in SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS 123"). See Note 14 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION" ("SFAS 131"), which establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. In addition, it establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 effective October 1, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and in June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. SFAS 137 deferred for one year the effective date of SFAS 133. The
Company is required to adopt this statement in fiscal 2001 and has not
determined the effect, if any, that adoption will have on its consolidated
financial position or results of operations.
As of October 1, 1998, the Company adopted SFAS No. 130, "REPORTING
COMPREHENSIVE INCOME," ("SFAS 130"). 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 income 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 (loss), which is disclosed in the statement of
stockholders' equity. The change in unrealized gain on investment is shown net
of related tax effects of $1.4 million, $7.0 million and $0.4 million in fiscal
1999, 1998 and 1997, respectively.
CASH FLOW INFORMATION. Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Income taxes paid during the year, net of
refunds......................................... $6,155 $8,165 $8,673
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common shares and stock options
related to the purchase of Sand................. -- 4,372 --
</TABLE>
43
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SHORT TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES
Short-term investments and other marketable securities were as follows:
<TABLE>
<CAPTION>
OTHER
SHORT-TERM MARKETABLE
INVESTMENTS SECURITIES
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
(IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. government agency obligations........ $21,066 $15,062 $8,684 $3,535
Marketable equity securities.............. -- -- -- 3,409
Commercial paper.......................... 6,623 5,745 -- --
Bankers' acceptances...................... -- 4,241 -- --
Certificates of deposit................... 2,003 -- -- --
Corporate debt securities................. 1,027 2,015 -- --
------- ------- ------ ------
$30,719 $27,063 $8,684 $6,944
======= ======= ====== ======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------
1999 1998
(IN THOUSANDS) -------- --------
<S> <C> <C>
Equipment................................................ $ 16,519 $11,995
Leasehold improvements................................... 5,725 6,292
Furniture and fixtures................................... 3,299 3,075
-------- -------
25,543 21,362
Less accumulated depreciation and amortization........... (12,955) (8,118)
-------- -------
$ 12,588 $13,244
======== =======
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $5.1 million, $4.0 million and $2.5 million for fiscal 1999, 1998 and
1997, respectively.
NOTE 5. COMPUTER SOFTWARE COSTS
Costs associated with purchased and internally developed computer software
of $2.4 million, $5.2 million and $6.8 million, were capitalized during fiscal
1999, 1998 and 1997, respectively. In addition, the Company capitalized
approximately $12.8 million of software costs in conjunction with its September
1998 acquisition of Sand Microelectronic, Inc. ("Sand"), a leading supplier of
standards-based system software and semiconductor intellectual property for PCs
and information appliances. Amortization charged to cost of revenue was
$4.8 million, $4.3 million and $5.0 million, during fiscal 1999, 1998 and 1997,
respectively. Accumulated amortization of capitalized computer software costs
was $8.1 million, $5.0 million and $2.3 million at September 30, 1999, 1998 and
1997, respectively.
44
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings
per share required under Statement of Financial Accounting Standards No. 128
("SFAS 128"):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income..................................... $ 1,804 $ 722 $20,335
======= ======= =======
Denominator:
Weighted average common shares outstanding--
denominator for basic earnings per share..... 25,966 25,543 25,293
Effect of dilutive securities (treasury stock
method):
Stock options................................ 1,160 1,202 1,011
Warrants..................................... 124 264 1,160
------- ------- -------
Total dilutive securities.................. 1,284 1,466 2,171
------- ------- -------
Weighted average common and equivalent shares
outstanding--denominator for diluted earnings
per share.................................... 27,250 27,009 27,464
======= ======= =======
Earnings per share:
Basic.......................................... $ 0.07 $ 0.03 $ 0.80
======= ======= =======
Diluted........................................ $ 0.07 $ 0.03 $ 0.74
======= ======= =======
</TABLE>
Options to purchase 4,653,655 shares of common stock at a weighted average
price of $13.15 per share and warrants to purchase 1,073,965 shares of common
stock at a weighted average price of $12.88 per share were outstanding at
September 30, 1999, but were not included in the computation of diluted earnings
per share because their inclusion would have been anti-dilutive.
NOTE 7. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES
In September 1998, the Company completed a merger with Award Software
International, Inc. ("Award"), a leading provider of system enabling and
management software for personal computers. The Company exchanged approximately
8.8 million shares of its common stock for all of the common stock of Award.
Each share of Award was exchanged for 1.225 shares of its common stock. In
addition, outstanding Award employee stock options were converted at the same
exchange ratio into options to purchase approximately 2.3 million shares of the
Company's common stock. The merger was accounted for as a pooling of interests,
and accordingly, the Company's consolidated financial statements have been
restated to include the combined results of operations and financial position of
Award for all periods and dates presented.
Prior to the merger, Award's fiscal year ended on December 31. The Award
statement of income for the year ended December 31, 1997 has been combined with
the Company's statement of income for the year ended September 30, 1997. In
order to conform Award's year-end to the Company's year-end, the fiscal 1997
operating results include a three-month period (ended December 31, 1997) that is
also included in the fiscal 1998 operating results. During this three-month
period, Award generated revenue of
45
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
$7,535,000 and net income of $1,660,000. Accordingly, an adjustment has been
made in fiscal 1998 to retained earnings for the duplication of net income for
such three-month period. There were no transactions between Award and the
Company prior to the combination, and immaterial adjustments were recorded to
conform Award's accounting policies. Certain reclassifications were made to the
Award financial statements to conform to the Company's presentation.
The results of operations for the separate companies prior to the merger and
the combined amounts included in the consolidated financial statements were as
follows:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED YEAR ENDED
JUNE 30, 1998 SEPTEMBER 30, 1997
(IN THOUSANDS) ----------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Phoenix.................................. $73,655 $ 82,129
Award.................................... 20,142 23,367
------- --------
Combined................................. $93,797 $105,496
======= ========
Net Income:
Phoenix.................................. $ 7,403 $ 15,655
Award.................................... 3,992 4,680
------- --------
Combined................................. $11,395 $ 20,335
======= ========
</TABLE>
Also in September 1998, the Company acquired Sand Microelectronic, Inc.
("Sand"), a leading supplier of standards-based system software and
semiconductor intellectual property for PCs and information appliances. The
purchase price consisted of approximately $18.6 million in cash, 464,000 shares
of the Company's common stock, approximately 264,000 stock options issued in
exchange for Sand stock options, and up to $3.7 million in performance
incentives to be paid through fiscal 2001. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the assets and liabilities
of the acquired business are included in the consolidated balance sheet as of
September 30, 1998. The results of operations of Sand from the date of
acquisition through September 30, 1998 were included in the accompanying
consolidated statement of income for the year ended September 30, 1998.
The total purchase cost of approximately $33.7 million exceeded the assets
acquired as follows (in thousands):
<TABLE>
<S> <C>
Total consideration......................................... $ 24,494
Liabilities assumed......................................... 7,749
Acquisition costs........................................... 1,465
--------
Total purchase cost......................................... 33,708
Less: Assets acquired....................................... (19,831)
Less: Acquired in-process research and development.......... (4,250)
--------
Excess of purchase cost over assets acquired................ $ 9,627
========
</TABLE>
The assets acquired include $12.8 million of software development costs
(that are being amortized on a straight-line basis over six years) and
$2.8 million of other intangible assets (that are being amortized on
46
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
a straight-line basis over three to six years). The $9.6 million of excess of
purchase cost over assets acquired was recorded as goodwill, and is being
amortized on a straight-line basis over six years.
The following unaudited pro forma information shows the results of
operations for the years ended September 30, 1998 and 1997, as if the Sand
acquisition had occurred at the beginning of each period presented and at the
purchase price established in September 1998. The results are not necessarily
indicative of those which would have occurred had the acquisition actually been
made at the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for fiscal 1997
combine the Company's results for the year ended September 30, 1997 with the
results of Sand for the year ended December 31, 1997. The pro forma results for
fiscal 1998 combine the Company's results for the year ended September 30, 1998,
with the results of Sand for the period from January 1, 1998 through the date of
acquisition and includes the $4.3 million write-off of acquired in-process
research and development discussed above. The following unaudited pro forma
results include the straight-line amortization of intangibles, primarily over a
period of six years:
<TABLE>
<CAPTION>
PRO FORMA, UNAUDITED
YEARS ENDED
SEPTEMBER 30,
---------------------
1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
<S> <C> <C>
Revenue................................................. $129,145 $110,520
Net income (loss)....................................... $ (2,508) $ 17,401
Diluted earnings (loss) per share....................... $ (0.10) $ 0.62
Weighted average number of shares used in computation... 26,007 27,928
</TABLE>
In May 1997, the Company's subsidiary merged with Unicore Software, Inc.
("Unicore"), a privately held company providing basic input/output software
upgrades for personal computers and embedded systems. The Company issued 267,749
shares of common stock for all of the outstanding stock of Unicore in a
transaction accounted for as a pooling of interests. The historical operations
of Unicore were not material and, as a result, the business combination has been
reported by restating the Company's consolidated financial statements to include
the consolidated financial statements of Unicore effective January 1, 1997.
Merger, acquisition and restructuring charges during the years ended
September 30, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Out-of-pocket merger and acquisition costs......... $ -- $ 5,677 $ --
Severance and other exit costs..................... 7,108 3,434 --
Asset write-offs................................... 7,346 1,369 --
In-process research and development................ -- 4,250 --
------- ------- ----
$14,454 $14,730 $ --
======= ======= ====
</TABLE>
47
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
1999 CHARGES
The charges in fiscal 1999 were related to realigning the business into
three operating divisions, the consolidation of certain facilities and
operations, and steps to integrate Award and Sand.
Included in the fourth quarter of fiscal 1999 was a restructuring charge of
$10.0 million associated with streamlining certain operations, facilities
consolidations (including closing the office in the United Kingdom), and
discontinuing or de-emphasizing certain products of the Company's inSilicon
Division. The restructuring plan included $3.6 million in severance benefits
associated with the elimination of approximately 54 positions in engineering,
sales, marketing, and administration from various product divisions, field
operations including field engineering and sales, and management (primarily in
the United Kingdom and North America), $5.7 million of asset write-offs (mostly
capitalized software of the inSilicon division), $0.6 million in facilities
abandonment, and $0.9 million of other business exit costs pursuant to the re-
organization plan. The Company also reversed $0.8 million of severance charges
from prior restructuring plans as a result of the decision to retain certain
positions. Of the 54 terminations, approximately 39 have been completed as of
September 30, 1999.
Included in the third quarter of fiscal 1999 was a restructuring charge of
$2.5 million associated with the discontinuation of the PICO and PC Enhancing
Division and severance related to certain management positions. Of the
$2.5 million, $1.6 million were associated with the write-off of PICO and PC
Enhancing related capitalized software, $0.8 million for severance benefits for
a management position, and $0.1 million for other general administrative
expenses.
In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $1.9 million related to the facilities consolidations and streamlining
certain field operations and other functions, including closing the offices in
Texas and France. The restructuring charge included $1.8 million of severance
benefits associated with the elimination of approximately 38 positions in
engineering, sales, marketing, and administration from various product
divisions, field operations, and general administrative functions, as well as
$0.1 million related to facilities abandonment.
Approximately $3.7 million of the fiscal 1999 restructuring charges were
unpaid as of September 30, 1999, most of which will be paid in fiscal 2000.
1998 CHARGES
Included in the fourth quarter of fiscal 1998 was a charge of $14.0 million
related to the acquisitions of Award and Sand. The charge consisted of $5.7
million of out-of-pocket costs, $3.4 million of asset write-offs, $0.5 million
in severance benefits associated with the elimination of 4 positions in North
America in various departments, $0.1 million in facilities abandonment, and a
$4.3 million of in-process research and development charge. Included in the
third quarter of 1998 is a restructuring charge of $0.8 million related to the
severance benefits for eliminating approximately 20 positions in engineering,
sales, marketing, and administration from various divisions as a result of the
consolidation of certain functions and the elimination of certain management
positions.
Out-of-pocket merger and acquisition costs of $5.7 million in fiscal 1998
include legal, accounting and investment banking fees associated with the
acquisition of Award. Asset write-offs of $3.4 million include the carrying
value of assets that were determined to be redundant as a result of either
merger or
48
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
restructuring activities. As of September 30, 1999, substantially all fiscal
1998 restructuring charges have been paid.
