<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to ____________ .
Commission file number 0-17111
PHOENIX TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
Delaware 04-2685985
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
411 East Plumeria Drive, San Jose, California 95134
(Address of principal executive offices, including zip code)
(408) 570-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------------- ------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.001 26,817,516
- --------------------------------------- ---------------------------------------
Class Number of Shares Outstanding at
April 30, 1999
Exhibit Index is on Page 21
<PAGE>
PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and September 30, 1998.............................3
Condensed Consolidated Statements of Income for the
Three and Six Months Ended March 31, 1999 and 1998................4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1999 and 1998..........................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...........18
Item 6. Exhibits and Report on Form 8-K
Exhibits .......................................................19
Reports on Form 8-K..............................................19
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Assets (unaudited) (1)
Current assets:
Cash and cash equivalents $ 46,478 $ 44,234
Short-term investments 24,613 27,063
Accounts receivable, net of allowances of $1,209 at
March 31, 1999 and $1,113 at September 30, 1998 33,696 28,446
Other current assets 6,298 7,120
----------------- -----------------
Total current assets 111,085 106,863
Other marketable securities 9,363 7,782
Property and equipment, net 12,704 13,244
Computer software costs, net 15,494 16,575
Goodwill and other intangible assets, net 11,426 12,693
Other assets 1,534 1,945
----------------- -----------------
Total assets $ 161,606 $ 159,102
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,307 $ 6,976
Payroll and related liabilities 6,454 7,294
Other accrued liabilities 9,568 8,524
Income taxes payable 5,742 6,926
----------------- -----------------
Total current liabilities 25,071 29,720
Long-term obligations 3,906 4,046
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 60,000 shares
authorized, 26,765 and 26,286 shares issued and
outstanding at March 31, 1999 and September 30, 1998 27 26
Additional paid-in capital 102,048 99,940
Retained earnings 29,755 25,269
Accumulated other comprehensive income 799 101
----------------- -----------------
Total stockholders' equity 132,629 125,336
----------------- -----------------
Total liabilities and stockholders' equity $ 161,606 $ 159,102
================= =================
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended September 30, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- ------------------------------
1999 1998 1999 1998
-------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
License fees $25,740 $25,859 $49,973 $50,501
Services 5,820 5,939 12,128 11,387
-------------- ---------------- -------------- --------------
Total revenue 31,560 31,798 62,101 61,888
Cost of revenue:
License fees 1,327 1,770 2,445 4,622
Services 4,184 4,007 8,833 7,543
Amortization of purchased technology 533 - 1,066 -
-------------- ---------------- -------------- --------------
Total cost of revenue 6,044 5,777 12,344 12,165
-------------- ---------------- -------------- --------------
Gross margin 25,516 26,021 49,757 49,723
Operating expenses:
Research and development 9,726 10,685 19,793 19,905
Sales and marketing 7,138 7,447 14,388 13,759
General and administrative 3,368 4,138 7,626 8,214
Amortization of goodwill and
acquired intangible assets 627 - 1,252 -
Restructuring charge - - 1,944 -
-------------- ---------------- -------------- --------------
Total operating expenses 20,859 22,270 45,003 41,878
-------------- ---------------- -------------- --------------
Income from operations 4,657 3,751 4,754 7,845
Interest and other income, net 614 1,165 1,844 3,472
-------------- ---------------- -------------- --------------
Income before income taxes 5,271 4,916 6,598 11,317
Provision for income taxes 1,687 1,541 2,112 3,465
-------------- ---------------- -------------- --------------
Net income $ 3,584 $ 3,375 $ 4,486 $ 7,852
============== ================ ============== ==============
Earnings per share:
Basic $ 0.13 $ 0.13 $ 0.17 $ 0.31
============== ================ ============== ==============
Diluted $ 0.13 $ 0.13 $ 0.16 $ 0.29
============== ================ ============== ==============
Shares used in earnings per share calculation:
Basic 26,656 25,337 26,615 25,324
============== ================ ============== ==============
Diluted 27,996 26,791 28,010 26,959
============== ================ ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-----------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,486 $ 7,852
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 6,469 4,181
Effect of Award fiscal year conversion - (1,660)
Realized gain on sale of other marketable securities (112) (1,146)
Change in operating assets and liabilities:
Accounts receivable (5,074) 359
