<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
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 (I.R.S. Employer Identification Number)
of incorporation or organization)
411 East Plumeria Drive, San Jose, California 95134
---------------------------------------------------
(Address of principal executive offices, including zip code)
(408) 570-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.001 26,266,584
----------------------------------------- -----------------------------------
Class Number of Shares Outstanding at
July 31, 2000
<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
June 30, 2000 and September 30, 1999.........................................................3
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended June 30, 2000 and 1999...........................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2000 and 1999.....................................................5
Notes to Condensed Consolidated Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
Exhibits....................................................................................17
Reports on Form 8-K.........................................................................17
</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>
June 30, September 30,
Assets 2000 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 56,897 $ 24,873
Short-term investments 43,613 30,719
Accounts receivable, net of allowance of $975 at
June 30, 2000 and $1,460 at September 30, 1999 39,444 30,105
Other current assets 9,942 8,762
------------------ -----------------
Total current assets 149,896 94,459
Other marketable securities 8,771 8,684
Investments 4,473 2,474
Property and equipment, net 12,557 12,588
Computer software costs, net 5,419 7,471
Goodwill and other intangible assets, net 8,492 10,165
Other assets 9,128 6,157
------------------ -----------------
Total assets $ 198,736 $ 141,998
================== =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 3,238 $ 3,810
Payroll and related liabilities 7,984 10,612
Other accrued liabilities 11,026 19,561
Income taxes payable 5,699 7,547
------------------ -----------------
Total current liabilities 27,947 41,530
Long-term obligations 4,123 1,546
Commitments and contingencies - -
Minority Interest 13,471 -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 60,000 shares
authorized, 26,196 and 24,036 shares issued and
outstanding at June 30, 2000 and September 30, 1999 30 24
Additional paid-in capital 131,933 89,227
Stock-based compensation (1,242) (33)
Retained earnings 22,788 10,573
Accumulated other comprehensive loss (314) (869)
------------------ -----------------
Total stockholders' equity 153,195 98,922
------------------ -----------------
Total liabilities and stockholders' equity $ 198,736 $ 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 Nine Months Ended
June 30, June 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 31,696 $ 26,398 $ 89,922 $ 76,371
Services 4,807 4,916 13,677 17,044
------------- -------------- --------------- -------------
Total revenue 36,503 31,314 103,599 93,415
Cost of revenue:
License fees 981 859 2,703 3,304
Services 4,900 4,858 13,614 13,691
Amortization of purchased technology 314 533 942 1,599
------------- -------------- --------------- -------------
Total cost of revenue 6,195 6,250 17,259 18,594
------------- -------------- --------------- -------------
Gross margin 30,308 25,064 86,340 74,821
Operating expenses:
Research and development 8,925 10,074 29,133 29,867
Sales and marketing 8,664 7,503 23,328 21,891
General and administrative 4,820 4,239 14,385 11,865
Amortization of goodwill and
acquired intangible assets 555 625 1,665 1,877
Stock-based compensation 118 - 570 -
Restructuring charge - 2,532 - 4,476
------------- -------------- --------------- -------------
Total operating expenses 23,082 24,973 69,081 69,976
------------- -------------- --------------- -------------
Income from operations 7,226 91 17,259 4,845
Interest and other income, net 1,395 4,628 2,740 6,472
Minority interest (10) - 15 -
------------- -------------- --------------- -------------
Income before income taxes 8,611 4,719 20,014 11,317
Provision for income taxes 2,759 1,510 6,406 3,622
------------- -------------- --------------- -------------
Net income $ 5,852 $ 3,209 $ 13,608 $ 7,695
------------- -------------- --------------- -------------
Earnings per share:
Basic $ 0.23 $ 0.12 $ 0.54 $ 0.29
------------- -------------- --------------- -------------
Diluted $ 0.21 $ 0.11 $ 0.49 $ 0.28
------------- -------------- --------------- -------------
Weighted average shares used in earnings per
share calculation:
Basic 25,871 26,144 24,975 26,534
------------- -------------- --------------- -------------
Diluted 28,130 27,945 27,770 27,924
------------- -------------- --------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
<PAGE>
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,608 $ 7,695
Reconciliation to net cash provided by (used in) operating activities:
Depreciation and amortization 7,577 8,764
Write-off of capitalized software - 1,616
Realized gain on sale of other marketable securities - (4,034)
Stock-based compensation 570 -
Minority interest (15) -
Change in operating assets and liabilities:
Accounts receivable (9,276) (725)
Other assets (3,495) 1,775
Accounts payable (615) (3,446)
Payroll and related liabilities (2,671) 1,156
Other accrued liabilities (5,352) (274)
Income taxes payable (1,860) (307)
--------------- ---------------
Total adjustments (15,137) 4,525
--------------- ---------------