The in-process research and development charge in fiscal 1998 was an
allocation of a portion of the purchase price for Sand for projects that were
not yet capitalizable under the provisions of Statement of Financial Accounting
Standards No. 86, "COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED."
The allocation was based upon an independent appraisal. The appraised value was
determined by estimating the future net cash flows from such projects and
discounting the net cash flows back to their present value. The discount rate
applied includes a factor that takes into account the uncertainty surrounding
the successful development of the purchased in-process technology. If these
projects are not successfully developed, future revenue and profitability of the
Company may be adversely affected. Additionally, the value of other intangible
assets acquired may become impaired.
NOTE 8. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In fiscal 1994, the Company sold all the assets
of its Printer Software Division to Xionics Document Technologies, Inc.
("Xionics") in return for a promissory note and shares of Xionics common stock.
In September 1996, Xionics completed an initial public offering of its common
stock and repaid the net amount due to Phoenix under the promissory note. In
fiscal 1998 and 1997, the Company sold 156,500 and 250,000 shares of Xionics
common stock for realized gains of approximately $1.5 million and $3.2 million,
respectively, which were recorded as other income. In fiscal 1999, the Company
sold 1,048,881 shares (all of its remaining ownership interest) of Xionics stock
and recorded a gain of approximately $4.0 million.
PUBLISHING DIVISION. In fiscal 1994, the Company sold 80% of its Publishing
Division to Softbank Corporation of Japan ("Softbank"). On September 30, 1997,
the Company sold the remaining 20% to Softbank for $7.5 million and recorded a
gain of $6.2 million which is included in other income in fiscal 1997. At
September 30, 1997, a receivable from Softbank in the amount of $7.5 million was
included in other current assets, and in October 1997, payment was received.
NOTE 9. UNSECURED LINE OF CREDIT
At September 30, 1999, there were no outstanding borrowings outstanding on
the Company's $10.0 million unsecured bank line of credit. Borrowings on the
line bear interest at the bank's prime rate of interest plus 1%. The line of
credit agreement contains various covenants that require the Company to operate
at a profit and meet certain financial ratios, and it restricts the payment of
cash dividends. The line of credit expires in March 2000.
49
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES
The components of the provision for income taxes from continuing operations
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 470 $ 2,286 $ 1,860
State.......................................... 1,356 561 1,249
Foreign........................................ 7,594 6,287 7,810
------- ------- -------
Total current................................ 9,420 9,134 10,919
Deferred:
Federal........................................ (7,161) (3,745) (1,297)
State.......................................... (1,409) (378) (153)
------- ------- -------
Total deferred............................... (8,570) (4,123) (1,450)
------- ------- -------
Provision for income taxes....................... $ 850 $ 5,011 $ 9,469
======= ======= =======
</TABLE>
The reconciliation of the United States federal statutory rate to our
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate.................. $ 928 $2,007 $10,364
State taxes, net of federal tax benefit............. (34) 119 698
Research and development tax credits................ (471) (605) (1,180)
Nondeductible merger and acquisition costs.......... 562 3,475 --
Foreign earnings taxed at less than U.S. rate....... (251) (173) (486)
Other............................................... 116 188 73
----- ------ -------
Provision for income taxes.......................... $ 850 $5,011 $ 9,469
===== ====== =======
</TABLE>
50
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
The components of net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
(IN THOUSANDS) -------- --------
<S> <C> <C>
Deferred tax assets:
Foreign tax credits..................................... $ 3,769 $ 2,169
Research and development tax credits.................... 3,396 2,396
Minimum tax carryforward................................ 894 667
Reserves and accruals................................... 7,021 3,435
Depreciation............................................ 1,862 1,608
Other................................................... 11 341
------- -------
Total................................................. 16,953 10,616
Less valuation allowance................................ 2,814 2,814
------- -------
Net deferred tax assets............................... 14,139 7,802
Deferred tax liabilities:
Capitalized software and other intangibles, net......... 3,560 6,307
Unrealized gain on available-for-sale securities........ -- 1,364
------- -------
Total deferred tax liabilities........................ 3,560 7,671
------- -------
Net deferred tax assets................................... $10,579 $ 131
======= =======
</TABLE>
Due to the uncertainty surrounding the timing of the realization of the
benefit of certain tax attributes in future tax returns, the Company has
recorded a valuation allowance against otherwise recognizable net deferred tax
assets. Realization of the Company's net deferred tax assets is dependent upon
its generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.
Net undistributed earnings of certain foreign subsidiaries amounted to
approximately $12.0 million at September 30, 1999. These earnings are considered
to be indefinitely reinvested, and accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of these
earnings in the form of dividends or otherwise, the Company would be subject to
U.S. income taxes (subject to an adjustment for foreign tax credits) of
approximately $1.2 million.
At September 30, 1999, the Company had available for federal income tax
purposes foreign tax credits of $1.3 million, which expire in the years 2003
through 2004, and research and development tax credits of $3.4 million, which
expire in the years 2003 through 2019.
NOTE 11. SEGMENT REPORTING
Segment information is presented in accordance with Statement of Financial
Account Standards No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." This standard requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. The Company has three reportable
segments: Platform Enabling, inSilicon and PhoenixNet.
51
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT REPORTING (CONTINUED)
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.
INSILICON: Provides communications semiconductor intellectual property, or
SIP, that is used by semiconductor and systems companies to design the complex
semiconductors called systems-on-a-chip, or SOCs, which are critical components
of digital devices. inSilicon provides SIP cores, related silicon subsystems and
firmware to over 400 customers that use these technologies in hundreds of
digital devices ranging from network routers to wireless phones.
PHOENIXNET: 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.
The Company evaluates operating segment performance based on revenue, gross
margin and operating income. We have not historically allocated assets to its
individual operating segments.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Revenue:
Platform Enabling........................... $106,871 $114,093 $100,385
inSilicon................................... 18,955 8,792 5,111
PhoenixNet.................................. -- -- --
-------- -------- --------
Total....................................... $125,826 $122,885 $105,496
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Gross margin:
Platform Enabling........................... $ 82,512 $ 91,998 $ 83,356
inSilicon................................... 14,994 6,835 3,501
PhoenixNet.................................. -- -- --
-------- -------- --------
Total....................................... $ 97,506 $ 98,833 $ 86,857
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Income (loss) from operations:
Platform Enabling........................... $ 13,146 $ 6,670 $ 18,393
inSilicon................................... (12,082) (7,101) (1,986)
PhoenixNet.................................. (5,725) -- --
-------- -------- --------
Total....................................... $ (4,661) $ (431) $ 16,407
======== ======== ========
</TABLE>
52
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT REPORTING (CONTINUED)
The Company also records geographic information, which is categorized into
three regions: United States, Asia and Europe.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Revenue:
United States............................... $ 40,907 $ 49,021 $ 40,878
Asia........................................ 73,423 62,209 54,605
Europe...................................... 11,496 11,655 10,013
-------- -------- --------
Total....................................... $125,826 $122,885 $105,496
======== ======== ========
</TABLE>
The Company licenses its products worldwide. Export revenue was made
principally to the following geographic areas:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Japan......................................... $ 30,704 $ 25,556 $ 28,916
Europe........................................ 11,496 11,655 11,538
-------- -------- --------
$ 42,200 $ 37,211 $ 40,454
======== ======== ========
</TABLE>
A summary of foreign operations, principally represented by locations in the
Asia/Pacific region, is presented below.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Revenue....................................... $ 45,390 $ 34,142 $ 27,179
Income from operations........................ 6,463 7,734 7,978
Income before income taxes.................... 7,128 8,016 8,173
Identifiable assets........................... 26,922 28,662 19,733
</TABLE>
NOTE 12. COMMITMENTS
The Company has commitments related to office facilities under operating
leases. Total rent expense was $4.5 million, $5.4 million and $3.9 million in
fiscal 1999, 1998 and 1997, respectively.
At September 30, 1999, future minimum operating lease payments are required
as follows (IN THOUSANDS):
<TABLE>
<S> <C>
YEARS ENDING SEPTEMBER 30,
2000........................................................ $ 4,113
2001........................................................ 3,698
2002........................................................ 2,768
2003........................................................ 2,211
2004........................................................ 518
2005 and thereafter......................................... 508
-------
Total minimum lease payments................................ $13,816
=======
</TABLE>
53
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCKHOLDERS' EQUITY
SALES OF COMMON STOCK AND ISSUANCE OF WARRANTS. The Company recorded a
stock-based compensation cost of $1.1 million in the fourth quarter of fiscal
1999, in which $1.0 million was for accelerated vesting of stock options related
to a change in management.
In February 1996, the Company sold 894,971 newly issued, unregistered shares
of its common stock and a warrant to purchase 1,073,965 additional shares of its
common stock to Intel Corporation for $10.4 million. The purchase rights under
the warrant vest annually, beginning in December 1996, in increments of 214,793
shares for each of the first three years and 429,586 shares for the fourth year.
The warrant becomes fully exercisable in the event of an acquisition of the
Company or termination of a technology agreement between the two parties. The
price at which the warrant may be exercised is $13.46 per share at
September 30, 1998, increasing in annual increments to $15.22 per share. The
warrant expires in April 2001.
In connection with the issuance and sale of 698,290 shares of common stock
in January 1996, the Company issued 333,683 common stock warrants with an
exercise price of $10.02 per share for $0.02 per warrant. These warrants are
exercisable at any time up to September 30, 2000. There are no proceeds
separately allocated to these warrants.
In connection with the issuance of shares of common stock in 1995, the
Company issued 151,083 common stock warrants with an exercise price of $0.82 per
share for $0.02 per warrant. These warrants are exercisable at any time up to
September 30, 2000. There are no proceeds which are separately allocated to
these warrants.
In October 1994, the Company granted 245,000 common stock warrants to a
customer under a software licensing agreement. These warrants were deemed to
have a nominal value on the date of grant. In July 1996, 94,938 of these
warrants were exercised, and, in March 1998, the remaining warrants were
exercised. The proceeds were $78,000 and $122,000, respectively.
STOCKHOLDER RIGHTS PLAN. The Company has a stockholder rights plan which
provides existing stockholders with the right to purchase one one-hundredth
preferred share for each share of common stock held in the event of certain
changes in its ownership. These rights may serve as a deterrent to certain
abusive takeover tactics that are not in the best interests of stockholders.
This plan expired in October 1999.
STOCK REPURCHASE PROGRAM. In fiscal 1999, the Board of Directors authorized
two programs to repurchase outstanding shares of common stock. Under these
programs, the Company repurchased approximately 3.3 million shares during fiscal
1999 at a total aggregate cost of approximately $34.1 million. The Company
repurchased an additional 175,000 shares subsequent to the end of fiscal 1999 at
a cost of approximately $2.2 million. As of October 1999, both repurchase
programs were completed and terminated.
In fiscal 1997, the Board of Directors authorized a program to repurchase up
to 1 million shares of outstanding common stock. Under this program, the Company
repurchased and retired 644,000 shares of common stock at a cost of
approximately $8.6 million. The repurchase program was completed and terminated
in April of 1998.
54
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS. The Company has various incentive stock option plans
for employees, officers, consultants and independent contractors. Incentive
stock options may not be granted at a price less than 100% (110% in certain
cases) of the fair market value of the shares on the date of grant. Nonqualified
options may not be granted at a price less than 85% of the fair value of the
shares on the date of grant. To date, all grants have been made at fair market
value or greater. Options vest over a period determined by the Company's Board
of Directors, generally four years, and have a term not exceeding ten years.
In connection with the fiscal 1998 acquisitions of Award and Sand, the
Company issued options to purchase 2,273,781 and 264,074 shares of its common
stock, respectively, in exchange for options to purchase Award and Sand common
stock. The exercise prices of these options ranged from $0.11 to $9.18 per
share. The Award and Sand option plans were terminated in fiscal 1999.
The following table sets forth the option activity under the Company's
option plans, including the Award and Sand activity for all periods presented
and the fiscal 1998 option grants issued in exchange for Sand options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Shares under option, September 30, 1996........... 4,515,628 $ 6.80
Options granted................................. 2,344,430 11.44
Options exercised............................... (692,802) 3.80
Options canceled................................ (267,346) 11.90
----------
Shares under option, September 30, 1997........... 5,899,910 8.77
Options granted................................. 1,954,020 8.84
Options exercised............................... (298,911) 3.62
Options canceled................................ (928,634) 11.79
----------
Shares under option, September 30, 1998........... 6,626,385 8.52
Options granted................................. 3,279,370 9.07
Options exercised............................... (674,208) 4.80
Options canceled................................ (1,476,343) 9.46
----------
Shares under option, September 30, 1999........... 7,755,204 $ 8.90
==========
</TABLE>
At September 30, 1999, the number of shares exercisable under the stock
option plans was 3,759,261 and 401,339 shares were available for grant.