Other assets 1,533 (1,836)
Accounts payable (3,643) 284
Payroll and related liabilities (927) 551
Other accrued liabilities 721 2,074
Income taxes payable (1,182) (1,656)
----------------- ---------------
Total adjustments (2,215) 1,151
----------------- ---------------
Net cash provided by operating activities 2,271 9,003
Cash flows from investing activities:
Maturity of short-term and long-term investments 24,342 31,377
Purchases of short-term and long-term investments (24,011) (29,322)
Proceeds from sale of other marketable securities 117 1,193
Purchases of property and equipment (1,637) (2,833)
Additions to computer software costs (1,963) (2,654)
Proceeds from the sale of minority interest in Softbank
Content Group - 9,810
----------------- ---------------
Net cash provided by (used in) investing activities (3,152) 7,571
Cash flows from financing activities:
Proceeds from issuance of common stock - 72
Proceeds from stock purchases under stock option and
stock purchase plans 2,058 1,090
Repurchases of common stock - (3,553)
----------------- ---------------
Net cash provided by (used in) financing activities 2,058 (2,391)
----------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 1,067 (307)
----------------- ---------------
Net increase in cash and cash equivalents 2,244 13,876
Cash and cash equivalents at beginning of period 44,234 46,800
----------------- ---------------
Cash and cash equivalents at end of period $ 46,478 $ 60,676
================= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid (refunded) during the period, net $ (293) $ 306
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 5
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
Phoenix Technologies Ltd. ("Phoenix" or the "Company") designs,
develops, markets and supports standards-based system and chip-level software
for information platforms, including personal computers, servers, embedded
systems, information appliances and peripherals. The accompanying condensed
consolidated financial statements of Phoenix Technologies Ltd. and its
wholly-owned subsidiaries have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The information included in this report should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Company's
financial position, results of operations and cash flows for the interim
periods presented. All significant intercompany accounts and transactions
have been eliminated. The operating results for the three and six-month
periods ended March 31, 1999, are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 1999, or for
any other future period.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
NOTE 2. REVENUE RECOGNITION
Effective October 1, 1998, the Company adopted Statement of
Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The adoption of SOP 97-2 did not have a
material impact on the Company's consolidated financial position or results
of operations.
NOTE 3. CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of
less than three months are considered cash equivalents.
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 4. RESTRUCTURING CHARGES
In December 1998, the Company recorded a restructuring charge of
approximately $1.9 million. This charge included the costs of employee
severance and facilities consolidations associated with closing the Company's
offices in Texas and France, and the elimination of 38 positions in
engineering, sales, marketing, and administration.
Of the $8.9 million of restructuring and out-of-pocket merger and
acquisition costs incurred and charged to operations in fiscal 1998 and the
quarter ended December 31, 1998, $1.6 million was unpaid as of March 31,
1999, most of which will be paid in the last half of fiscal 1999.
NOTE 5. EARNINGS PER SHARE
The following table presents the calculations of basic and diluted
earnings per share under Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ----------------------------
1999 1998 1999 1998
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 3,584 $ 3,375 $ 4,486 $ 7,852
=============== ============== ============= ==============
Denominator:
Weighted average common shares
outstanding -- denominator for basic
earnings per share 26,656 25,337 26,615 25,324
Effect of dilutive securities (Treasury Stock
Method):
Stock options 1,205 1,028 1,261 1,193
Warrants 135 426 134 442
--------------- -------------- ------------- --------------
Total dilutive securities 1,340 1,454 1,395 1,635
Weighted average common and equivalent
shares outstanding -- denominator
for diluted earnings per share 27,996 26,791 28,010 26,959
=============== ============== ============= ==============
Earnings per share:
Basic $ 0.13 $ 0.13 $ 0.17 $ 0.31
=============== ============== ============= ==============
Diluted $ 0.13 $ 0.13 $ 0.16 $ 0.29
=============== ============== ============= ==============
</TABLE>
Page 7
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. COMPREHENSIVE INCOME (LOSS)
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net loss or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which are reported separately in
stockholders' equity, to be included in comprehensive income.