Net cash provided by (used in) operating activities (1,529) 12,220
Cash flows from investing activities:
Maturity of short-term and long-term investments 367,791 31,842
Purchases of short-term and long-term investments (380,773) (45,335)
Proceeds from sales of other marketable securities - 4,073
Purchases of property and equipment (3,590) (2,801)
Additions to computer software costs (244) (2,276)
--------------- ---------------
Net cash used in investing activities (16,816) (14,497)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 37,168 -
Proceeds from common stock purchases under stock option and
stock purchase plans 17,885 5,043
Repurchases of common stock (6,289) (14,800)
--------------- ---------------
Net cash provided by (used in) financing activities 48,764 (9,757)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 1,605 524
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 32,024 (11,510)
Cash and cash equivalents at beginning of period 24,873 44,234
--------------- ---------------
Cash and cash equivalents at end of period $ 56,897 $ 32,724
=============== ===============
</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 business units (one of which, inSilicon
Corporation ("inSilicon"), is a majority-owned subsidiary), 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 wholly and majority-owned subsidiaries have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). All
intercompany accounts and transactions have been eliminated. 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
fiscal 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. The operating results for the three and nine-month period ended June
30, 2000 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. SALE OF INTEREST IN INSILICON CORPORATION
The initial public offering of 3.5 million shares of the Company's
subsidiary, inSilicon, closed on March 27, 2000. Proceeds, net of issuance
costs, to inSilicon were $37.2 million. The accompanying condensed consolidated
financial statements include the financial position and results of operations of
inSilicon on a fully consolidated basis. During fiscal 2000, as part of the
separation of the inSilicon business to a separate subsidiary, the Company
contributed certain assets to inSilicon including technology, licenses, personal
property and other assets with inSilicon assuming the related liabilities. The
Company entered into certain agreements with inSilicon, including a services and
cost sharing agreement, employee matters agreement, and a tax sharing agreement
that will govern the ongoing relationship of the parties.
NOTE 3. CHANGES IN ACCOUNTING
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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") which outlines the
Staff's position on various revenue recognition issues. SAB 101 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
Page 6
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
No. 25 ("Opinion 25"). FIN 44 clarifies (a) the definition of "employee" for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, except requirements regarding
certain events that occur after December 15, 1998 or January 12, 2000 but before
the effective date should be applied prospectively. FIN 44 will not have a
material impact on the Company's financial position, results of operations or
cash flows.
NOTE 4. RESTRUCTURING CHARGES
In the first quarter of fiscal 1999, the Company recorded a
restructuring charge of $1.9 million related to facilities consolidations and
streamlining of 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 June 30, 2000, the
restructuring charge was fully paid.
In June 1999, the Company recorded a restructuring charge of $2.5
million. This charge included the costs of employee severance and the write-off
of certain capitalized software associated with the discontinuance of the PICO
and PC Enhancing Division. As of June 30, 1999, $0.8 million was unpaid.
NOTE 5. EARNINGS PER SHARE
The following table presents the calculations of basic and diluted
earnings per share under Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
Page 7
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2000 1999 2000 1999
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 5,852 $ 3,209 $13,608 $ 7,695
============ =========== ========== ===========
Weighted average common shares
outstanding 25,871 26,144 24,975 26,534
Effect of dilutive securities (using the treasury
stock method):
Stock options 1,769 1,661 2,289 1,254
Warrants 490 140 506 136
------------ ----------- ---------- -----------
Total dilutive securities 2,259 1,801 2,795 1,390
------------ ----------- ---------- -----------
Weighted average diluted common and
equivalent shares outstanding 28,130 27,945 27,770 27,924
------------ ----------- ---------- -----------
Earnings per share:
Basic $ 0.23 $ 0.12 $ 0.54 $ 0.29
============ =========== ========== ===========
Diluted $ 0.21 $ 0.11 $ 0.49 $ 0.28
============ =========== ========== ===========
</TABLE>
NOTE 6. COMPREHENSIVE INCOME
Following are the components of comprehensive income (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Net income $ 5,852 $ 3,209 $13,608 $ 7,695
Foreign currency translation adjustments (114) 99 555 1,121
Unrealized loss on securities, net of tax - (1,722) - (2,046)
---------- -------- -------- -----------
Other comprehensive income (loss) (114) (1,623) 555 (925)
---------- -------- -------- -----------
Comprehensive income $ 5,738 $ 1,586 $14,163 $ 6,770
---------- -------- -------- -----------
</TABLE>
NOTE 7. SEGMENT REPORTING
The Company has three reportable segments: Platform Enabling,
inSilicon and PhoenixNet.