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OF SHARES LIFE (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
- --------------- --------- --------------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.1100-$ 2.3800...... 807,642 3.86 $ 1.4895 694,442 $ 1.5864
$ 3.8750-$ 7.5500...... 2,011,343 6.99 5.8310 1,278,751 5.4270
$ 7.6875-$ 8.6700...... 1,475,212 8.23 8.4364 581,238 8.4202
$ 8.7500-$11.1875...... 1,637,224 9.49 10.7782 133,395 9.8133
$11.3750-$15.1250...... 1,286,959 7.83 13.0123 686,793 13.1570
$15.2500-$19.8750...... 536,824 7.10 17.1986 384,642 17.3985
--------- --------------- ------------- --------- ------------
$ 0.1100-$19.8750...... 7,755,204 7.57 $ 8.8986 3,759,261 $ 7.9731
========= =============== ============= ========= ============
</TABLE>
55
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock
Purchase Plan ("Purchase Plan") allows eligible employees to purchase shares at
six month intervals, through payroll deductions, at 85% of the fair market value
of the Company's common stock at the beginning or end of the six-month period,
whichever is less. The maximum amount each employee may contribute during an
offering period is 10% of gross base pay. As of September 30, 1999, 1,012,303
shares had been issued under the Purchase Plan and 187,846 shares remained
reserved for future issuance.
DISCLOSURES OF STOCK-BASED COMPENSATION PLANS. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123. This
information is required to be determined as if the Company had accounted for its
employee stock options granted subsequent to September 30, 1995 under the fair
value method of that statement. The fair value of options granted in fiscal
1999, 1998 and 1997 reported below has been estimated as of the date of the
grant using a Black-Scholes multiple option pricing model with the following
assumptions for the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
EMPLOYEE STOCK OPTIONS PURCHASE PLAN
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life from vest date (in years).... 0.70 0.70 0.70 0.50 0.50 0.50
Risk-free interest rate.................... 5-6% 5-6% 6-7% 5-6% 5-6% 5-6%
Volatility................................. 0.56 0.57 0.63 0.56 0.57 0.63
Dividend yield............................. NONE None None NONE None None
</TABLE>
The weighted average estimated fair value of employee stock options granted
during fiscal 1999, 1998 and 1997, was $3.48, $4.95 and $7.01 per share,
respectively. The weighted average estimated fair value of shares granted under
the Purchase Plan during fiscal 1999, 1998 and 1997 was $2.58, $3.98 and $4.97,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period of the options. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method of SFAS 123, the Company's net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $1,804 $ 722 $20,335
Pro forma....................................... (370) (7,583) 16,333
Basic earnings (loss) per share:
As reported..................................... $ 0.07 $ 0.03 $ 0.80
Pro forma....................................... (0.01) (0.31) 0.67
Diluted earnings (loss) per share:
As reported..................................... $ 0.07 $ 0.03 $ 0.74
Pro forma....................................... (0.01) (0.29) 0.61
</TABLE>
56
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. RETIREMENT PLANS
The Company has a retirement plan ("401(k) Plan") that is qualified under
Section 401(k) of the Internal Revenue Code. This plan covers U.S. employees who
meet minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. In addition, the
Company's contributions to the 401(k) Plan may be made at the discretion of the
Board of Directors. In January 1996, the Company began making a matching
contribution of 25% of each participant's contribution, up to a match of $1,000
per year per participant. The matching contributions vest over a four-year
period, which starts with the participant's employment start date with the
Company. Effective January 1, 2000, the Company will match employee
contributions to the 401(k) plan at 100% up to the first 3% of salary
contributed to the plan and 50% on the next 3% of salary, up to a maximum
company match of $3,000 annually. The Company's contributions to the
401(k) Plan for fiscal 1999, 1998 and 1997 were $367,000, $348,000 and $264,000,
respectively.
NOTE 15. SUBSEQUENT EVENTS
In October 1999, the Company executed a Preferred Shares Rights Agreement
pursuant to which the Company's Board of Directors declared a dividend of one
right to purchase one one-thousandth share of its Series B Preferred Stock for
each outstanding share of its common stock. The dividend was paid on
November 4, 1999 to stockholders of record as of the close of business on that
date. Each right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Preferred Stock at an exercise price of
$75.00 per share, subject to adjustment.
57
<PAGE>
SCHEDULE II
PHOENIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END
YEAR ENDED OF YEAR PROVISIONS DEDUCTIONS(1) OTHER OF YEAR
- ---------- ---------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
September 30, 1999.......................... $1,113 $709 $(362) $ -- $1,460
September 30, 1998.......................... 697 355 (39) 100 1,113
September 30, 1997.......................... 582 148 (33) -- 697
</TABLE>
- ------------------------
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
58
<PAGE>
PERSONAL AND CONFIDENTIAL INFORMATION
SEPARATION AGREEMEENT
This Agreement is entered into between Phoenix Technologies Ltd., a Delaware
corporation ("Phoenix") and George Adams ("Employee") to be effective as of
January 31, 1999 (the "Agreement Date"). Employee, based on his own
considerations, including the terms set forth in this Agreement, has decided to
voluntarily enter into this Agreement providing for the separation of his
employment, certain amounts of pay in lieu of notice, certain other rights and
obligations, and the release of all pending legal claims.
In consideration of the mutual agreements and covenants set forth below,
Employee and Phoenix agree as follows:
1. RESIGNATION. Employee hereby submits his resignation effective
on January 31, 1999.
2. COMPENSATION.
a. REGULAR PAY. Employee shall continue to receive his base
salary rate of $145,000 per year in effect on the Agreement
Date until his employment responsibilities terminate on
January 31, 1999 ("Separation Date"). This amount will be paid
according to Phoenix's regular, semi-monthly payroll schedule.
b. CONTINUATION PAY. Employee shall continue to receive his base
salary of $145,000 per year, the rate in effect on the
Separation Date ("Base Salary"), for twelve (12) months beyond
Separation Date. This amount will be paid according to
Phoenix's regular, semi-monthly payroll schedule.
Phoenix will pay for Employee's Health Benefits coverage,
defined below, during the Continuation Period.
c. CONTINGENT PAY. If Employee has not obtained Re-employment by
January 31, 2000, Employee will continue to receive his Base
Salary for up to the earlier of July 31, 2000, or the date on
which Employee obtains Re-employment.
For the purposes of this Agreement, the "Continuation Period"
shall mean any time during which Employee is receiving
Continuation Pay or Contingent Pay. For the purposes of this
Agreement, "Final Date" means July 31, 2000 or the date at
which Contingent Pay ends, whichever is earlier.
d. LOAN FORGIVENESS. Phoenix will forgive the balance remaining
(and gross-up in the same manner as done in previous years) on
the loan made to Employee in connection with his relocation to
California.
e. VACATION PAY. Employee shall receive payment for any remaining
accrued but unused vacation on the Separation Date.
f. STOCK OPTIONS. Phoenix will grant Employee a new option for
10,000 shares effective as of and at the exercise price
applicable on the date such grant is approved by the
Compensation Committee of the Board of Directors. Employee's
new option shall vest according to the standard vesting
schedule, and option vesting will continue for the duration of
Employee participation on the Phoenix Advisory Board ("PAB").
<PAGE>
3. DEDUCTIONS. Employee authorizes Phoenix to deduct from sums due
hereunder all applicable and customary amounts, including, without
limitation, taxes, benefits plan payments, advances or other sums
due Phoenix.
4. BENEFITS.
a. CONTINUING HEALTH BENEFIT PLANS. Phoenix will pay for
employee's continued health coverage under the terms of
Phoenix's benefits plans at the same coverage level in effect
on the Agreement Date through the Separation Date. After the
Separation Date, Phoenix will pay the costs of COBRA at the
same coverage level in effect on the Agreement Date through
the Continuation Period. Employee will have the option to
assume the costs of continued coverage under COBRA or decline
continued coverage after the Continuation Period.
b. OTHER BENEFIT PLANS. Employee's current stock options will
continue to vest according to the terms of such options.
Employee will be able to continue to participate in Phoenix's
401(k) plan, including company match, and the Employee Stock
Purchase Plan (ESPP) until the Separation Date. Employee will
continue to accrue vacation and sick leave until the
Separation Date.
5. OTHER OBLIGATIONS AFTER AGREEMENT DATE.
a. CONSULTING ARRANGEMENT. Employee will serve as a member of the
PAB through July 31, 2000. The parties have entered into the
Consulting Agreement shown in Exhibit A, which will provide
for the payment of consulting fees where Employee participates
in pre-authorized activities. Employee will not receive
additional compensation for PAB meetings occurring less than
250 miles from his home. When PAB meetings are over 250 miles
from his home, Employee will receive consulting fees in the
amount of $1,200 per diem. Employee will also be reimbursed
for travel costs and related expenses for such activities and
PAB meetings under the terms of Phoenix's standard
reimbursement policy. Phoenix will have sole discretion
whether to request Employee's participation in activities and
PAB meetings.
b. CERTAIN OFFICE EQUIPMENT. Employee will have the full use,
along with the technical support and maintenance Phoenix
normally provides its employees for such equipment, of the
Fujitsu notebook PC and related accessories, HP5P Printer, Zip
Drive, tape recorder and pager he is currently using through
the Final Date, at no cost to Employee. Employee will also
have the option to purchase such equipment at Phoenix's
then-current book value for those items upon the Final Date.
c. ACCESS TO ELECTRONIC COMMUNICATION. Phoenix will give Employee
access to voicemail and electronic mail at Employee's current
phone number and email address until the Final Date.
d. TRANSITION ASSISTANCE. From the Separation Date through March
31, 1999, Employee shall make himself available to Phoenix to
assist in reasonable requests relating to the transition of
Employee's work responsibilities at Phoenix to other
employees, to answer questions regarding matters assigned to
him prior to the Separation Date and to otherwise assist
Phoenix in transferring his responsibilities to others within
Phoenix. Employee will receive additional compensation for
such assistance, as described in Exhibit A.
e. OUTPLACEMENT ASSISTANCE. Phoenix will pay for professional
outplacement service assistance in resume preparation,
interview skills, and search techniques valued at an amount
not to exceed $7,500. Phoenix will reimburse Employee for
reasonable telephone expenses for search related activities
until the Final Date.
<PAGE>
f. EXIT INTERVIEW. If requested, Employee agrees to participate
in Phoenix's exit interview process. At the exit
interview, Employee will complete applicable paperwork,
and return Phoenix property, except as shown in section
5b above, including without limitation and if applicable
his keys, credit and telephone calling cards.
g. EXPENSE REPORTS. Employee will submit, within 30 days after
Separation Date, all expense reports for travel or other
expenses applicable through Separation Date. On approval by
Employee's manager, Phoenix will reimburse the Employee for
such expenses in accordance with Phoenix's policy on
reimbursement for such expenses.
h. COVENANT NOT TO SOLICIT. Upon the termination of the
Employee's employment with the Company pursuant to Section 1
and until the Final Date, Employee agrees that he shall not
either directly or indirectly solicit, induce, attempt to
hire, recruit, encourage, take away, hire any employee of the
Company or cause any employee of the Company to leave his or
her employment either for Employee or for any other entity or
person.
6. CONFIDENTIALITY.
a. EMPLOYEE OBLIGATIONS REGARDING THIS AGREEMENT. Employee agrees
that he will not disclose, for any purpose, at any time,
except as required by a valid court order, any specific terms
of this Agreement to any person except his immediate family,
and personal legal and tax advisors.
b. EMPLOYEE OBLIGATIONS REGARDING PHOENIX CONFIDENTIAL
INFORMATION. Employee agrees that he will not disclose, for
any purpose, at any time, except as required by a valid court
order, any Confidential Information he knows of the Company.
Such "Confidential Information" includes trade secrets,
know-how, inventions, computer programs, source code,
marketing information, and any other information designated
"Phoenix Confidential" and which is not generally available to
the public. The provisions of this paragraph shall apply until
the Final Date.
c. PHOENIX OBLIGATIONS. Phoenix agrees that it will not disclose,
for any purpose, at any time, except as required by a valid
court order, any specific terms of this Agreement to any
person except those inside Phoenix who have a need to know,
and legal and tax advisors. Phoenix will have all reference
inquiries regarding Employee directed to either the Vice
President of Human Resources or the Chief Executive Officer.
d. NON-DISPARAGEMENT. Subject to the parties' confidentiality
obligations, Employee and Phoenix agree that they will not
disparage one another. Any reference checks on Employee will
be referred to Human Resources, who will confirm factual data,
including employment dates and titles. Salary and any other
information will not be disclosed without Employee's prior
written consent.