Following are the components of comprehensive income or loss (IN
THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- -----------------------------
1999 1998 1999 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 3,584 $ 3,375 $ 4,486 $ 7,852
Foreign currency translation adjustments (478) 555 1,022 (436)
Unrealized gain (loss) on securities, net of tax (385) 1,214 (324) (8,802)
------------- -------------- -------------- --------------
Other comprehensive income (loss) (863) 1,769 698 (9,238)
------------- -------------- -------------- --------------
Comprehensive income (loss) $ 2,721 $ 5,144 $ 5,184 $(1,386)
============= ============== ============== ==============
</TABLE>
NOTE 7. SUBSEQUENT EVENT
In April 1999, the Company's Board of Directors authorized the
repurchase of up to $25 million of outstanding common stock at a maximum
price per share of $10. In May 1999, the Company's Board of Directors
increased the maximum per share price to $12.50.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q, INCLUDING WITHOUT LIMITATION THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E AND SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED HEREIN AND IN PART II, ITEM 7
(MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS) OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1998, AND IN OTHER DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
COMPANY OVERVIEW
The Company designs, develops, markets and supports standards-based
system and chip-level software for information platforms, including personal
computers, servers, embedded systems, information appliances and peripherals.
The Company's software provides compatibility, connectivity, security, and
manageability of the various components and technologies used in such
devices. The Company provides these products primarily to platform and
peripheral manufacturers (collectively, "OEMs") that range from large PC
manufacturers to small system integrators. Phoenix also provides training,
consulting, maintenance and engineering services to its customers. The
Company markets and licenses its products and services primarily through a
direct sales force, but also through regional distributors and sales
representatives.
The Company's operations include the following divisions:
PLATFORM ENABLING: Develops and markets foundation software and
related services to information platform OEMs and system integrators.
Foundation software includes BIOS (Basic Input Output System) and related
products.
PICO AND PC ENHANCING: Provides system enhancing software for PCs as
well as industrial, handheld, and consumer platforms in the emerging
information appliance market. Examples include software products that manage
system diagnostics, system security, power consumption and internet
foundations.
SEMICONDUCTOR IP (PREVIOUSLY INTERCONNECT): Provides synthesizable
cores, related tools and firmware that help semiconductor manufacturers
quickly incorporate industry standard interfaces into chip designs.
In September 1998, Award Software International, Inc. ("Award") was
merged with a wholly-owned subsidiary of the Company. Award is a leading
provider of system enabling and management software that includes a suite of
BIOS products for designers and manufacturers of motherboards, PC systems and
other microprocessor-based (or embedded) devices. In the merger, each share
of Award common stock was exchanged for 1.225 shares of Phoenix common stock
(an aggregate of approximately 8.8 million shares of Phoenix common stock).
In addition, outstanding Award employee stock options and warrants were
converted at the same exchange ratio into options and warrants to purchase
approximately 2.3 million and 0.5 million shares of Phoenix common stock,
respectively. The transaction was accounted for as a pooling of interests
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
for financial reporting purposes, and was structured to qualify as a tax-free
reorganization. The consolidated statements of income for the three and six
months ended March 31, 1998, have been restated to include the combined
results of operations of Phoenix and Award.
Also in September 1998, Phoenix completed the acquisition of Sand
Microelectronics, Inc. ("Sand"), a supplier of synthesizable cores for the
computer industry. Synthesizable cores are pre-packaged circuit descriptions
used as building blocks for system-level application specific integrated
circuits ("ASICs"). These ASICs are used to connect computers and peripheral
devices using PCI, AGP, USB, IEEE 1394, IrDA and other emerging industry
standard protocols. The purchase price consisted of $18.6 million in cash,
464,000 shares of Phoenix common stock, stock options to purchase
approximately 264,000 shares of Phoenix common stock (in exchange for Sand
stock options), and up to $3.7 million payable through fiscal 2001, subject
to the achievement of certain performance objectives. The acquisition was
accounted for using the purchase method of accounting, and the results of
operations of Sand subsequent to the date of acquisition have been included
in the consolidated results of operations of the Company.