PLATFORM ENABLING: Provides system-enabling software that is used in
the design, deployment and ongoing operation of PCs, internet appliances,
embedded systems, and other connected digital devices. The Platform Enabling's
flagship BIOS products provide support for current technologies and industry
standards, allowing systems and device manufacturers to base new product designs
on a range of microprocessors, chipsets and operating systems combinations.
INSILICON: Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of digital devices. inSilicon
provides cores, related silicon subsystems and firmware to over 400 customers
Page 8
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
that use its technologies in hundreds of different digital devices ranging from
network routers to cellular phones.
PHOENIXNET: Provides PC users worldwide with a solution to manage and
support their computers, and the ability to turn their computers into powerful
tools for communication, business, entertainment and education.
The Company evaluates operating segment performance based on revenue,
gross margin and operating income.
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------------------- -------------------------------------
(IN THOUSANDS) 2000 1999 2000 1999
----------------------------------- ------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue:
Platform Enabling $ 29,683 $ 27,162 $ 86,260 $ 79,055
inSilicon 6,811 4,152 17,906 14,360
PhoenixNet 532 - 671 -
Intercompany eliminations (523) - (1,238) -
------------------- ------------------ ------------------ -----------------
Total $ 36,503 $ 31,314 $ 103,599 $ 93,415
=================== ================== ================== =================
Gross Margin:
Platform Enabling $ 24,087 $ 21,773 $ 70,975 $ 63,575
inSilicon 5,689 3,291 14,694 11,246
PhoenixNet 532 - 671 -
------------------- ------------------ ------------------ -----------------
Total $ 30,308 $ 25,064 $ 86,340 $ 74,821
=================== ================== ================== =================
Income (loss) from operations:
Platform Enabling $ 9,463 $ 7,127 $ 26,135 $ 16,428
inSilicon (245) (1,883) (2,054) (4,486)
PhoenixNet (1,992) (2,621) (7,422) (2,621)
Restructuring charges - (2,532) - (4,476)
Reversal of Y2K support - - 600 -
------------------- ------------------ ------------------ -----------------
Total $ 7,226 $ 91 $ 17,259 $ 4,845
=================== ================== ================== =================
</TABLE>
The Company also reports geographic information, which is categorized into three
regions: North America, Asia and Europe.
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------------------- -------------------------------------
(IN THOUSANDS) 2000 1999 2000 1999
----------------------------------- ------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue:
North America $ 11,897 $ 10,478 $ 29,071 $ 31,668
Asia 22,506 18,933 67,319 53,952
Europe 2,100 1,903 7,209 7,795
------------------- ------------------ ------------------ -----------------
Total $ 36,503 $ 31,314 $103,599 $ 93,415
=================== ================== ================== =================
</TABLE>
Page 9
<PAGE>
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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 3.3 million shares during fiscal 1999 at a total aggregate cost of
$34.1 million. The Company repurchased an additional 175,000 shares during the
first quarter of fiscal 2000 at a cost of $2.1 million. As of December 1999,
both repurchase programs were completed and terminated.
Page 10
<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:
PLATFORM ENABLING: Provides system-enabling software that is used in
the design, deployment and ongoing operation of PCs, internet appliances,
embedded systems, and other connected digital devices. The Platform Enabling's
flagship BIOS products provide support for current technologies and industry
standards, allowing systems and device manufacturers to base new product designs
on a range of microprocessors, chipsets and operating systems combinations.
INSILICON: Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of digital devices. inSilicon
provides cores, related silicon subsystems and firmware to over 400 customers
that use its technologies in hundreds of different digital devices ranging from
network routers to cellular phones.