7. RELEASE. The parties hereby forever waive for themselves, their
attorneys, heirs, executors, administrators, successors and assigns
any claim against the other party, including such party's insurers
and the Company's affiliates, shareholders, officers, directors and
employees (the "Parties Released"), for any action, loss, expense
or any damages arising from any occurrence from the beginning of
time until the date of the signing of this Agreement and arising or
in any way resulting from Employee's employment with Phoenix or his
resignation thereof. The only exceptions to the above waiver are
claims by Employee under any worker's compensation or unemployment
statutes and any Company or Employee obligation or right arising
under this Agreement. The parties represent that they have no
current intention to assert any claim on any basis against the
Parties Released.
<PAGE>
8. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement between the parties with respect to Employee's
separation from Phoenix and any obligations owed by either party to
the other. The terms of this Agreement shall not be amended or
modified and supersede all previous or contemporaneous written,
oral or electronic communications.
9. EMPLOYEE REPRESENTATIONS. EMPLOYEE STATES THAT HE HAS CAREFULLY
READ THIS SEPARATION AGREEMENT, THAT HE KNOWS, UNDERSTANDS AND
ACCEPTS THE TERMS AND CONDITIONS OF THIS DOCUMENT, AND THAT HE
EXECUTED THIS DOCUMENT OF HIS OWN FREE WILL. EMPLOYEE FURTHER
REPRESENTS AND AGREES THAT HE HAS BEEN ADVISED BY PHOENIX TO
CONSULT AN ATTORNEY PRIOR TO EXECUTING THIS SEPARATION AGREEMENT.
EMPLOYEE UNDERSTANDS AND ACCEPTS THAT THE TERMS CONTAINED IN THIS
AGREEMENT ARE TO BE A FULL AND FINAL RELEASE OF ALL CLAIMS WITH
FINAL AND BINDING EFFECT.
10. CONDITION.
a. EMPLOYEE ACKNOWLEDGES THAT HE HAS BEEN GIVEN A PERIOD OF AT LEAST
TWENTY-ONE (21) DAYS WITHIN WHICH TO CONSIDER THIS AGREEMENT
BEFORE SIGNING IT. THE PARTIES AGREE THAT EMPLOYEE SHALL HAVE
THE RIGHT TO REVOKE THIS AGREEMENT BY WRITTEN NOTICE TO
PHOENIX WITHIN THE SEVEN-DAY PERIOD FOLLOWING ITS EXECUTION,
AND THAT THIS AGREEMENT SHALL NOT BECOME EFFECTIVE AND BINDING
UNTIL SUCH PERIOD HAS EXPIRED. IN THE EVENT THIS AGREEMENT IS
REVOKED BY EMPLOYEE, EMPLOYEE SHALL RETURN ALL CONSIDERATION
AND BENEFITS PROVIDED TO EMPLOYEE PURSUANT TO THIS AGREEMENT.
b. This Agreement will not become effective until Employee signs
this Agreement after due consideration, in light of the time
periods specified in Paragraph 10.a., above. When this Agreement
has been executed by both parties, it will become effective as of
the Agreement Date.
11. GOVERNING LAWS. It is the intention of the parties hereto that the
internal laws of the state of California, U.S.A. (irrespective of
its choice of law principles) shall govern the validity of this
Agreement, the construction of its terms, and the interpretation
and enforcement of the rights and duties of the parties hereto. The
parties hereby agree that any suit to enforce any provision of this
Agreement or arising out of or based upon this Agreement or the
business relationship between any of the parties hereto shall be
brought in the United States District Court for the Northern
District of California or the Superior or Municipal Court
jurisdiction in and for the County of Santa Clara, California,
U.S.A. Each party hereby agrees that such courts shall have
exclusive IN PERSONAM jurisdiction and venue with respect to such
party, and each party hereby submits to the exclusive IN PERSONAM
jurisdiction and venue of such courts.
12. BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in this Agreement, each and all of the
covenants, terms, and provisions and agreements contained herein
shall be binding upon, and inure to the benefit of, the permitted
successors, executors, heirs, representatives, administrators and
assigns of the parties hereto.
13. ATTORNEYS' FEES. Should suit be brought or an arbitration action
commenced to enforce or interpret any part of this Agreement, the
prevailing party shall be entitled to recover, as an element of the
costs of suit and not as damages, reasonable attorneys' fees to be
fixed by the court or
<PAGE>
arbitrator (including without limitation, costs, expenses and fees
of any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall
not be entitled to recover attorneys' fees. No sum for attorneys'
fees shall be counted in calculating the amount of a judgment for
purposes of determining if a party is entitled to recover costs or
attorneys' fees.
The undersigned hereby agree to the terms of this Agreement.
PHOENIX TECHNOLOGIES LTD. EMPLOYEE
By: /s/ Jack Kay /s/ George Adams
------------------------ --------------------------
Jack Kay George Adams
President and CEO
APPROVED BY
LEGAL DEPT. /s/ sa
<PAGE>
AGREEMENT FOR CONSULTING SERVICES
Phoenix Technologies Ltd. of 411 E. Plumeria Drive, San Jose, CA 95134
("Phoenix") does hereby retain George Adams residing at 420 Hacienda Court,
Los Altos, CA 94022 ("Consultant") upon the following terms and conditions:
1. TERM AND TERMINATION
This Agreement shall be effective as of February 1, 1999 and shall
continue in effect on a month-to-month basis unless terminated by
Consultant or Phoenix by written notice.
The period from February 1, 1999 through March 31, 1999 shall include 16
days of Transition Assistance and 11 days of Other Activities
(applicable rates depend on type of activity and location where services
are performed - see Table 1 below).
At the beginning of each month, Consultant and Phoenix will set the
number of days of service to be performed the following month.
Consultant or Phoenix may terminate this Agreement with 30 days written
notice for any reason, to be effective on or after April 1, 1999.
2. SERVICES PROVIDED BY CONSULTANT
Consultant shall perform the following services:
Through March 31, 1999, Transition Assistance, as defined in
Section 5.d. of the Separation Agreement between Consultant and
Phoenix.
Other Activities:
Developing potential strategic business relationships with one or
more of the following companies: America On-Line, BackWeb, Cisco
Systems, Lucent Technologies, Network Associates, and Sun
Microsystems.
Identifying new potential business and investment opportunities
for Phoenix for follow up by Consultant or Phoenix employees.
Reviewing and providing feedback on Phoenix strategic plans and
proposals.
Additional services as mutually agreed between Consultant and
Phoenix.
<PAGE>
3. COMPENSATION
In consideration of Consultant's performing the services described
above, Phoenix shall pay to Consultant the amounts shown in Table 1,
below.
TABLE 1: COMPENSATION RATES
<TABLE>
<S> <C> <C> <C>
------------------------------------ ------------------------ ------------------------------ ------------------------
Type of Activity => Phoenix Advisory Board Transition Assistance Other Activities
Meetings through 3/31/99
Location where service is
performed
------------------------------------ ------------------------ ------------------------------ ------------------------
Less than 250 miles from $0.00 per day $600 per day $1,200 per day
Consultant's home
------------------------------------ ------------------------ ------------------------------ ------------------------
More than 250 miles from $1,200 per day $900 per day $1,200 per day
Consultant's home
------------------------------------ ------------------------ ------------------------------ ------------------------
</TABLE>
a. Any expenses incurred by Consultant shall not be reimbursed to
consultant without Phoenix's prior written consent. Any and all
taxes incurred by Consultant under this agreement shall be born by
Consultant.
b. All records necessary to support approved payments or expenses
pursuant to this Agreement shall be maintained by Consultant on a
current basis, continuing for one year after the completion of
Service. Upon reasonable notice, these records shall be made
available to Phoenix or its agents.
c. Consultant shall submit invoices for services rendered on the 15th
and last day of each month. Phoenix shall pay such valid invoices
within 10 days of receipt.
4. OWNERSHIP
Consultant acknowledges and agrees that all works of authorship created
within the scope of this Agreement, including but not limited to computer
programs and documentation, constitute works made for hire and that all
copyrights, trademarks and any other intellectual property rights in
those works belong exclusively to Phoenix. To the extent that any such
works may not be considered works made for hire, Consultant hereby
assigns and relinquishes all of its right, title and interest therein to
Phoenix. There shall be no obligation of Phoenix or any of its direct or
indirect licensees to designate Consultant as author of any such works
when distributed publicly or otherwise, nor to make any distribution
thereof. Consultant hereby waives and releases any rights, including
moral rights, which it may have in those works. Consultant agrees to
execute any papers and to assist Phoenix in any manner deemed necessary
by Phoenix to enable Phoenix to register and enforce any intellectual
property rights in those works.
<PAGE>
5. INDEPENDENT CONTRACTOR STATUS
It is expressly agreed and understood that Consultant is performing
services under this Agreement as an independent contractor, and that
Consultant is not an employee or agent of Phoenix. Phoenix's liability
hereunder shall be limited to payment of the fees provided in Section 3
above for work actually performed.
6. CONFIDENTIALITY
In the performance of services under this Agreement with Phoenix,
Consultant may learn, receive or have access to materials and information
of Phoenix deemed to be confidential and proprietary information of
Phoenix, Consultant agrees to maintain all such information in strict
confidence, not to disclose any such information to any third party
whatsoever without Phoenix's express written permission, and not to use
or copy such information except as Phoenix may authorize or direct. This
section shall apply regardless of whether Phoenix's confidential
information is created or produced by Consultant or not. Furthermore
Consultant agrees to be bound by the terms and conditions of the
Non-Disclosure Agreement attached hereto as Exhibit A.
7. TAXES
Consultant shall assume any and all liability for any applicable taxes
that may arise as a result of this Agreement, including but not limited
to social security, income tax, and other payroll tax requirements.
Consultant shall pay estimated taxes on a quarterly basis.
8. CONDUCT
Consultant agrees to abide by all specified Phoenix rules and
regulations. Consultant will perform only the Services identified in
section 2 and will work only in the geographic areas and building
locations designated for such services. Consultant also agrees to abide
by all Federal, State and Local Laws, ordinances and regulations.
Consultant shall indemnify and hold Phoenix harmless from all claims
arising out of any noncompliance with this section 8.
9. COMPETITORS
a. During the past two (2) years, Consultant has, or will during the
term of this agreement render consulting services to the following
competitor of Phoenix (include nature for service): None
b. If, during consultant's Service, Consultant becomes aware of any
such services to Phoenix's competitor, consultant shall provide
written notice of Consultant's service to Phoenix pursuant to this
Agreement.
<PAGE>
10. INDEMNIFICATION/WAIVER OF RIGHTS
Consultant agrees to indemnify and hold Phoenix harmless from all claims
for bodily injury or property damage that may arise from Consultant's
Service. Consultant waivers all rights against Phoenix for damages
covered by Consultant's insurance. Consultant shall require all
subcontractors retained under this Agreement to execute similar waivers.
Waiver of any breach of this Agreement shall not be implied as a waiver
of any other breach of this Agreement.
11. GENERAL
This Agreement may be amended only in writing by both parties. Neither
party may assign, without the other party's prior written consent, this
Agreement or any right or obligation hereunder, and any assignment
without such prior written consent shall be null and void. This Agreement
represents the entire understanding of the parties with respect to the
subject matter hereof, and supersedes all prior written or oral
agreements with respect to such subject matter. This Agreement shall be
governed by the laws of the State of California.
PHOENIX TECHNOLOGIES LTD. CONSULTANT
By: /s/ Jack Kay By: /s/ George Adams
----------------------------- ---------------------------
Name: Jack Kay Name: George Adams
----------------------------- ---------------------------
Title: CEO Title: --
----------------------------- ---------------------------
Date: 2/5/99 Date: 2/5/99
----------------------------- ---------------------------
APPROVED BY
LEGAL DEPT. /s/ sa
<PAGE>
EXHIBIT A
TO
AGREEMENT FOR CONSULTING SERVICES
NON-DISCLOSURE AGREEMENT
------------------------
This Non-Disclosure Agreement (this "Agreement") is made as of February 1, 1999
by and between Phoenix Technologies Ltd., having a principal place of business
at 411 E. Plumeria Drive, San Jose, CA 95134 ("Phoenix") and George Adams
residing at 420 Hacienda Court, Los Altos, CA 94022 ("Consultant").
