<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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)
<TABLE>
<S><C>
Delaware 04-2685985
- --------------------------------------------------- -------------------------------------------------
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification Number)
</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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------------- ------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.001 24,920,486
- ----------------------------------------- --------------------------------
Class Number of Shares Outstanding at
January 31, 2000
Exhibit Index is on Page 18
<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
December 31, 1999 and September 30, 1999..................................................3
Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 1999 and 1998.............................................4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 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......................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................................16
Item 6. Exhibits and Report on Form 8-K
Exhibits.................................................................................16
Reports on Form 8-K......................................................................16
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
-------------------- -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,055 $ 24,873
Short-term investments 15,555 30,719
Accounts receivable, net of allowances of $1,563 at
December 31, 1999 and $1,460 at September 30, 1999 28,007 30,105
Other current assets 8,648 8,762
-------------------- -----------------
Total current assets 90,265 94,459
Other marketable securities 14,364 8,684
Property and equipment, net 11,888 12,588
Computer software costs, net 6,522 7,471
Goodwill and other intangible assets, net 9,607 10,165
Other assets 6,865 8,631
-------------------- -----------------
Total assets $ 139,511 $ 141,998
==================== =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,217 $ 3,810
Payroll and related liabilities 9,032 10,612
Other accrued liabilities 13,605 19,561
Income taxes payable 7,835 7,547
-------------------- -----------------
Total current liabilities 33,689 41,530
Long-term obligations 1,607 1,546
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 60,000 shares
authorized, 24,390 and 24,036 shares issued and
outstanding at December 31, 1999 and September 30, 1999 24 24
Additional paid-in capital 92,722 89,194
Retained earnings 11,928 10,573
Accumulated other comprehensive loss (459) (869)
-------------------- -----------------
Total stockholders' equity 104,215 98,922
-------------------- -----------------
Total liabilities and stockholders' equity $ 139,511 $ 141,998
==================== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Revenue:
License fees $27,382 $24,233
Services 4,989 6,308
------------------- -----------------
Total revenue 32,371 30,541
Cost of revenue:
License fees 1,478 1,118
Services 4,022 4,649
Amortization of purchased technology 314 533
------------------- -----------------
Total cost of revenue 5,814 6,300
------------------- -----------------
Gross margin 26,557 24,241
Operating expenses:
Research and development 10,504 10,067
Sales and marketing 6,957 7,250
General and administrative 4,709 4,258
Amortization of goodwill and
acquired intangible assets 555 625
Stock-related compensation 327 -
Restructuring charges - 1,944
------------------- -----------------
Total operating expenses 23,052 24,144
------------------- -----------------
Income from operations 3,505 97
Interest and other income, net 535 1,230
------------------- -----------------
Income before income taxes 4,040 1,327
Provision for income taxes 1,291 425
------------------- -----------------
Net income $ 2,749 $ 902
=================== =================
Earnings per share:
Basic $ 0.11 $ 0.03
=================== =================
Diluted $ 0.10 $ 0.03
=================== =================
Shares used in earnings per share calculation:
Basic 24,128 26,412
=================== =================
Diluted 26,332 27,780
=================== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,749 $ 902
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 2,912 3,010
Realized gain on sale of other marketable securities - (112)
Change in operating assets and liabilities:
Accounts receivable 2,271 (777)
Other assets (537) 1,348
Accounts payable (591) (2,218)
Payroll and related liabilities (1,625) (1,566)
Other accrued liabilities (1,516) 2,029
Income taxes payable 280 (1,688)
----------------- ---------------
Total adjustments 1,194 26
----------------- ---------------
Net cash provided by operating activities 3,943 928
Cash flows from investing activities:
Maturity of short-term and long-term investments 16,234 24,342
Purchases of short-term and long-term investments (4,277) (13,780)
Proceeds from sale of other marketable securities - 117
Purchases of property and equipment (527) (739)
Additions to computer software costs (144) (1,305)
----------------- ---------------
Net cash provided by investing activities 11,286 8,635
Cash flows from financing activities:
Proceeds from stock purchases under stock option and
stock purchase plans 4,005 1,121
Repurchases of common stock (6,289) -
----------------- ---------------
Net cash provided by (used in) financing activities (2,284) 1,121
----------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 237 481
----------------- ---------------
Net increase in cash and cash equivalents 13,182 11,165
Cash and cash equivalents at beginning of period 24,873 44,234
----------------- ---------------
Cash and cash equivalents at end of period $ 38,055 $ 55,399
================= ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 5
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is a global
leader in system-enabling software solutions for PCs and connected digital
devices. The Company has three operating divisions, each of which delivers
leading products and professional services that enable connected computing. The
accompanying condensed consolidated financial statements of Phoenix Technologies
Ltd. and its subsidiaries have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The information
included in this report should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1999.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Company's
financial position, results of operations and cash flows for the interim periods
presented. All significant intercompany accounts and transactions have been
eliminated. The operating results for the three-month period ended December 31,
1999, are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2000, or for any other future period.