REVENUE
The Company's products are generally designed into personal computer
systems, information appliances and semiconductors. License fee and service
revenue by platform for the three and six-month periods ended March 31, 1999
and 1998, were as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Three months ended March 31: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PC systems $ 22,317 $ 25,114 (11%) 71% 79%
Information appliances 3,915 3,970 (1%) 12% 12%
Semiconductor 5,328 2,535 110% 17% 8%
Other - 179 (100%) 0% 1%
-------------- ------------- ------------- -------------
Total revenue $ 31,560 $ 31,798 (1%) 100% 100%
============== ============= ============= =============
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Six months ended March 31: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PC systems $ 43,445 $ 47,980 (9%) 70% 77%
Information appliances 7,978 8,448 (6%) 13% 14%
Semiconductor 10,397 4,317 141% 16% 7%
Other 281 1,143 (75%) 1% 2%
-------------- ------------- ------------- -------------
Total revenue $ 62,101 $ 61,888 0% 100% 100%
============== ============= ============= =============
</TABLE>
The declines in PC systems revenues in the second quarter and first
six months of fiscal 1999 of 11% and 9%, respectively, from the comparable
periods last year were due to the loss of a significant North American
desktop customer (due to acquisition) and declines in average selling prices,
primarily on desktop products.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The decrease of 6% in revenue from information appliances for the
six-month period ended March 31, 1999, was due to the timing of license fee
payments and the discontinuance of certain Award products.
Semiconductor revenue increased 110% and 141% in the second quarter
and the first six months of fiscal 1999, respectively, due to the acquisition
of Sand and the continued demand for outsourced circuit intellectual
property. The Company's USB and IEEE 1394 products contributed to most of
this growth.
The decline in other revenue for the six months ended March 31,
1999, was due to $0.8 million of revenue generated in the first quarter of
fiscal 1998 from shipments of a network management product, which was
subsequently discontinued.
Revenue by geographic region for the three and six-month periods
ended March 31, 1999 and 1998, were as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Three months ended March 31: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
North America $11,182 $11,472 (3%) 35% 36%
Japan 8,846 8,677 2% 28% 27%
Asia (excluding Japan) 8,711 7,870 11% 28% 25%
Europe 2,821 3,779 (25%) 9% 12%
-------------- ------------- ------------- -------------
Total revenue $31,560 $31,798 (1%) 100% 100%
============== ============== ============= =============
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
Six months ended March 31: 1999 1998 % CHANGE 1999 1998
-------------- ------------- --------------- ------------- -------------
North America $21,190 $21,104 0% 34% 34%
Japan 17,204 16,940 2% 28% 27%
Asia (excluding Japan) 17,815 16,773 6% 29% 27%
Europe 5,892 7,071 (17%) 9% 12%
-------------- ------------- ------------- -------------
Total revenue $62,101 $61,888 0% 100% 100%
============== ============== ============= =============
</TABLE>
North America revenue decreased in the second quarter due to a
decline in revenue from a significant North American desktop customer as
noted above. Asian revenue increased and European revenue declined in the
three and six-month periods due to the outsourcing of manufacturing by
European OEMs to Asian PC and motherboard manufacturers. The Company's growth
rate in PC revenue is expected to be impacted in future quarters by the
significant customer loss and lower average selling prices generated from the
transition of manufacturing to Asia.
No customer accounted for more than 10% of revenue during the three
and six-months ended March 31, 1999 or 1998.
Service revenue in the three and six-month periods ended March 31,
1999, decreased 2% and increased 7% over the comparable periods in fiscal
1998, respectively. The second quarter decrease was mostly due to a slowdown
in the release of new Intel chipset technologies. The increase in the
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
six-month period was due to increased maintenance revenue from the growing
base of semiconductor IP customers.