In the course of dealings between Phoenix and Consultant, Consultant may learn
or receive from Phoenix "Confidential Information", as that term is later
defined in this Agreement. Consultant and Phoenix desire to establish and set
forth Consultant's obligations with respect to Phoenix's Confidential
Information. In consideration of the foregoing, Consultant and Phoenix agree as
follows:
1. The term "Confidential Information" shall mean any and all products,
information, data, know-how and documentation which Consultant learns or
receives from Phoenix, including but not limited to information regarding
Phoenix's products and potential strategic business relationships, as
described in the Agreement For Consulting Services between the parties,
except that which Consultant can establish by written evidence: (1) was,
on the date of this Agreement, generally known to the public; or (2)
became generally known to the public after the date of this Agreement
other than as a result of the act or omission of Consultant; or (3) was
contained in documents rightfully known to Consultant prior to Consultant
learning or receiving same from Phoenix; or (4) is or was disclosed by
Phoenix to third parties generally without restrictions on use and
disclosure; or (5) Consultant lawfully received from a third party without
that third party's breach of agreement or obligation of trust.
2. Phoenix considers all of its Confidential Information to be confidential
and proprietary. All Confidential Information shall at all times, and
throughout the world, remain the property of the Phoenix, exclusively, and
all applicable rights in patents, copyrights, and trade secrets shall
remain in Phoenix, exclusively. Consultant shall not permit any person to
reproduce or copy any portion of the Confidential Information.
3. Consultant shall not directly or indirectly use any of the Confidential
Information for any purpose, except to the extent necessary for Consultant
to perform Consultant's contractual obligations to Phoenix.
4. Consultant shall not disclose, or permit access to, any portion of the
Confidential Information to any person except if such person is legally
bound by a written contract to comply with the provisions of this
Agreement.
<PAGE>
5. Consultant shall indemnify Phoenix against all losses and expenses
incurred by Phoenix, (including but not limited to reasonable counsel
fees) which result from the breach of any portion of this Agreement by
Consultant.
6. This Agreement shall be effective as of the date first written above and
shall continue in effect at least for five years, and thereafter until
ninety days after either party receives from the other party written
notice of termination; however, this Agreement shall remain in effect in
perpetuity with respect to Confidential Information which Consultant
learned or received from Phoenix prior to the date of termination.
Immediately after termination of this Agreement Consultant shall return
all Confidential Information in tangible form to Phoenix. Consultant shall
return all Confidential Information and all copies thereof to Phoenix at
any time promptly upon written request by Phoenix.
7. This Agreement is the complete and exclusive statement of the agreement
between the parties and supersedes all prior written and oral
communications and agreements relating to the subject matter hereof; No
modification, termination, extension, renewal or waiver of any provision
of this Agreement shall be effective unless in writing and signed by an
authorized representative of each party.
AGREED TO AND ACCEPTED BY:
PHOENIX TECHNOLOGIES LTD. CONSULTANT
By: /s/ Jack Kay By: /s/ George Adams
----------------------------- ---------------------------
Title: CEO George Adams
-----------------------------
Date: 2/5/99 Date: 2/5/99
----------------------------- ---------------------------
APPROVED BY
LEGAL DEPT. /s/ sa
<PAGE>
SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into
effective as of January 21, 1999, by and between Jack Kay (the "Executive") and
Phoenix Technologies Ltd., a Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") believes that
it is in the best interests of the Company and its stockholders to provide the
Executive with certain severance benefits should Executive's employment with the
Company terminate under certain circumstances.
B. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by the Executive, to agree to the
terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 7 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT. The Company currently employs
Executive as President and Chief Executive Officer, as such position has been
defined in terms of responsibilities and compensation as of the effective date
of this Agreement. The Executive shall comply with and be bound by the Company's
operating policies, procedures and practices from time to time in effect during
his employment. During the term of the Executive's employment with the Company,
the Executive shall continue to devote his full time, skill and attention to his
duties and responsibilities, and shall perform them faithfully, diligently and
competently, and the Executive shall use his best efforts to further the
business of the Company and its affiliated entities.
2. BASE COMPENSATION. The Company pays the Executive as compensation for
his services a base salary at the annualized rate of $310,000.00. Such salary
shall be paid periodically in accordance with normal Company payroll practices.
The annual compensation specified in this Section 2, together with any increases
in such compensation as the Board may direct from time to time, is referred to
in this Agreement as "Base Compensation."
3. EXECUTIVE BENEFITS. The Executive shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company applicable to other key executives of the Company, including (without
limitation) retirement plans, savings or profit-sharing plans, stock option,
incentive or other bonus plans, life, disability, health, accident and other
insurance programs, paid vacations, and similar plans or programs, subject in
each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the sole determination of the Board or any
committee administering such plan or program.
4. TERMS OF EMPLOYMENT/TERM OF AGREEMENT.
(a) TERMS OF EMPLOYMENT. The Company and the Executive acknowledge
that the Executive's employment will continue to be governed by the existing
understandings, except to the extent this agreement changes the same.
(b) TERM OF AGREEMENT. The terms of this Agreement shall terminate
on the date that all obligations of the parties hereunder have been
satisfied. A termination of the terms of this Agreement pursuant to this
Section shall be effective for all purposes.
<PAGE>
5. SEVERANCE BENEFITS UPON TERMINATION OR RESIGNATION. If the Executive
voluntarily resigns from the Company, or if the Company terminates the
Executive's employment for any reason other than for Cause, the Executive shall
be entitled to receive the following severance benefits:
a. SEVERANCE PAYMENTS. Subject to Executive entering into a Release of
Claims (in a form substantially similar to the release of claims attached
as Exhibit A), Executive shall be entitled to a severance payment
consisting of 12 months' additional payment of $25,833.33 per month for
each of the next 12 months following the date of termination (the
severance payment to be made in accordance with the Company's standard
payroll practices, extended by an additional six months (at the same
annual rate of $310,000) if Re-employment has not commenced. For the
purposes of this Agreement, "Reemployment" shall mean providing services
to an entity other than the Company for remuneration based on more than
twenty hours per week by the end of the Severance Benefits Period
(whether such remuneration consists of cash, debt, deferred compensation,
equity compensation or other valuable property or rights).
b. MEDICAL BENEFITS. The Company, at the Company's sole expense, shall
provide Executive (and, if applicable, his eligible dependents) with the
same level of health coverage and benefits as in effect for Executive
(and, if applicable, his eligible dependents) on the day immediately
preceding the day of the Executive's termination of employment (the
"Company-Paid Coverage"); provided, however, that (i) Executive and each
eligible dependent constitutes a qualified beneficiary, as defined in
Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended
(collectively, "Qualified Beneficiaries"); (ii) each Qualified
Beneficiary elects continuation coverage under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), within the time
period prescribed pursuant to COBRA; and (iii) if the health coverage is
no longer offered by the Company to its current employees, then the
Company shall be under no obligation to continue the existing coverage
for Executive (and, if applicable, his eligible dependents). Such
Company-Paid Coverage shall continue in effect for each Qualified
Beneficiary until the earlier of (i) the Qualified Beneficiary is no
longer eligible to receive continuation coverage under COBRA, or (ii)
eighteen (18) months following termination of employment pursuant to
Section 5(a).
c. FAMILY TRAVEL EXPENSES. The company shall grant a "Travel Allowance" (TA)
to the Executive (and members of his family) by paying invoices for
travel expenses to unrelated third parties for said persons' travel costs
and/or reimbursing the Executive for such costs which he personally pays.
For purposes of this agreement, the TA shall be the sum of $25,000 for
each year the executive has resided in California, plus $60,000.
d. FY 1999 EXECUTIVE BONUS. Should the Compensation Committee of the Board
of Directors award the executive management with a bonus for FY 1999
performance, then the Executive shall be entitled to an amount equal to
that percent granted by the compensation committee multiplied by his
bonus target for FY 1999 ($165,000). The Compensation Committee, at its
discretion has the right to pro-rate the amount paid by that fraction of
the fiscal year in which the Executive was employed by the Company.
e. MOVING EXPENSES. The Company shall pay for moving the Executives
household effects (including automobile) from California to
Massachusetts, or to Arizona, except that should these household goods be
split between two or more destinations, the executive shall be solely
responsible for any amount over the cost for shipping all goods to just
one address.
f. USE OF OFFICE EQUIPMENT. During the eighteen (18) month period following
termination of employment, the Executive shall be entitled to the use of
his personal computer, e-mail address, and telephone extension. However,
should the Executive begin full time employment at another company, such
benefits shall cease and the equipment returned to the Company.
<PAGE>
g. STATUS OF STOCK OPTIONS. The Company hereby represents and warrants to
the executive that the following stock options have been vested to him
prior to this date (or will without question vest prior to June 9, 1999
whether or not the Executive is then an employee).
<TABLE>
<CAPTION>
- ---------------- --------------- ------------- ----------- ------------ ------------
Number Option Date Plan Type Price Shares
<S> <C> <C> <C> <C> <C>
- ---------------- --------------- ------------- ----------- ------------ ------------
001606 12/12/90 87NQ NQ $2.3800 13,419
- ---------------- --------------- ------------- ----------- ------------ ------------
B01678 12/12/90 871S NQ $2.3800 20,831
- ---------------- --------------- ------------- ----------- ------------ ------------
000344 2/4/92 871S ISO $7.8750 2,886
- ---------------- --------------- ------------- ----------- ------------ ------------
001018 2/4/92 871S ISO $7.8750 50,000
- ---------------- --------------- ------------- ----------- ------------ ------------
001099 2/4/92 86 ISO $7.8750 1,l38
- ---------------- --------------- ------------- ----------- ------------ ------------
A01690 2/4/92 87NQ NQ $7.8750 7,147
- ---------------- --------------- ------------- ----------- ------------ ------------
B01690 2/4/92 87NQ NQ $7.8750 2,529
- ---------------- --------------- ------------- ----------- ------------ ------------
001593 11/3/93 92 NQ $3.8750 42,000
- ---------------- --------------- ------------- ----------- ------------ ------------
001570 8/10/94 92 NQ $5.0000 100,000
- ---------------- --------------- ------------- ----------- ------------ ------------
001573 8/10/94 92 NQ $5.0000 80,000
- ---------------- --------------- ------------- ----------- ------------ ------------
001609 8/10/94 94 NQ $5.0000 200,000
- ---------------- --------------- ------------- ----------- ------------ ------------
001447 8/10/94 92 ISO $5.0000 20,000
- ---------------- --------------- ------------- ----------- ------------ ------------
002822 5/13/97 94 ISO $12.3750 15,245
- ---------------- --------------- ------------- ----------- ------------ ------------
002823 5/13/97 94 NQ $12.3750 6,630
- ---------------- --------------- ------------- ----------- ------------ ------------
</TABLE>
In addition thereto, the Company hereby represents and warranties to
the Executive that so long as he is a member of the Board of Directors of the
Company, he will continue to enjoy the following stock options, all of which
will vest in the event of a change of control.
<TABLE>
<CAPTION>
- ---------------- --------------- ------------- ----------- ------------ ------------
Number Option Date Plan Type Price Shares
<S> <C> <C> <C> <C> <C>
- ---------------- --------------- ------------- ----------- ------------ ------------
002822 5/13/97 94 ISO $12.3750 18,180
- ---------------- --------------- ------------- ----------- ------------ ------------
002823 5/13/97 94 NQ $12.3750 9,945
- ---------------- --------------- ------------- ----------- ------------ ------------
TBD 10/l/98 50,000
- ---------------- --------------- ------------- ----------- ------------ ------------
</TABLE>
h. DISABILITY; DEATH. If the Company terminates the Executive's employment
as a result of the Executive's Disability or if the Executive's
employment terminates due to the death of the Executive, then the
Executive shall not be entitled to receive severance or other benefits
pursuant to this Agreement, except he shall be entitled to receive the
benefit of the stock options vested at that time. However, Executive
shall remain eligible for those severance and other benefits (if any) as
may then be available under the Company's then existing severance and
benefits plans and policies at the time of Executive's termination or
death.