Certain amounts in the fiscal 1999 financial statements have been
reclassified to conform to the fiscal 2000 presentation.
NOTE 2. REVENUE RECOGNITION
The Company adopted Statement of Position 98-9, ("SOP 98-9"),
Modification of SOP 97-2, "Software Revenue Recognition, With Respect to Certain
Transactions", as of October 1, 1999. The adoption of SOP 98-9 did not 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.
NOTE 3. CASH EQUIVALENTS
All highly liquid securities purchased with an original maturity of
less than three months are considered cash equivalents.
NOTE 4. RESTRUCTURING CHARGES
In 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. As of December 31, 1999,
approximately $0.2 million was unpaid.
NOTE 5. EARNINGS PER SHARE
The following table presents the calculations of basic and diluted
earnings per share under Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
<S> <C>
1999 1998
--------------- -------------
Numerator:
Net income $ 2,749 $ 902
=============== =============
Denominator:
Weighted average common shares
outstanding - denominator for basic
earnings per share 24,128 26,412
Effect of dilutive securities (using the treasury stock method):
Stock options 2,002 1,235
Warrants 202 133
--------------- -------------
Total dilutive securities 2,204 1,368
Weighted average common and equivalent --------------- -------------
shares outstanding - denominator
for diluted earnings per share 26,332 27,780
=============== =============
Earnings per share:
Basic $ 0.11 $ 0.03
=============== =============
Diluted $ 0.10 $ 0.03
=============== =============
</TABLE>
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 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.
Following are the components of comprehensive income (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------------
1999 1998
------------------- ----------------
<S> <C> <C>
Net income $ 2,749 $ 902
Foreign currency translation adjustments 410 1,500
Unrealized gain on securities, net of tax - 61
------------------- ----------------
Other comprehensive income 410 1,561
------------------- ----------------
Comprehensive income $ 3,159 $2,463
=================== =================
</TABLE>
NOTE 7. SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" in its fiscal 1999 Annual Report on Form 10-K. The Company has
three reportable segments: Platform Enabling, inSilicon and PhoenixNet.
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.
Page 7
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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. It has not historically allocated assets to
its individual operating segments.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------
(IN THOUSANDS) 1999 1998
----------------------------------------------------------------- --------------------- ------------------
<S> <C> <C>
Revenue:
Platform Enabling $27,114 $25,675
inSilicon 5,257 4,866
PhoenixNet - -
--------------------- ------------------
Total $ 32,371 $30,541
===================== ==================
Gross Margin:
Platform Enabling $22,375 $20,093
inSilicon 4,182 4,148
PhoenixNet - -
--------------------- ------------------
Total $ 26,557 $24,241
===================== ==================
Income (loss) from operations before restructuring charges:
Platform Enabling $7,640 $3,270
inSilicon (1,058) (1,229)
PhoenixNet (3,077) -
--------------------- ------------------
Total $ 3,505 $2,041
===================== ==================
</TABLE>
The Company also records geographic information, which is categorized into three
regions: United States, Asia and Europe.
<TABLE>
<CAPTION>
Three Months Ended December 31,
------------------------------------------
(IN THOUSANDS) 1999 1998
--------------------------------------------------------------- --------------------- -------------------
<S> <C> <C>
Revenue:
United States $7,616 $ 10,008
Asia 22,108 17,462
Europe 2,647 3,071
--------------------- -------------------
Total $ 32,371 $ 30,541
===================== ===================
</TABLE>
NOTE 8. 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 during the fiscal quarter ended December 31, 1999 at a
cost of approximately $2.1 million. As of October 1999, both repurchase programs
were completed and terminated.
Page 8
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 9. STOCK PLAN
The Company's Board of Directors adopted the inSilicon Corporation 1999
Stock Option Plan on December 21, 1999 for inSilicon Corporation, a wholly owned
subsidiary of Phoenix Technologies Ltd. The stock issuable under the Plan will
be authorized but unissued shares or treasury shares, and the aggregate number
of shares reserved for grants under the Plan will not exceed 2,700,000 shares.