GROSS MARGIN
Gross margin as a percentage of revenue was 81% and 82% for the
three-month periods ended March 31, 1999 and 1998, respectively. Gross margin
as a percentage of revenue was 80% for both six-month periods ended March 31,
1999 and 1998. Service gross margin as a percentage of revenue declined to
28% and 27%, respectively, in the three and six-month periods ended March 31,
1999, from 33% and 34% in the comparable periods of fiscal 1998. These
decreases were largely as a result of the timing of certain NRE revenue
generated in fiscal 1998, and an amendment to the Company's agreement with
Intel such that a higher proportion of revenue relates to services that have
lower gross margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended
March 31, 1999, decreased $1.0 million (9%) from the comparable period in
fiscal 1998. This decrease was primarily due to an increase in the portion of
internal development costs that were dedicated to deployment efforts and
therefore recognized as cost of sales, and lower recruiting costs.
Research and development expenses for the six months ended March 31,
1999, remained approximately unchanged at $19.8 million, or 32% of revenue.
The Company capitalized $0.9 million and $1.5 million of internal
software development costs for the three and six-month periods ended March
31, 1999, respectively, as compared to $1.0 million and $2.5 million for the
same periods in fiscal 1998. These decreases in capitalization of development
costs were due to a higher proportion of costs being incurred on
non-capitalizable projects, including the development of enabling software
related to Intel's next-generation architecture, IA-64, and tools associated
with the deployment of the Company's products. The Company believes that
continued investment in new and evolving technologies is essential to meet
the rapidly changing industry requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three-month period ended March
31, 1999, decreased $0.3 million (4%) from the comparable period in fiscal
1998. This decrease was primarily due to a 7% decrease in personnel, as the
Company has begun to successfully leverage marketing resources with the
combined companies of Phoenix and Award.
Sales and marketing expenses for the six-month period ended March
31, 1999, increased $0.6 million (5%) from the comparable period in fiscal
1998. This increase was primarily due to expanded participation in major
tradeshows and industry events and increased spending on public relations
activities, partially offset by decreased personnel.
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and six-month
periods ended March 31, 1999, decreased $0.8 million (19%) and $0.6 million
(7%), respectively, from the comparable periods in the prior year. These
decreases were principally due to decreased personnel and the reversal of
certain excess costs accrued in prior quarters.
COST OF RESTRUCTURING
In December 1998, the Company recorded a restructuring charge of
approximately $1.9 million. This charge included the costs of employee
severance and facilities consolidations associated with closing the Company's
offices in Texas and France, and the elimination of 38 positions in
engineering, sales, marketing and administration.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, for the three and six-month periods
ended March 31, 1999, decreased $0.6 million (47%) and $1.6 million (47%),
respectively, from the comparable periods in fiscal 1998. This decrease for
the three-month period was primarily due to lower average cash balances, as
$18.6 million was paid for the acquisition of Sand. The decrease for the
six-month period was due to lower average cash balances as noted above and
the sale of fewer shares of Xionics Document Technologies, Inc. ("Xionics")
common stock at lower selling prices. The Company sold 28,000 common shares
of Xionics stock at an average price of $4.24 per share in the first half of
fiscal 1999 as compared to 89,000 shares at an average selling price of
$13.48 per share in the first half of fiscal 1998. At March 31, 1999, the
Company owned approximately 1,021,000 shares of Xionics stock with a market
value of approximately $2.9 million.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $1.7 million and $2.1
million for the three and six-month periods ended March 31, 1999,
respectively, as compared to $1.5 million and $3.5 million for the comparable
periods in fiscal 1998. The fiscal 1999 provisions for income taxes reflect
an effective tax rate of 32% as compared to 31% in the respective periods in
the prior fiscal year. The effective tax rate increased due to the
nondeductible amortization of goodwill from the Sand acquisition, offset by
favorable tax benefits of the Company's Foreign Sales Corporation. The
Company's effective tax rate has been lower than the U.S. combined Federal
and state statutory rate due to various federal and state tax credits and
lower tax rates imposed on foreign earnings in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity include cash, cash
equivalents, short-term investments, and other marketable securities. The
Company believes that its existing sources of liquidity will be sufficient to
satisfy the Company's cash requirements for at least the next twelve months.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
In fiscal 1997, the Board of Directors authorized the repurchase of
up to 1,000,000 shares of outstanding common stock under a share repurchase
program. The Company repurchased and retired approximately 645,000 shares at
a cost of approximately $8.6 million until the program was terminated in
April 1998.