<PAGE>
6. COVENANTS NOT TO COMPETE AND NOT TO SOLICIT.
(a) Upon the termination of the Executive's employment with the
Company by the Company for any reason other than for cause and for a period
of eighteen (18) months thereafter, Executive agrees that he shall not, on
his own behalf, or as owner, manager, advisor, principal, agent, partner,
consultant director, officer, stockholder or employee of any business entity,
or otherwise in any territory in which the Company is actively engaged in
business (i) open or operate any business which is in competition with any
business of the Company, (ii) act as an employee, agent, advisor or
consultant of any competitor of the Company, (iii) solicit or accept business
from any of the Company's competitors, (iv) take any action to or do anything
reasonably intended to divert business from the Company or influence or
attempt to influence any existing customers of the Company to cease doing
business with the Company or to alter its business relationship with the
Company, or (v) take any action or do anything reasonably intended to
influence any suppliers of the Company to cease doing business with the
Company or to alter its business relationship with the Company. Executive
further covenants and agrees that he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any territory
served by the Company, directly or indirectly solicit or accept business from
any of the Company's existing customers for the purchase or sale of product
or services of a like kind to those sold or provided the Company. The
foregoing covenant shall not be deemed to prohibit Executive from acquiring
an investment not more than one percent (1%) of the capital stock of a
competing business, whose stock is traded on a national securities exchange
or through the automated quotation system of a registered securities
association.
(b) Upon the termination of the Executive's employment with the
Company by the Company for any reason other than for cause and for a period
of eighteen (18) months thereafter, Executive agrees that he shall not either
directly or indirectly solicit, induce, attempt to hire, recruit, encourage,
take away, hire any employee of the Company or cause any employee of the
Company to leave his or her employment either for Executive or for any other
entity or person.
(c) Executive represents that he (i) is familiar with the foregoing
covenants not to compete and not to solicit, and (ii) is fully aware of his
obligations hereunder, including, without limitation, the reasonableness of
the length of time, scope and geographic coverage of these covenants.
7. DEFINITION OF TERMS. The following terms referred to in this Agreement
shall have the following meanings for the purposes of this Agreement only:
(a) CAUSE. "Cause" shall mean (i) any act of personal dishonesty
taken by the Executive in connection with his responsibilities as an
Executive and intended to result in substantial personal enrichment of the
Executive, (ii) conviction of a felony that is injurious to the Company,
(iii) a willful act by the Executive which constitutes gross misconduct and
which is injurious to the Company, and (iv) continued violations by the
Executive of the Executive's obligations under Section I of this Agreement
that are demonstrably will and deliberate on the Executive's part after there
has been delivered to the Executive a written demand for performance from the
Company which describes the basis for the Company's belief that the Executive
has not substantially performed his duties.
(b) DISABILITY. "Disability" shall mean that the Executive has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least
ninety (90) days after its commencement is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
Agreement as to acceptability not to be unreasonably withheld). Termination
resulting from Disability may only be effected after at least 30 days'
written notice by the Company of its intention to terminate the Executive's
employment. In the event that the Executive resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
4
<PAGE>
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this Section or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, devisees and legatees.
9. NOTICE.
(a) GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Executive, mailed notices shall be addressed to him at the home address,
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
(b) NOTICE OF TERMINATION. Any termination by the Company for Cause
shall be communicated by a notice of termination to the Executive given in
accordance with Section 9(a) of this Agreement. Such notice shall indicate
the specific termination provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 15 days after the giving of
such notice).
10. ARBITRATION.
(a) The Company and Executive agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, the
interpretation, validity, construction, performance, breach, or termination
hereof, or any of the matters herein released shall be settled by binding
arbitration to be held in Santa Clara County, California in accordance with
the National Rules for the Resolution of Employment Disputes then in effect
of the American Arbitration Association (the "Rules"). The arbitrator may
grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's
decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to conflicts of law rules. Executive
hereby consents to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating
to this Agreement or relating to any arbitration in which the Parties are
participants.
(c) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH
DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
EXECUTIVE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF, OR ANY OF THE MATTERS HEREIN TO
BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF
EXECUTIVES RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL
DISPUTES RELATING TO ALL ASPECTS OF THIS SEVERANCE AGREEMENT AND RELEASE OF
ALL CLAIMS.
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<PAGE>
11. MISCELLANEOUS PROVISIONS.
(a) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Executive and by an authorized officer of the
Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(b) WHOLE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes in its entirety any and all prior undertakings and agreements of
the Company and Executive with respect to the subject matter hereof.
(c) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal substantive
laws but not the choice of law rules of the State of California.
(d) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(e) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Section 11 (e)
shall be void.
(f) EMPLOYMENT TAXES. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(g) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: PHOENIX TECHNOLOGIES LTD.
/s/ Ronald D. Fisher
-------------------------
By
Chairman
-------------------------
Title
EXECUTIVE: [INSERT NAME OF EXECUTIVE]
/s/ Jack Kay
-------------------------
Signature
Jack Kay
-------------------------
Printed Name
6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
SEVERANCE AGREEMENT AND MUTUAL RELEASE
This Severance Agreement and Mutual Release ("Agreement") is made by and
between Phoenix Technologies Ltd., (the "Company"), and David Frodsham
("Executive").
WHEREAS, the Company currently employs Executive as Chief Operating
Officer;
WHEREAS, the Company and Executive wish to provide for the terms of
Executive's (i) separation of employment, and (ii) to release each other from
any claims arising from or related to Executive's employment relationship
with the Company;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Executive (collectively referred to as "the Parties") hereby
agree as follows:
1. TERMINATION OF EMPLOYMENT. Executive hereby acknowledges termination of
his employment effective upon October 6, 1999 (the "Termination Date").
2. TRANSITION PERIOD. For the period from August 28, 1999 until the
Termination Date, Executive will take vacation. The Parties agree that
Executive's use of vacation from August 28, 1999 to the Termination Date will
exhaust any of his vacation balance remaining and Executive will be granted
additional vacation hours for this period if his balance at the commencement of
this period is inadequate.
3. CONSIDERATION. As consideration for Executive entering into and not
revoking this Agreement, the Company agrees to provide Executive with the
following benefits:
(a) POST-TERMINATION SALARY PAYMENTS. For the period of three months
following the Termination Date (the "Severance Benefits Period"), Executive
will continue to be paid his base salary at $250,000 according the Company's
payroll practices. Such payment will be made from the Phoenix location
specified by Executive. In January 2000, Executive will receive a lump sum
payment of $312,500, representing fifteen months of pay at his base rate of
compensation.
(b) STOCK OPTION VESTING. Executive currently holds various stock
option agreements pursuant to option grants, including two grants effective
October 1, 1998 covering 400,000 and 200,000 shares, respectively. Executive
hereby agrees to rescind and disclaim rights under the option agreement on
200,000 shares. Aside from the option on 200,000 shares hereby disclaimed,
immediately on the Termination Date, any other options that would vest during
the eighteen months of the Severance Benefits Period will vest immediately
and may be exercised at any time during the Severance Benefits Period.
(c) BENEFITS. During the Severance Benefits Period, all benefits that
Executive receives, including without limitation pension, medical, dental
and/or vision continuation benefits under COBRA, will continue and Executive
will only be required to pay the same premium as he would pay as an active
employee with identical coverage, and the Company will pay the balance of any
COBRA premiums.
<PAGE>
(d) ANNUAL BONUSES. Executive's FY 1999 bonus will be paid in an
amount that is the greater of $100,000 or the actual amount earned (once
determined) promptly upon payment of FY'99 annual bonuses to other executives
of the Company or as the Parties agree under Section 7 of this Agreement.
Except for the bonus paid under the preceding sentence, Executive will not
receive additional bonuses of any kind after the Termination Date.
(e) RELOCATION AND OTHER COMMITMENTS. Until the end of the Severance
Benefits period, Executive will continue to be eligible to receive tbe
relocation and other benefits Executive receives under the letters signed by
the Company dated 24 June, 1997 and 13 November, 1998, and attached hereto as
Exhibits A and B. The Company agrees to pay for the reasonable costs incurred
by Executive and approved in advance by Company for shipping his car, family
and personal effects to Europe.
(f) PUBLIC ANNOUNCEMENTS. The Parties agree that the Company will,
promptly after this Agreement is fully executed, announce to the public
Executive's departure from employment, the wording of such announcement to be
pre-approved by the Parties. In any additional public announcements or
reference checks, the Company will state that Executive departed the Company
to "pursue other interests", or words to that effect.
4. PAYMENT OF SALARY AND BENEFITS. Except as otherwise set forth in this
Agreement, Executive and the Company acknowledge acknowledges and represents
that the Company has settled all salary, wages, accrued vacation, tax
equalization payments and any and all other benefits due to Executive as of
the Effective Date.
5. RELEASE OF CLAIMS. Executive agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to
Executive by the Company. Executive and the Company, on behalf of themselves,
and their respective heirs, executors, officers, directors, employees,
investors, shareholders, administrators, predecessor and successor
corporations, and assigns, hereby fully and forever release each other and
their respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators, predecessor and successor corporations, and
assigns, of and from any claim, duty, obligation or cause of action relating
to any matters of any kind, whether presently known or unknown, suspected or
unsuspected, that any of them may possess arising from any omissions, acts or
facts that have occurred up until and including the Effective Date,
including, without limitation,
(a) any and all claims relating to or arising from Executive's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Executive's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction
of emotional distress; negligent or intentional misrepresentation; negligent
or intentional interference with contract or prospective economic advantage;
and defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in
2
<PAGE>
Employment Act of 1967, the Americans with Disabilities Act of 1990, and the
California Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination;
(f) any rights he may have under the Age Discrimination in
Employment Act of 1967 ("ADEA"). Executive further acknowledges that he has
been advised by this writing that (i) he should consult with an attorney
PRIOR to executing this Agreement; (ii) he has at least twenty-one (21) days
within which to consider this Agreement; (iii) he has at least seven (7) days
following the execution of this Agreement by the Parties a sole right to
revoke the Agreement; and (iv) this Agreement will not be effective until the
revocation period has expired; and
(g) any and all claims for attorneys' fees and costs.
The Company and Executive agree that the release set forth in this section
will be and remain in effect in all respects as a complete general release as to
the matters released. This release does not extend to any obligations incurred
under this Agreement.
The Parties acknowledge that they have been advised by legal counsel and are
familiar with the provisions of California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
The Parties, being aware of said Code Section, agree to expressly waive any
rights they may have thereunder, as well as under any other statute or common
law principles of similar effect.
6. CONFIDENTIALITY. The Parties hereto each agree to use their best
efforts to maintain in confidence the existence of this Agreement, the
contents and terms of this Agreement, and the consideration for this
Agreement (hereinafter collectively referred to as "Settlement Information").
Each Party hereto agrees to take every reasonable precaution to prevent
disclosure of any Settlement Information to third parties, and each agrees
that there will be no publicity, directly or indirectly, concerning any
Settlement Information. The Parties hereto agree to take every precaution to
disclose Settlement Information only to those employees, officers, directors,
attorneys, accountants, governmental entities, and family members who have a
reasonable need to know of such Settlement Information.
7. TAX CONSEQUENCES. The Company agrees to structure payments to
Executive under this Agreement in a fashion that improves the tax impact of
these benefits on Executive, including reasonably altering the timing and
location of payments of the various sums contemplated hereunder. The Company
makes no representations or warranties with respect to the tax consequences
of the payments of any sums to Executive under the terms of this Agreement.
The Company will withhold sums from Executive's compensation hereunder
sufficient to satisfy the Company's withholding obligations. Executive agrees
and understands that he is responsible for payment, if any, of local,
3
<PAGE>
state and/or federal taxes on the sums paid hereunder by the Company and any
penalties or assessments thereon. The Company agrees to reimburse Executive
reasonable expenses of a Tax Advisor to implement the objectives of this Section
7.
8. NO ADMISSION OF LIABILITY. No action taken by the Parties hereto, or
either of them, either previously or in connection with this Agreement will
be deemed or construed to be (a) an admission of the truth or falsity of any
claims heretofore made or (b) an acknowledgment or admission by either party
of any fault or liability whatsoever to the other party or to any third party.
9. COSTS. The Parties will each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
10. Arbitration and Equitable Relief.
(a) The Parties hereto agree that, to the extent permitted by law,
any dispute or controversy arising out of, relating to, or in connection with
this Agreement, or the interpretation, validity, construction, performance,
breach, or termination thereof will be settled by arbitration to be held in
Santa Clara County, California, in accordance with the National Rules for the
Resolution of Employment Disputes then in effect of the American Arbitration
Association (the "Rules"). The arbitrator may grant injunctions or other
relief in such dispute or controversy. The decision of the arbitrator will be
final, conclusive and binding on the parties to the arbitration. Judgment may
be entered on the arbitrator's decision in any court having jurisdiction.