PHOENIXNET: Provides PC users worldwide with a solution to manage and
support their computers, and the ability to turn their computers into powerful
tools for communication, business, entertainment and education.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUE
The Company's products are generally designed into personal computer
systems, information appliances and semiconductors. License fee and service
revenue by segment for the three and nine-month periods ended June 30, 2000 and
1999, were as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
------------------------ ----------------------
Three months ended June 30: 2000 1999 % CHANGE 2000 1999
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Platform Enabling $ 29,683 $ 27,162 9% 81.3% 86.7%
inSilicon 6,811 4,152 64% 18.7% 13.3%
PhoenixNet 532 - N/A 1.4% -
Intercompany eliminations (523) - N/A (1.4%) -
---------- ----------- ------- ----------
Total revenue $ 36,503 $ 31,314 17% 100% 100%
========== =========== ======= ==========
<CAPTION>
% of Consolidated
Amount Revenue
------------------------ ----------------------
Nine months ended June 30: 2000 1999 % CHANGE 2000 1999
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Platform Enabling $ 86,260 $ 79,055 9% 83.3% 84.6%
inSilicon 17,906 14,360 25% 17.3% 15.4%
PhoenixNet 671 - N/A 0.6% -
Intercompany eliminations (1,238) - N/A (1.2%) -
---------- ----------- ------- ----------
Total revenue $ 103,599 $ 93,415 11% 100% 100%
========== =========== ======= ==========
</TABLE>
The increase in Platform Enabling revenue in the third quarter and
first nine months of fiscal 2000 of 9% from the comparable periods of fiscal
1999 was primarily due to increased worldwide demand for personal computers.
inSilicon revenue increased in the third quarter and first nine months of fiscal
2000 from the comparable periods of fiscal 1999 primarily due to the greater
market acceptance of semiconductor intellectual property, the increased
acceptance of re-use licenses of semiconductor intellectual property to existing
customers, and increased service revenue due to increased maintenance revenue
from inSilicon's growing installed base of customers. Comparison of PhoenixNet
revenues to the same periods in fiscal 1999 is not applicable, since PhoenixNet
first generated revenues in the second quarter of fiscal 2000.
Revenue by geographic region for the three and nine-month periods ended
June 30, 2000 and 1999, was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
------------------------ ----------------------
Three months ended June 30: 2000 1999 % CHANGE 2000 1999
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
North America $ 11,897 $10,478 14% 32.6% 33.5%
Asia 22,506 18,933 19% 61.6% 60.4%
Europe 2,100 1,903 10% 5.8% 6.1%
---------- ----------- ------- ----------
Total revenue $ 36,503 $31,314 17% 100% 100%
=========== =========== ======= ==========
<CAPTION>
% of Consolidated
Amount Revenue
------------------------ ----------------------
Nine months ended June 30: 2000 1999 % CHANGE 2000 1999
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
North America $ 29,071 $31,668 (8%) 28.0% 33.9%
Asia 67,319 53,952 25% 65.0% 57.8%
Europe 7,209 7,795 (8%) 7.0% 8.3%
---------- ----------- ------- ----------
Total revenue $103,599 $93,415 11% 100% 100%
=========== =========== ======= ==========
</TABLE>
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
All regions experienced increased revenue in the three-month period
ended June 30, 2000 due primarily to significantly increased worldwide demand
for personal computers. Revenue increased despite lower average selling prices
of our BIOS products than in the three-month period ended June 30, 1999 partly
due to a recent shift in demand for personal computers from desktop to notebook
computers. An increase in inSilicon license fees and the release of their USB
2.0 Controller contributed to Asian and European revenue growth in the
three-month period ended June 30, 2000. In the three-month period ended June 30,
2000, North American revenues were impacted favorably by the new revenue
generated from the PhoenixNet division. In the nine-month period ended June 30,
2000, Asian revenues increased while North American and European revenue
decreased. This was due primarily to the outsourcing of system design and
manufacturing to Asian PC and motherboard manufacturers, inSilicon's release of
their USB 2.0 Controller, and to growth in Japan PC shipments in the Platform
Enabling segment.
One customer accounted for 13% of total revenue during the three and
nine-month periods ended June 30, 2000. One customer accounted for more than 11%
of revenue during the three-month period ended June 30, 1999. No customer
accounted for more than 10% of revenue during the nine-month period ended June
30, 1999.
Service revenue in the three and nine-month periods ended June 30, 2000
decreased 2% and 20%, respectively, over the comparable periods in fiscal 1999.