In April 1999, the Company's Board of Directors authorized the
repurchase of up to $25 million of outstanding common stock at a maximum
price per share of $10. In May 1999, the Company's Board of Directors
increased the maximum share price for repurchases to $12.50 per share.
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities in the six months ended
March 31, 1999 and 1998, were $2.3 million and $9.0 million, respectively,
resulting primarily from cash provided by net income, adjusted for non-cash
items. Net cash used in investing activities in the six-month period ended
March 31, 1999, was $3.2 million. It consisted primarily of $0.3 million of
net maturities of short-term and long-term investments, $1.6 million in
purchases of property and equipment, and $2.0 million in additions to
computer software costs. Net cash provided by investing activities in the
six-month period ended March 31, 1998, was $7.6 million. This consisted
primarily of net maturities of short-term and long-term investments of $2.0
million, purchases of property and equipment of $2.8 million, additions to
computer software costs of $2.7 million, and proceeds from the sale of a
minority interest in Softbank Content Group for $9.8 million. Cash generated
from financing activities during the six months ended March 31, 1999, was
$2.1 million, consisting of the exercise of common stock options and the
issuance of stock under the Company's employee stock purchase plan. Cash used
in financing activities in the comparable period in fiscal 1998 was $2.4
million, consisting primarily of $3.6 million to repurchase common stock of
the Company, partially offset by $1.1 million generated from the exercise of
common stock options and the issuance of stock under the Company's employee
stock purchase plan.
YEAR 2000
Many software and firmware products and internally developed
applications used two digits to designate the year instead of four digits.
This may result in the interpretation of the year 00 as 1900 or other dates
instead of correctly interpreting it as 2000. Such failure could disrupt
processing transactions or even cause certain systems to fail. This
possibility affects the Company's products and its information technology and
other internal systems as well as the Company's customers and vendors. The PC
industry has also defined the Year 2000 ("Y2K") issue to include proper
handling of leap year calculations. Significant uncertainty exists in the
software industry concerning the potential effects associated with the Year
2000 problem.
The Company's Year 2000 compliance effort covers the Company's
products, internal systems and services provided by others.
PHOENIX PRODUCTS
HISTORY. Since its inception, the Company has sold or licensed
various products, including BIOS products, semiconductor intellectual
property and consumer software. BIOS software performs, among other
functions, certain date related changes for PC systems.
Page 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's BIOS products fall into differing definitions of Y2K
compliance. BIOS-related products sold or licensed after fiscal 1995 are
generally designed to automatically handle millennium date changes and leap
year calculations. The Company's BIOS products prior to that date are
manually compliant, which mean that end users must change the date on their
system at or after December 31, 1999 in order for the system date to be
proper. The Company has identified one product line that was not manually
compliant.
The Company's semiconductor IP product lines do not handle
date-related functions and accordingly do not implicate Year 2000 issues. The
Company discontinued its consumer software product lines in 1996.
Accordingly, the Company does not believe that a significant number of these
products will remain in use on January 1, 2000. The Company has developed a
list of all products it sold and licensed and continues to assess the level
of compliance of these products. This effort is expected to be completed in
the third quarter of the Company's 1999 fiscal year.
REMEDIAL STEPS. The Company sells and licenses its products directly
to OEMs, and therefore does not have direct customer relationships with end
users of PCs or information appliances. Nonetheless, for any products deemed
to be less than fully compliant, the Company will make available to end users
software upgrades, fixes or patches. These solutions will be available to
users through the Company's web site and by mail, if necessary. The Company
will also make these solutions available to OEM customers for placement by
those customers on their respective web sites. Where appropriate, the Company
will undertake other efforts to inform and deliver solutions to end users.
However, there can be no assurance that end users of products containing
software sold or licensed by the Company will take steps to download these
solutions from the Internet, or that such end users will have Internet
access. The Company believes that the incremental costs of providing these
solutions to customers will not be significant.
EXPOSURE. The Company continues to identify and assess the state of
Y2K compliance of those products it sold or licensed that remain in use.
There can be no assurance that the Company will be able to identify all
compliance issues for each of the products it has sold or licensed during its
history. Accordingly, the Company is not able to estimate the cost of
obtaining compliance of its products at this time.