(b) The arbitrator will apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings will be governed by federal arbitration law and by
the Rules, without reference to state arbitration law. The Parties hereto
hereby expressly consent to the personal jurisdiction of the state and
federal courts located in California for any action or proceeding arising
from or relating to this Agreement and/or relating to any arbitration in
which the Parties are participants.
(c) The Company and Executive will each pay one-half of the costs and
expenses of such arbitration, and will separately pay its counsel fees and
expenses.
(d) THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 9, WHICH
DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING
TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUT1ON OF ALL DISPUTES RELATING
TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING CLAIMS:
(i) (ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL
4
<PAGE>
INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND
DEFAMATION.
(ii)(ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR
LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND
LABOR CODE SECTION 201, ET SEQ;
(iii) (ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
11. AUTHORITY. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Executive represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through his to bind them to the
terms and conditions of this Agreement.
12. NO REPRESENTATIONS. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement. Neither
party has relied upon any representations or statements made by the other
party hereto which are not specifically set forth in this Agreement.
13. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement will continue in full force and effect without said
provision.
14. ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding between the Company and Executive concerning Executive's
employment transition and eventual separation from the Company, and
supersedes, replaces and fully discharges all obligations under any and all
prior agreements and understandings concerning Executive's relationship with
the Company and his compensation by the Company, including the Offer Letter
from the Company to Executive dated November 13, 1998 and Exhibits A and B.
With the exception of the Change of Control provisions referenced in Section
3(b), the terms of Executive's stock option agreements are not intended to be
superseded by this Agreement.
15. NO ORAL MODIFICATION. This Agreement may only be amended in writing
signed by Executive and an authorized representative of the Company.
16. EFFECTIVE DATE. This Agreement is effective seven days after it has
been signed by the Parties.
17. COUNTERPARTS. This Agreement may be executed in counterparts, and
each counterpart will have the same force and effect as an original and will
constitute an effective, binding agreement on the part of each of the
undersigned.
5
<PAGE>
18. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf
of the Parties hereto, with the full intent of releasing all claims. The
Parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
Phoenix Technologies Ltd.
Dated: August 13, 1999 By /s/ Albert E. Sisto
-------------------------
Executive, an individual
Dated: August 13, 1999 /s/ D. Frodsham
-----------------------------
David Frodsham
6
<PAGE>
SEPARATION AGREEMENT
--------------------
This Severance Agreement (the "Agreement") is made and entered into
effective as of December 18, 1998, by and between Robert J. Riopel (the
"Executive") and Phoenix Technologies Ltd., a Delaware corporation (the
"Company").
R E C I T A L S
A. Executive, based on his own considerations, including the terms
set forth in this Agreement, has decided to voluntarily enter into this
Agreement providing for the separation of his employment, certain amounts of
pay in lieu of notice, certain other rights and obligations, and the release
of all pending legal claims.
B. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by the Executive, to agree to the
terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 7 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. DEFINITION OF TERMS. The following terms referred to in this Agreement
shall have the following meanings for the purposes of this Agreement only:
a. CAUSE. "Cause" shall mean (i) any act of personal dishonesty
taken by the Executive in connection with his responsibilities as an
Executive and intended to result in substantial personal enrichment of the
Executive, (ii) conviction of a felony that is injurious to the Company,
(iii) a willful act by the Executive which constitutes gross misconduct and
which is injurious to the Company, and (iv) continued violations by the
Executive of the Executive's obligations under Section 1 of this Agreement
that are demonstrably willful and deliberate on the Executive's part after
there has been delivered to the Executive a written demand for performance
from the Company which describes the basis for the Company's belief that the
Executive has not substantially performed his duties.
b. DISABILITY. "Disability" shall mean that the Executive has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least
ninety (90) days after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
Agreement as to acceptability not to be unreasonably withheld). Termination
resulting from Disability may only be effected after at least 30 days'
written notice by the Company of its intention to terminate the Executive's
employment. In the event that the Executive resumes the performance of
substantially all of his duties hereunder before the
<PAGE>
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
c. RE-EMPLOYMENT. "Re-employment shall mean that the Executive has
obtained work for compensation from any single employer or client, or any
group of employers or clients in a cumulative amount greater than twenty-four
hours per week, or one hundred hours per month.
d. SEPARATION DATE. "Separation Date" shall mean the earlier of: (1)
January 31, 1999, (2) Executive's resignation from the Company upon twenty
(20) days written notice, (3) Company's involuntary termination of Executive
for any reason other than Cause.
2. RIGHTS AND OBLIGATIONS UNTIL SEPARATION.
a. SCOPE OF EMPLOYMENT. The Company currently employs Executive as
Chief Financial Officer, as such position has been defined in terms of
responsibilities and compensation as of the Effective Date of this Agreement.
Executive shall comply with and be bound by the Company's operating policies,
procedures and practices from time to time in effect until the Separation
Date. Until the Separation Date, Executive shall continue to devote his full
time, skill and attention to his duties and responsibilities, and shall
perform them faithfully, diligently and competently, and Executive shall use
his best efforts to further the business of the Company and its affiliated
entities.
b. BASE COMPENSATION. The Company pays the Executive as compensation
for his services a base salary at the annualized rate of $180,000. Such
salary shall be paid periodically in accordance with normal Company payroll
practices. The annual compensation specified in this Section 2, together with
any increases in such compensation as the Board may direct from time to time,
is referred to in this Agreement as "Base Compensation."
c. EXECUTIVE BENEFITS. The Executive shall be eligible to
participate in the employee benefit plans and executive compensation programs
maintained by the Company applicable to other key executives of the Company,
including (without limitation) retirement plans, savings or profit-sharing
plans, stock option, incentive or other bonus plans, life, disability,
health, accident and other insurance programs, paid vacations, and similar
plans or programs, subject in each case to the generally applicable terms and
conditions of the applicable plan or program in question and to the sole
determination of the Board or any committee administering such plan or
program.
d. TERMINATION FOR CAUSE. Until the Separation Date, if the Company
terminates Executive's employment for Cause, Executive shall not be entitled
to receive severance or other benefits pursuant to this Agreement.
e. DISABILITY; DEATH. If the Company terminates Executive's
employment before the Separation Date as a result of the Executive's
Disability or if the Executive's employment terminates due to the death of
the Executive, then the Executive shall not be entitled to receive severance
or other benefits pursuant to this Agreement. However, Executive shall remain
eligible for those
<PAGE>
severance and other benefits (if any) as may then be available under the
Company's then existing severance and benefits plans and policies at the time
of Executive's termination or death.
3. RIGHTS AND OBLIGATIONS AFTER SEPARATION DATE.
a. GUARANTEED SEVERANCE PAYMENTS. Executive shall receive severance
payments for twelve (12) months after the Separation Date at Executive's Base
Compensation to be paid to Executive in accordance with the Company's
standard payroll practices. Executive will continue to receive severance
payments for up to an additional six months in the event that Executive has
not obtained Re-employment during the twelve month period following the
Separation Date. During the period beginning twelve months from the
Separation Date and ending six months thereafter, Severance payments shall
discontinue in the event Executive obtains Re-employment.
b. MEDICAL BENEFITS. The Company, at the Company's sole expense,
shall provide Executive (and, if applicable, his eligible dependents) with
the same level of health coverage and benefits as in effect for Executive
(and, if applicable, his eligible dependents) on the day immediately
preceding the day of the Executive's termination of employment (the
"Company-Paid Coverage"); provided, however, that (i) Executive and each
eligible dependent constitutes a qualified beneficiary, as defined in Section
498OB(g)(1) of the Internal Revenue Code of 1986, as amended (collectively,
"Qualified Beneficiaries"); (ii) each Qualified Beneficiary elects
continuation coverage under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended ("COBRA"), within the time period prescribed pursuant
to COBRA. Such Company-Paid Coverage shall continue in effect for each
Qualified Beneficiary until the earlier of (i) the Qualified Beneficiary is
no longer eligible to receive continuation coverage under COBRA, or (ii)
eighteen (18) months following termination of employment pursuant to Section
5(a).
c. COVENANTS NOT TO COMPETE AND NOT TO SOLICIT.
(i) Upon the termination of the Executive's employment with
the Company pursuant to Section 5(a) and for a period of eighteen (18)
months thereafter, Executive agrees that he shall not, on his own
behalf, or as owner, manager, advisor, principal, agent, partner,
consultant, director, officer, stockholder or employee of any business
entity, or otherwise in any territory in which the Company is actively
engaged in business (i) open or operate any business which is in
competition with any business of the Company, (ii) act as an employee,
agent, advisor or consultant of any competitor of the Company, (iii)
solicit or accept business from any of the Company's competitors, (iv)
take any action to or do anything reasonably intended to divert
business from the Company or influence or attempt to influence any
existing customers of the Company to cease doing business with the
Company or to alter its business relationship with the Company, or (v)
take any action or do anything reasonably intended to influence any
suppliers of the Company to cease doing business with the Company or to
alter its business relationship with the Company. Executive further
covenants and agrees that he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any
territory served by the Company, directly or indirectly solicit or
accept business from any of the Company's existing customers for the
purchase or sale of products or services of a like kind to those sold
or provided the Company. The
<PAGE>
foregoing covenant shall not be deemed to prohibit Executive from
acquiring an investment not more than one percent (1%) of the
capital stock of a competing business, whose stock is traded on a
national securities exchange or through the automated quotation
system of a registered securities association.
(ii) Upon the termination of the Executive's employment with
the Company pursuant to Section 5 (a) and for a period of eighteen (18)
months thereafter, Executive agrees that he shall not either directly
or indirectly solicit, induce, attempt to hire, recruit, encourage,
take away, hire any employee of the Company or cause any employee of
the Company to leave his or her employment either for Executive or for
any other entity or person.
(iii) Executive represents that he (i) is familiar with the
foregoing covenants not to compete and not to solicit, and (ii) is
fully aware of his obligations hereunder, including, without
limitation, the reasonableness of the length of time, scope and
geographic coverage of these covenants.
d. TRANSITION ASSISTANCE. Executive will make himself available to
respond to inquiries regarding Company matters.
e. OTHER BENEFIT PLANS. Executive's stock options will vest and be
exercisable according to the terms of the options after the Separation Date.
Employee will be able to continue to participate in neither the Phoenix's 401(k)
plan nor the Employee Stock Purchase Plan (ESPP) after the Separation Date.
Employee will not continue to accrue vacation and sick leave after the
Separation Date.
4. RELEASE.
Executive hereby forever waives for himself, his attorneys, heirs,
executors, administrators, successors and assigns any claim against Phoenix,
including its subsidiaries, affiliates, insurers, shareholders, officers,
directors and employees (the "Parties Released"), for any action, loss, expense
or any damages arising from any occurrence from the beginning of time until the
date of the signing of this Agreement and arising or in any way resulting from
Executive's employment with Phoenix or his resignation thereof. The only
exceptions to the above waiver are claims by Executive under any worker's
compensation or unemployment statutes and any right arising under this
Agreement. Executive represents that he has no current intention to assert any
claim on any basis against the Parties Released.
5. SUCCESSORS.
a. COMPANY'S SUCCESSORS. Any successor to the Company (whether direct
or indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
include any
<PAGE>
successor to the Company's business and assets which executes and delivers
the assumption agreement described in this Section or which becomes bound by
the terms of this Agreement by operation of law.
b. EXECUTIVE'S SUCCESSORS. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, devices and legatees.
6. NOTICE.
a. GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Executive, mailed notices shall be addressed to him at the home address,
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
b. NOTICE OF TERMINATION. Any termination by the Company for Cause
shall be communicated by a notice of termination to the Executive given in
accordance with Section 9(a) of this Agreement. Such notice shall indicate
the specific termination provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 15 days after the giving of
such notice).
7. ARBITRATION.
a. The Company and Executive agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, the
interpretation, validity, construction, performance, breach, or termination
hereof, or any of the matters herein released shall be settled by binding
arbitration to be held in Santa Clara County, California in accordance with
the National Rules for the Resolution of Employment Disputes then in effect
of the American Arbitration Association (the "Rules"). The arbitrator may
grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's
decision in any court having jurisdiction.
b. The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. Executive
hereby consents to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating
to this Agreement or relating to any arbitration in which the Parties are
participants.
c. EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF,
<PAGE>
RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF, OR ANY OF
THE MATTERS HEREIN TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE
RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THIS SEVERANCE
AGREEMENT AND RELEASE OF ALL CLAIMS.