The inSilicon Corporation 1999 Stock Plan provides for granting of
incentive and nonstatutory stock options to employees, consultants and directors
of inSilicon Corporation. Options granted under this plan are for periods not to
exceed ten years, and are generally granted at prices not less than 100% and 85%
for incentive and nonstatutory stock options, respectively, of the fair market
value on the date of grant. The stock options become fully vested and
exercisable over a maximum of five years. As of December 31, 1999, no shares
were issued under the inSilicon Corporation 1999 Stock Plan.
NOTE 10. SUBSEQUENT EVENTS
inSilicon Corporation, a wholly owned subsidiary of Phoenix
Technologies Ltd., filed a registration statement with the Securities and
Exchange Commission on January 13, 2000 for an initial public offering of shares
of its common stock.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q, INCLUDING WITHOUT LIMITATION THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS 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,
1999, AND IN OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
COMPANY OVERVIEW
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.
REVENUE
The Company's Platform Enabling and Semiconductor IP products are
generally designed into personal computer systems, information appliances and
semiconductors. License fee and service revenue by platform for the three-month
periods ended December 31, 1999 and 1998, were as follows (DOLLARS IN
THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
---------------------------- ---------------------------
1999 1998 % CHANGE 1999 1998
-------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Platform Enabling $ 27,114 $ 25,675 6% 84% 84%
inSilicon 5,257 4,866 8% 16% 16%
-------------- ------------- ------------- -------------
Total revenue $ 32,371 $ 30,541 6% 100% 100%
============== ============= ============= =============
</TABLE>
The increase in Platform Enabling revenue in the first quarter of
fiscal 2000 from the comparable period last year was due to increased worldwide
demand for personal computers, especially in Asia. inSilicon revenue increased
in the first quarter of fiscal 2000 due to the increased demand for outsourced
circuit intellectual property by semiconductor and systems companies.
Revenue by geographic region for the three-month periods ended December
31, 1999 and 1998, were as follows (DOLLARS IN THOUSANDS):
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
--------------------------- -------------------------
1999 1998 % CHANGE 1999 19998
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
North America $7,616 $10,008 (24%) 24% 33%
Asia 22,108 17,462 27% 68% 57%
Europe 2,647 3,071 (14%) 8% 10%
------------- ------------- ------------ -----------
Total revenue $32,371 $30,541 6% 100% 100%
============= ============= ============ ===========
</TABLE>
Asian revenue increased while North American and European revenue
decreased in the three-month period ended December 31, 1999 due to the
outsourcing of system design and manufacturing to Asian PC and motherboard
manufacturers and to increased Japan PC shipments. The Company's growth rate
in Platform Enabling revenue may be impacted in future quarters by a possible
decline in average selling prices due in part to the transition of design and
manufacturing to Asia.
One customer accounted for 13% of total revenue during the three-month
period ended December 31, 1999. No customer accounted for more than 10% of
revenue during the three-month period ended December 31, 1998.
Service revenue in the first quarter of fiscal 2000 decreased 21% over
the comparable period in fiscal 1999, primarily due to the market shift to Asia
where a higher proportion of total revenues has historically been generated from
license fees.
GROSS MARGIN
Gross margin as a percentage of revenue was 82% and 79% for the
three-month periods ended December 31, 1999 and 1998, respectively. Included
in the costs of revenue was $0.5 million and $0.3 million of amortization of
purchased technologies from Sand Microelectronics for the three months ended
December 31, 1999 and 1998, respectively. Gross margin as a percentage of
revenue before the amortization of purchased technology was 83% and 81% for
the three-month periods ended December 31, 1999 and 1998, respectively.
Service gross margin as a percentage of revenue declined to 19% in the
quarter ended December 31, 1999, from 26% in the quarter ended December 31,
1998. This decrease was mostly due to a decline in service revenues mentioned
above, partially offset by a reallocation of engineering resources from
deployment to development.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month period ended
December 31, 1999, increased $0.4 million (4%) from the comparable period in
fiscal 1999. This increase was primarily due to a $0.9 million of non-recurring
license fee related to certain web-based PhoenixNet technologies, partially
offset by decreased headcount as a result of the Company gaining efficiency
after the fiscal 1999 reorganizations into three operating divisions.