INFORMATION TECHNOLOGY AND OTHER SYSTEMS
The Company's plans for dealing with the Year 2000 include surveying
and testing or certifying all of the hardware and software used in the
Company for compliance, performing remediation where necessary and developing
a contingency plan for the beginning of the millennium.
CURRENT STATUS. The Company's internal systems are generally based
on purchased software and operated on personal computers, PC servers and Unix
workstations and servers. The vast majority of hardware, including networking
hardware, is three years old or less. Software products in use range in age
generally from the latest upgrade to approximately ten years old. The Company
uses Oracle for its primary financial system, which has been upgraded
recently and which Oracle represents is Y2K compliant. The Company is in the
process of selecting a replacement for the source code management system used
in product development and deployment. The replacement, as all new software
purchases, must be Y2K compliant.
Page 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company has developed a project plan, approved by the Board of
Directors, and is in the process of testing its internal use hardware and
software. A key element of the plan is to assure that all firmware and
software is identified and tested, and various elements have been assigned to
specific individuals. Most of the computers, and the applications thereon,
can be tested over the Company's wide area network. The software and hardware
part of the plan is targeted for completion in September 1999; to date, less
than 40% of all project tasks have been completed.
However, there are also embedded firmware and software in other
systems, such as building access and temperature control systems, which will
require individual testing and possibly remediation. The facilities part of
the plan is targeted for completion in June 1999; to date, 75% of this plan
has been completed. Y2K compliance letters have been received from suppliers
and are considered sufficient. There will be no testing of the utility power
and building systems such as HVAC and fire alarms. Remediation of
non-compliant systems is in progress and expected to be complete by the end
of June 1999.
All employees have been alerted to the Y2K issues.
TEST, CERTIFICATION AND REMEDIATION. Third-party software is being
used to audit each of the computer systems and inventory all applications in
use. The application information will be compared to vendor or other
published databases with Y2K compliance information. Remedial action, where
necessary, which usually involves acquiring and implementing an upgrade, will
be performed in groups based on the level of priority. For those applications
not found in the published Y2K information, the vendors will be contacted,
and where necessary, upgrades will be acquired and implemented. There will be
some applications where the vendor no longer exists, in which case a
determination will be made, based on importance, to test and, if necessary,
modify, replace or ignore the application.
COST OF COMPLIANCE TESTING AND REMEDIATION. The Company has spent
approximately $110,000 in testing and upgrades to date. The new code
management system is expected to cost approximately $2 million for software,
implementation assistance and training, excluding the cost of Phoenix
personnel involved in the project. The Company's Information Technology
personnel will spend approximately 15% of their time over the current fiscal
year on Y2K issues at an approximate cost of $250,000. Software purchases and
certain other vendor costs are capitalized and depreciated while other costs
are charged directly to expense. Year 2000 expenses are being funded through
operating cash flows. Total anticipated Y2K expenditures are not material to
the Company's financial condition. However, there can be no assurance that
additional and material unanticipated costs will not arise during the course
of testing, certification and remediation. In addition, there can be no
assurance that the estimates of time and cost contained herein will be
achieved, and actual results could differ materially from those anticipated.
THIRD-PARTY SYSTEMS
The Company has relationships with various third parties and the
failure of these third parties to achieve Year 2000 compliance could have a
material impact on the Company's business, operating results and financial
condition. The Company is making inquiries of its major vendors and
suppliers, such as banks, payroll service and equipment vendors about their
Y2K readiness.
Page 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
While responses to date or their published Y2K readiness have been
satisfactory, the Company has information on less than 60% of the significant
vendors. Further, there can be no assurance that unanticipated processing or
supply problems will not occur at the turn of the century.
The Company does not currently have any information concerning the
Y2K readiness of its customers. In the event that the Company's significant
customers do not successfully and timely achieve Y2K compliance, the
Company's business or operations could be adversely affected.