8. MISCELLANEOUS PROVISIONS.
a. WAIVER. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the
Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
b. WHOLE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof and supersedes in
its entirety any and all prior undertakings and agreements of the Company and
Executive with respect to the subject matter hereof.
c. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal substantive
laws but not the choice of law rules of the State of California.
d. SEVERABILITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
e. NO ASSIGNMENT OF BENEFITS. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Section 11(e)
shall be void.
f. EMPLOYMENT TAXES. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
g. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
9. REPRESENTATIONS BY EXECUTIVE.
EXECUTIVE STATES THAT HE HAS CAREFULLY READ THIS SEPARATION AGREEMENT, THAT
HE KNOWS, UNDERSTANDS AND ACCEPTS THE TERMS AND CONDITIONS OF THIS DOCUMENT,
AND THAT HE EXECUTED THIS DOCUMENT OF HIS OWN FREE WILL. EXECUTIVE FURTHER
REPRESENTS AND AGREES THAT HE HAS
<PAGE>
BEEN ADVISED BY PHOENIX TO CONSULT AN ATTORNEY PRIOR TO EXECUTING THIS
SEPARATION AGREEMENT. EXECUTIVE UNDERSTANDS AND ACCEPTS THAT THE TERMS
CONTAINED IN THIS AGREEMENT ARE TO BE A FULL AND FINAL RELEASE OF ALL CLAIMS
WITH FINAL AND BINDING EFFECT.
10. CONDITIONS PRECEDENT AND REVOCATION.
EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN GIVEN A PERIOD OF AT LEAST TWENTY-ONE
(21) DAYS WITHIN WHICH TO CONSIDER THIS AGREEMENT BEFORE SIGNING IT. THE
PARTIES AGREE THAT EXECUTIVE SHALL HAVE THE RIGHT TO REVOKE THIS AGREEMENT BY
WRITTEN NOTICE TO PHOENIX WITHIN THE SEVENDAY PERIOD FOLLOWING ITS EXECUTION,
AND THAT THIS AGREEMENT SHALL NOT BECOME EFFECTIVE AND BINDING UNTIL SUCH
PERIOD HAS EXPIRED. IN THE EVENT THIS AGREEMENT IS REVOKED BY EXECUTIVE,
EXECUTIVE SHALL RETURN ALL CONSIDERATION AND BENEFITS PROVIDED TO EXECUTIVE
PURSUANT TO THIS AGREEMENT.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: PHOENIX TECHNOLOGIES LTD.
/s/ Jack Kay
-------------------------
By: Jack Kay
Chief Executive Officer
EXECUTIVE: Robert J. Riopel
/s/ Robert J. Riopel
-------------------------
Signature
<PAGE>
EXHIBIT A
In consideration for Executive accepting the benefits under his Severance
Agreement dated December 18, 1998, Executive agrees to release Company of all
claims arising from his employment as set forth below.
Executive hereby forever waives for himself, his attorneys, heirs, executors,
administrators, successors and assigns any claim against Phoenix, including
its subsidiaries, affiliates, insurers, shareholders, officers, directors and
employees (the "Parties Released"), for any action, loss, expense or any
damages arising from any occurrence from the beginning of time until the date
of the signing of this Agreement and arising or in any way resulting from
Executive's employment with Phoenix or the termination thereof. The only
exceptions to the above waiver are claims by Executive under any worker's
compensation or unemployment statutes and any right arising under this
Agreement. Executive represents that he has no current intention to assert
any claim on any basis against the Parties Released. Phoenix releases its
claims on intellectual property created by Employee after the date of
execution of this Agreement.
EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN GIVEN AT LEAST TWENTY-ONE (21) DAYS
WITHIN WHICH TO CONSIDER SIGNING THIS RELEASE. EXECUTIVE MAY REVOKE THIS
AGREEMENT BY WRITTEN NOTICE TO PHOENIX WITHIN SEVEN DAYS FOLLOWING ITS
EXECUTION. THIS RELEASE SHALL NOT BECOME EFFECTIVE AND BINDING UNTIL SUCH
PERIOD HAS EXPIRED. EXECUTIVE WILL RETURN ALL CONSIDERATION AND BENEFITS
PROVIDED IN CONNECTION WITH THE GRANTING OF THIS RELEASE IF HE REVOKES THE
RELEASE.
In the event of breach of this Agreement by Phoenix, Executive's exclusive
remedy for such breach shall be limited to the enforcement of the terms of
this Agreement.
COMPANY: PHOENIX TECHNOLOGIES LTD.
-------------------------
By
-------------------------
Title
EXECUTIVE: Robert J. Riopel
-------------------------
Signature
<PAGE>
[PHOENIX TECHNOLOGIES LOGO]
PHOENIX TECHNOLOGIES LTD.
PERSONAL & CONFIDENTIAL
Via e-mail
June 8, 1999
Mr. Albert E. Sisto
1105 Via Roble
Lafayette, CA 94549
Dear Al:
The entire Board of Directors is very excited and enthusiastic about your
joining Phoenix Technologies as the President & Chief Executive Officer.
Through the course of the selection process, we have developed tremendous
confidence in your ability to provide outstanding leadership for Phoenix. We
believe you will significantly contribute to the growth and success of the
company.
On behalf of the Board, I am very pleased to present the terms of your
employment and look forward to working through with you the details of the
announcement, planned for June 21, 1999.
The terms of the offer are as follows:
(1) POSITION
President & Chief Executive Officer. You will be appointed to the Board of
Directors at our next board meeting.
(2) START DATE
We propose a start date as soon as reasonably convenient for you. However, in
no case will this date be later than June 21, 1999. The formal announcement
of your appointment will be made as soon as you can devote at least 75% of
your time to this assignment. This is to occur on June 21, 1999. In no case
will full time employment start later than July 5, 1999.
<PAGE>
(3) SALARY
Your base salary will be $350,000 per year, payable semimonthly at the rate
of $ 4,583. The Board of Directors will review your base salary annually
according to the Company's established performance review process.
(4) BONUS
You will be eligible for a performance bonus targeted at 50% of your base
salary, with the ability to exceed target bonus based on outstanding
performance. You will work with the board in your first 45 days to define and
agree on the specific criteria and measurement for fiscal year 1999 bonus
objectives. As a way to frame the discussion, objectives could include:
(a) the development of a clear business plan detailing product strategy,
market differentiation, sales and distribution strategy, staffing plans and
P&L projections; (b) managing the successful release of the next generation
product; (c) achieving specific revenue targets; (d) setting and meeting
analyst expectations (e) successfully staffing the senior management team;
(f) retaining key executive and technical talent; and, (g) managing and
maintaining effective relationships within the employee ranks; (h)
successfully staffing the board.
(5) EQUITY -- OPTION GRANT
You will be granted five hundred thirty thousand (530,000) non-qualified
stock options upon your hire date. The option term will be ten (10) years
from the date of the grant. These stock options will vest over four years.
One hundred thirty-two thousand five hundred (132,500) options will vest on
the first anniversary of your hire date. The remaining three hundred
ninety-seven thousand five hundred (397,500) shares will vest quarterly from
months 13 through 48, in equal quarterly installments. The stock option price
will be that price posted for Phoenix Technologies Limited common stock
(NASDAQ:PTEC) at the close of business on the date this offer letter is fully
executed.
In addition, you will be eligible to receive additional annual option grants
at the discretion of the board based on meeting and exceeding annual MBO's.
(6) ACCELERATED VESTING BASED ON CHANGE-OF-CONTROL
In the event of a "change of control," your vesting schedule will immediately
be accelerated to vest 100% of all unvested options. The definition of
change-of-control and the actual mechanics of the acceleration will be
pursuant to the standard change-of-control agreements that are already in
place for key management.
<PAGE>
(7) SALARY CONTINUATION IN THE EVENT OF TERMINATION OF EMPLOYMENT
You will have a two-year employment contract that will be subject to
non-solicitation, non-compete and confidentiality provisions.
In the event of termination due to change-of-control of the Company, you will
receive, upon execution of appropriate termination and release agreements,
severance benefits for up to eighteen months. One year is guaranteed. The
remaining six months is available until you engage in full time employment.
These benefits are paid monthly.
If you are terminated due to disability at any time, you will continue to
receive your base salary compensation until you become eligible for
disability compensation under the company disability plan.
If Phoenix terminates you without cause, you will receive, upon execution of
appropriate termination and release agreements, severance benefits for up to
eighteen months. One year is guaranteed. The remaining six months is
available until you engage in full time employment. These benefits are paid
monthly.
All severance payments will be subject to execution of appropriate release
agreements and continued compliance with covenants related to competition,
disclosure and solicitation of employees.
(8) BENEFITS
You will be eligible to participate in all Phoenix benefit plans.
(9) VACATION
You are eligible for four weeks paid vacation per year. In addition, you will
be eligible for prorated vacation benefits for fiscal 1999.
(10) FINANCIAL PLANNING & COUNSEL
You are eligible for reimbursement for up to $5,000 annually for tax planning
and financial counsel.
(11) PERSONAL LOAN
Phoenix will guarantee a personal loan for up to $300,000 for a period of up
to four (4) years from the date of employment.
<PAGE>
This offer letter shall be binding on both parties once fully executed.
Please respond to this offer by returning a signed copy via facsimile to
617-928-9301 no later than June 9, 1999.
Al, we are all excited with the prospect of your joining Phoenix. I
personally look forward to being a part of your team as you lead Phoenix into
an exciting future that is certain to result in the enhancement of
shareholder value and the reaping of tremendous rewards for you and your
family.
Sincerely,
/s/ Anthony P. Morris
Mr. Anthony P. Morris
Director
Chairman, Search Committee
CC: Mr. Charles Federman
Mr. Ronald Fisher
Mr. George Huang
Mr. Jack Kay
Mr. Anthony Sun
Acceptance: The signing of this letter acknowledges the acceptance of the offer
contained herein.
Agreed & accepted:
/s/ Albert E. Sisto 6/10/99
- ------------------------- -------------------------
Mr. Albert E. Sisto Date
plus attached email from Jack Kay dated 6/10/99
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
PHOENIX TECHNOLOGIES LTD.
SUBSIDIARY COUNTRY/STATE OF INCORPORATION
<TABLE>
<CAPTION>
<S> <C>
WHOLLY OWNED
Phoenix Technologies (Taiwan) Ltd. Delaware
Phoenix Technologies Kabushiki Kaisha Japan
Phoenix Technologies SARL France
Phoenix Technologies GmbH Germany
Phoenix Technologies FSC Ltd. Barbados
Phoenix Technologies (Hungary) Ltd. Hungary
Phoenix Technologies (Korea) Ltd. Korea
Award Software Hong Kong Ltd. Hong Kong
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of Phoenix Technologies Ltd. (Form S-8 File Numbers 33-58027, 33-67858,
33-30939, 33-44211, 33-81984, 333-37063, 333-20447, 333-56103 and 333-65291;
Form S-3 File Number 333-16309) of our report dated October 20, 1999, with
respect to the consolidated financial statements and schedule of Phoenix
Technologies Ltd. included in the Annual Report (Form 10-K) for the year ended
September 30, 1999.
/S/ ERNST & YOUNG LLP
San Jose, California
December 17, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Numbers 33-58027, 33-67858, 33-30939, 33-44211,
33-81984, 333-37063, 333-20447, 333-56103 and 333-65291) and on Form S-3 (File
Number 333-16309) of Phoenix Technologies Ltd. of our report dated January 29,
1998, relating to the consolidated financial statements of Award Software
International, Inc. for the year ended December 31, 1997, which appears in this
Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 24,873
<SECURITIES> 30,719
<RECEIVABLES> 31,565
<ALLOWANCES> 1,460
<INVENTORY> 0
<CURRENT-ASSETS> 94,459
<PP&E> 25,543
<DEPRECIATION> 12,955
<TOTAL-ASSETS> 141,998
<CURRENT-LIABILITIES> 41,530
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 98,898
<TOTAL-LIABILITY-AND-EQUITY> 141,998
<SALES> 125,826
<TOTAL-REVENUES> 125,826
<CGS> 28,320
<TOTAL-COSTS> 28,320
<OTHER-EXPENSES> 102,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 2,654
<INCOME-TAX> 850
<INCOME-CONTINUING> 1,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,804
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