The Company capitalized $0.1 million and $0.6 million of internal
software development costs for the three-month periods ended December 31, 1999
and 1998, respectively. This decrease in capitalization was due to a higher
proportion of costs being incurred on non-capitalizable projects, such as
products that have not yet reached technological feasibility and tools
associated with the deployment of the Company's products. The Company believes
that continued investment in new and evolving technologies is essential to meet
the rapidly changing industry requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three-month period ended December
31, 1999, decreased $0.3 million (4%) from the comparable period in fiscal 1999
mostly due to a reduction in the field sales management organization from a
fiscal 1999 reorganization, as well as lower tradeshow and related travel
activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
December 31, 1999, increased $0.5 million (11%) primarily due to increased
patent costs associated with the PhoenixNet division, as well as increased
variable compensation due to higher company profitability.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESTRUCTURING CHARGES
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. As of December 31, 1999,
approximately $0.2 million was unpaid.
STOCK-RELATED COMPENSATION
The stock-related compensation charge in the three-month period ended
December 31, 1999, was mostly due to the granting of options to purchase
inSilicon stock at below-market prices.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, for the three-month period ended
December 31, 1999, decreased $0.7 million (57%) from the comparable period in
fiscal 1999. This decrease was primarily due to lower cash balances as a result
of stock repurchases in fiscal 1999.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $1.3 million and $0.4
million for the three-month periods ended December 31, 1999 and 1998,
respectively. The provisions for income taxes reflect an effective tax rate of
32% for both of the respective quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity include cash, cash
equivalents, short-term investments, other marketable securities, and a $10
million unsecured line of credit with a commercial bank that expires in March
2000. There were no borrowings outstanding under the credit facility at December
31, 1999. The Company believes that its existing sources of liquidity will be
sufficient to satisfy the Company's cash requirements for at least the next
twelve months.
In fiscal 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 during the fiscal quarter ended December 31, 1999 at a
cost of approximately $2.1 million. As of October 1999, both repurchase programs
were completed and terminated.
CHANGES IN FINANCIAL CONDITION
Net cash provided by operating activities in the three months ended
December 31, 1999 was $3.9 million, consisting primarily of $2.7 million of net
income and $2.3 million of cash inflow from accounts receivable due to improved
collection, partially offset by payments of restructuring-related costs. Net
cash generated from investing activities in the three-month period ended
December 31, 1999 was $11.3 million, consisting primarily of $12.0 million of
net purchases of short-term and long-term investments and marketable securities,
partially offset by $0.5 million in purchases of property and equipment, and
$0.1 million in additions to computer software costs. Net cash used in financing
activities during the three months ended December 31, 1999, was $2.3 million,
consisted primarily of $6.3 million of cash used to repurchase the Company's
common stock, partially offset by $4.0 million generated from the exercise of
common stock options and the issuance of stock under the Company's employee
stock purchase plan.
NEW ACCOUNTING PRONOUNCEMENT
The Company adopted Statement of Position 98-9, ("SOP 98-9"),
Modification of SOP 97-2, "Software Revenue Recognition, With Respect to Certain
Transactions", as of October 1, 1999. The adoption of SOP 98-9 did
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
not 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.
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 these statements in fiscal 2001 and have not
determined the effect, if any, that adoption will have on the Company's
consolidated financial position or results of operations.
YEAR 2000
Significant uncertainty existed in the software industry concerning the
potential effects associated with the Year 2000 ("Y2K") problem. Many software
and firmware products and internally developed applications used two digits to
designate the year instead of four digits, which could 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 the Company's products and its information technology and other internal
systems as well as its customers and vendors.
The Company's Y2K compliance effort covers the Company's products,
internal systems and services provided by others.
PHOENIX PRODUCTS
HISTORY. Since the Company's inception, it has sold or licensed
various products, including BIOS products, semiconductor intellectual
property and consumer software.
Phoenix's BIOS products fall into differing definitions of Y2K
compliance. Most BIOS-related products sold or licensed after fiscal 1995 were
designed to automatically handle Y2K date changes. Most of the Company's 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. The Company identified one product line that was
not compliant at various shipment dates, and has made test utilities and fixes
available on the Company's 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.
As of January 31, 2000, the Company recorded approximately 490,000 sessions to
the Company's Y2K information on its web site.
The Company's semiconductor IP product lines do not generally handle
date-related functions and accordingly do not cause Y2K issues. The Company
discontinued consumer software product lines in 1996. Accordingly, the Company
does not believe that a material number of these products will remain in use
after January 1, 2000. The Company has developed a list of all products it sold
and licensed and has assessed the level of compliance of these products. This
effort was completed in the second quarter of 1999 fiscal year. As of January
31, 2000, the Company received approximately 35 inquiries concerning these
products.