These decreases were primarily due to the market shift within the Platform
Enabling segment to Asia where a higher proportion of total revenues has
historically been generated from license fees, the timing of new processor chip
releases from semiconductor chip manufacturers and the shift towards recurring
license revenues versus non-recurring service revenues, partially offset by
increases in inSilicon's service revenues due to increased maintenance revenue
generated from inSilicon's growing installed base of customers.
GROSS MARGIN
Gross margin as a percentage of revenue for the three and nine-month
periods ended June 30, 2000 was unchanged from 83% and 80%, respectively, in the
comparable periods of fiscal 1999. Included in the costs of revenue was $0.3
million and $0.5 million of amortization of purchased technologies from Sand
Microelectronics for the three months ended June 30, 2000 and 1999,
respectively, and $0.9 million and $1.6 million for the nine months ended June
30, 2000 and 1999, respectively. Also included in the costs of revenue in the
nine months ended June 30, 2000 was $0.6 million of Year 2000 ("Y2K") support
cost reversal. For the three and nine-month periods ended June 30, 2000, gross
margin as a percentage of revenue before the amortization of purchased
technology and reversal of Y2K support costs was unchanged from 84% and 82%,
respectively, in the comparable periods of fiscal 1999.
Service gross margin as a percentage of revenue declined to (2%) and 1%
in the three and nine-month periods ended June 30, 2000, from 1% and 20% in the
three and nine-month periods ended June 30, 1999. This decrease was mostly due
to the decline in service revenues within the Platform Enabling segment
mentioned above.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three-month periods ended
June 30, 2000 and 1999 decreased $1.1 million from 32% of revenue to 24%.
Research and development expenses for the nine month periods ended June 30, 2000
and 1999, decreased $0.7 million from 32% of revenue to 28%. These decreases
were primarily due to the improvement of product and resource management
resulting in lower headcount and the movement of research and development
centers to Asia and Japan where costs are lower. The decrease in the nine-month
period ended June 30, 2000 from the same period of fiscal 1999 was partially
offset by $0.9 million of license fees related to certain web-based PhoenixNet
technologies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company capitalized $0.1 million of internal software development
costs for the three-month period ended June 30, 2000 as compared to $0.4 million
for the same period in fiscal 1999. The Company capitalized $0.2 million and
$1.9 million of internal software development costs for the nine-month periods
ended June 30, 2000 and 1999, respectively. This decrease in capitalization was
due to a higher proportion of costs being incurred on non-capitalizable
projects.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three and nine-month periods ended
June 30, 2000, increased $1.2 million (16%) and $1.4 million (7%), respectively,
from the comparable periods in fiscal 1999. As a percentage of revenue, sales
and marketing expenses remained unchanged from 24% and 23% in the three and
nine-month periods ended June 30, 2000 and 1999, respectively. The increases
were mostly due to increases in personnel and consulting and related recruiting
costs, especially in the PhoenixNet segment and inSilicon subsidiary, and costs
related to the annual sales meeting, partially offset by a slight decrease in
trade show and industry event attendance by Company personnel. Management has
made a conscious effort to increase sales and marketing efforts through the
reallocation of resources.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and nine-month
periods ended June 30, 2000, increased $0.6 million (14%) and $2.5 million
(21%), respectively, from the comparable periods in fiscal 1999. As a
percentage of revenue, general and administrative expenses decreased from 14%
to 13% in the three-month period ended June 30, 2000 and 1999, respectively,
and increased from 13% to 14% in the nine-month period ended June 30, 2000
and 1999, respectively. The increases were primarily due to increases in
personnel and consulting, especially in the PheonixNet segment and inSilicon,
and increased variable compensation due to higher profitability.
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 June 30, 2000, the
restructuring charge was fully paid.
In June 1999, the Company recorded a restructuring charge of $2.5
million. This charge included the costs of employee severance and the write-off
of certain capitalized software associated with the discontinuance of the PICO
and PC Enhancing Division. As of June 30, 1999, $0.8 million was unpaid.