CONTINGENCY PLANNING AND WORST CASE SCENARIO. Contingency plans are
not yet in place but mission critical systems have been identified and
worksheets are being developed for each system. Contingency plans are
targeted to be in place by September 1999. If Phoenix is required to
implement any of these contingency plans, doing so could have a material
adverse effect on the Company's financial condition and results of
operations. Phoenix's ability to achieve Year 2000 Compliance and the level
of incremental associated costs, could be adversely impacted by, among other
things, the availability and cost of programming and testing resources,
various parties' ability to modify proprietary software, and unanticipated
problems identified in the ongoing compliance review. Such failures could
have a material adverse effect on Phoenix's business, financial condition and
results of operations.
EURO
The Company is addressing the issues raised by the introduction of
the Single European Currency ("Euro") on January 1, 1999 and during the
transition period through January 1, 2002. The Company's internal systems
that are affected by the initial introduction of the Euro have been made Euro
capable without material system modification costs. Further internal systems
changes will be made during the three-year transition phase in preparation
for the ultimate withdrawal of the legacy currencies in July 2002, and the
costs of these changes are not expected to be material. The Company does not
presently expect that introduction and use of the Euro will materially affect
the Company's foreign exchange activities, or will result in any material
increase in costs to the Company. While the Company will continue to evaluate
the impact of the Euro introduction over time, based on currently available
information, management does not believe that the introduction of the Euro
will have a material adverse impact on the Company's financial condition or
overall trends in the results of operations.
Page 17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of its Stockholders on January 20,
1999, at which the following occurred:
ELECTION OF DIRECTORS: The stockholders elected Charles Federman and Jack Kay
as Class 3 Directors to serve until the 2001 Annual Meeting of Stockholders.
The vote on the matter was as follows:
<TABLE>
<S> <C>
Charles Federman:
FOR 20,805,693
WITHHELD/AGAINST 180,990
Jack Kay:
FOR 20,795,252
WITHHELD/AGAINST 191,431
</TABLE>
APPROVAL OF THE 1999 STOCK PLAN: The stockholders adopted the 1999 Stock Plan
under which 1,100,000 shares of the Company's Common Stock were reserved for
issuance pursuant to awards granted under the plan. The vote on the matter was
as follows:
<TABLE>
<S> <C>
FOR 8,496,638
AGAINST 3,670,341
ABSTAIN 305,435
BROKERS NON-VOTES 8,514,269
</TABLE>
APPROVAL OF THE AMENDED AND RESTATED 1991 EMPLOYEE STOCK PURCHASE PLAN: The
stockholders approved the Amended 1991 Employee Stock Purchase Plan, which
included an increase to the number of shares reserved for issuance thereunder by
350,000 shares. The vote on the matter was as follows:
<TABLE>
<S> <C>
FOR 11,558,924
AGAINST 619,182
ABSTAIN 294,308
BROKERS NON-VOTES 8,514,269
</TABLE>
APPOINTMENT OF INDEPENDENT AUDITORS: The stockholders ratified the appointment
of Ernst & Young, LLP as the Company's independent auditors for the year ending
September 30, 1999. The vote on the matter was as follows:
<TABLE>
<S> <C>
FOR 20,861,144
AGAINST 96,472
ABSTAIN 29,067
BROKERS NON-VOTES --
</TABLE>
Page 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index beginning on page 21 hereof.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during
the quarter ended March 31, 1999.
Page 19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
Date: May 14, 1999 By: /s/ WILLIAM E. MEYER
-------------------------
William E. Meyer
Vice President, Finance and
Chief Financial Officer
Page 20
<PAGE>
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule.
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 46,478
<SECURITIES> 24,613
<RECEIVABLES> 34,905
<ALLOWANCES> 1,209
<INVENTORY> 0
<CURRENT-ASSETS> 111,085
<PP&E> 23,287
<DEPRECIATION> 10,583
<TOTAL-ASSETS> 161,606
<CURRENT-LIABILITIES> 25,071
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 132,602
<TOTAL-LIABILITY-AND-EQUITY> 161,606
<SALES> 31,560
<TOTAL-REVENUES> 31,560
<CGS> 6,044
<TOTAL-COSTS> 6,044
<OTHER-EXPENSES> 20,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 5,271
<INCOME-TAX> 1,687
<INCOME-CONTINUING> 3,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,584
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