REMEDIAL STEPS. The Company sells and licenses its products directly to
OEMs and manufacturers of motherboards, 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 has made available to end-users software upgrades, fixes or patches.
These solutions have been made available to users through the Company's web site
and a contracted call support center. The Company has also made these solutions
available to OEM customers for placement by those customers on their respective
web sites and delivery to their customers. Where appropriate, the Company has
undertaken 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 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. The Company has estimated incremental
Page 13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTINUED)
costs of providing these solutions and other end user support and estimated
costs to be approximately $3.3 million and has accrued this amount in the
fourth quarter of fiscal 1999.
EXPOSURE. The Company continues to identify and assess any remaining
issues related to Y2K compliance of those products sold or licensed and the
number of those products remaining 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's estimate
of the cost of obtaining compliance and providing end user support is subject to
change.
INFORMATION TECHNOLOGY AND OTHER SYSTEMS
The Company's 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. 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 as its primary financial system, which has been upgraded recently to
a version, which Oracle represents is Y2K compliant. The Company has 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. As of January 31, 2000, the
Company experienced no Y2K compliance issues resulting from the code management
system.
The Company executed a project plan, approved by its Board of
Directors, and tested its 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. The Company spent
approximately $355,000 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 the Company's
personnel involved in the project. The Company's Information Technology
personnel spent approximately $314,000 on Y2K issues during fiscal 1999 and the
first quarter of fiscal 2000. 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 the Company's financial
condition or results of operations. However there can be no assurance that
additional and unanticipated costs will not arise, and actual results could
differ from those anticipated.
THIRD-PARTY SYSTEMS
The Company has relationships with various third parties and the
failure of these third parties to achieve Y2K compliance could have had a
material impact on the Company's business, operating results and financial
condition. The Company made inquiries of its major vendors and suppliers, such
as banks, payroll service and equipment vendors about their Y2K readiness. The
Company has determined that responses were satisfactory for determining the
readiness of these vendors. As of January 31, 2000, the Company experienced no
interruption of services provided by these third parties that resulted from Y2K
non-compliance. Nevertheless, there can be no assurance that unanticipated
processing or supply problems will not occur after the turn of the year.
Page 14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company does not have any specific information concerning the Y2K
readiness of the Company's customers. In the event that the Company's
significant customers did not successfully achieve Y2K compliance in a timely
manner, the Company's business or operations could have been adversely affected.
As of January 31, 2000, the Company is not aware that any of its significant
customers did not successfully achieved Y2K compliance.
WORST CASE SCENARIO AND CONTINGENCY PLANS
The worst case scenario would have included significant costs and
business interruptions associated with: 1) previously undetected errors in the
Company's products, 2) Y2K litigation, as currently being experienced by other
software vendors, 3) a significant disruption of the Company's internal
information systems and 4) the failure of infrastructure services provided by
government agencies and other third parties (e.g., air travel, banking,
utilities, etc.). Third-party litigation purporting to represent a class of PC
or other product users containing the Company's products, independent of the
merits of such claims, could require a significant amount of management time and
resources to defend the Company. The Company 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 the Company's or
third party systems. There can be no assurance that the actions being taken by
the Company, 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 the Company's business, operating results and financial
condition.
EURO
The Company is 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. The Company's 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. The Company does not
presently expect that the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest rate, foreign
currency exchange rates, and investment, refer to Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended September 30, 1999.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index beginning on page 18 hereof.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during
the quarter ended December 31, 1999.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
Date: February 14, 2000 By: /s/ WILLIAM E. MEYER
------------------ --------------------
William E. Meyer
Vice President, Finance and
Chief Financial Officer
Page 17
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule.
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 38,055
<SECURITIES> 15,555
<RECEIVABLES> 29,570
<ALLOWANCES> 1,563
<INVENTORY> 0
<CURRENT-ASSETS> 90,265
<PP&E> 26,115
<DEPRECIATION> 14,227
<TOTAL-ASSETS> 139,511
<CURRENT-LIABILITIES> 33,689
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 104,191
<TOTAL-LIABILITY-AND-EQUITY> 139,511
<SALES> 32,371
<TOTAL-REVENUES> 32,371
<CGS> 5,814
<TOTAL-COSTS> 5,814
<OTHER-EXPENSES> 23,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 4,040
<INCOME-TAX> 1,291
<INCOME-CONTINUING> 2,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,749
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