STOCK-BASED COMPENSATION
The stock-based compensation charges in the three and nine-month
periods ended June 30, 2000, was mostly due to the granting of options to
purchase inSilicon stock at exercise prices less than the fair market value of
inSilicon common stock on the grant date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND OTHER INCOME, NET
Interest and other income, net, for the three and nine-month periods
ended June 30, 2000, decreased $3.2 million (70%) and $3.7 million (58%) from
the comparable periods in fiscal 1999 primarily due to gains of $3.9 million and
$4.0 million received on the sales of Xionics Document Technologies, Inc. common
stock in the three and nine-month periods ended June 30, 1999, slightly offset
by interest received on higher cash balances as a result of the proceeds
inSilicon received from the initial public offering of inSilicon stock.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $2.8 million and $6.4
million for the three and nine-month periods ended June 30, 2000, respectively,
as compared to $1.5 million and $3.6 million for the comparable periods in
fiscal 1999. The provisions for income taxes reflect an effective tax rate of
32% for all periods. inSilicon is not consolidated for income tax purposes, as
the Company owns less than 80% of the voting stock issued and outstanding as of
June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have historically included
operating cash flow. The Company believes that its existing sources of
liquidity, which does not include the financial operations of inSilicon, will be
sufficient to satisfy the Company's cash requirements for at least the next
twelve months. In the second quarter of fiscal 2000, inSilicon raised net
proceeds of $37.2 million from its initial public offering. In addition,
inSilicon has a $5 million revolving line of credit with a commercial bank that
expires in January 2001. There were no borrowings outstanding under the credit
facility at June 30, 2000. The Company believes inSilicon's present liquidity
will be sufficient to meet inSilicon's operating and capital 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 3.3 million shares during fiscal 1999 at a total aggregate cost of
$34.1 million. The Company repurchased an additional 175,000 shares during the
first quarter of fiscal 2000 at a cost of $2.1 million. As of December 1999,
both repurchase programs were completed and terminated.
CHANGES IN FINANCIAL CONDITION
Net cash used in operating activities in the nine months ended June 30,
2000 was $1.5 million, consisting primarily of increases in accounts receivable
and other assets and decreases in payroll, other accrued liabilities and income
taxes payable, partially offset by $13.6 million of net income, adjusted for
non-cash items. Net cash generated from operating activities in the nine months
ended June 30, 1999 was $12.2 million, resulting primarily from cash provided by
net income, adjusted for non-cash items. Net cash used in investing activities
in the nine-month period ended June 30, 2000 was $16.8 million, consisting of
$13.0 million of net purchases of short-term and long-term investments, $3.6
million in purchases of property and equipment and $0.2 million in additions to
computer software costs. Net cash used in investing activities in the nine-month
period ended June 30, 1999, was $14.5 million. It consisted of $9.4 million of
net purchases of short-term and long-term investments and marketable securities,
$2.8 million in purchases of property and equipment, and $2.3 million in
additions to computer software costs. Net cash provided by financing activities
during the nine months ended June 30, 2000 was $48.8 million, consisting of
$37.2 million generated from the initial public offering of inSilicon stock and
$17.9 generated from the exercise of common stock options and the issuance of
stock under the Company's and inSilicon's employee stock purchase plans,
partially offset by $6.3 million of cash used to repurchase the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company's common stock. Cash used in financing activities in the nine months
ended June 30, 1999, was $9.8 million, consisting of $14.8 million used to
repurchase common stock of the Company, partially offset by $5.0 million
generated from the exercise of common stock options and the issuance of stock
under the Company's employee stock purchase plan.
NEW ACCOUNTING PRONOUNCEMENTS
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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") which outlines the
Staff's position on various revenue recognition issues. SAB 101 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of Accounting Principles
Board Opinion No. 25 ("Opinion 25"). FIN 44 clarifies (a) the definition of
"employee" for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, except requirements regarding certain events that occur after December
15, 1998 or January 12, 2000 but before the effective date should be applied
prospectively. FIN 44 will not have a material impact on the Company's
financial position, results of operations or cash flows.
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 also defined the Y2K issue to include
proper handling of leap year calculations. A Y2K issue could have disrupted
processing transactions or even caused certain systems to fail. This possibility
affected the Company's products, its information technology and other internal
systems as well as its customers and vendors. Consequently, the Company's Y2K
compliance effort covered the Company's products, internal systems and services
provided by others.
As of June 30, 2000, the Company had not yet experienced significant
costs or business interruptions associated with: 1) previously undetected errors
in the Company's products, 2) Y2K litigation, as may have been experienced by
other software vendors or 3) a significant disruption of the Company's internal
information systems.
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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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Exhibit Index 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 June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
Date: August 11, 2000 By: /s/ JOHN M. GREELEY
--------------- -------------------
John M. Greeley
Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
27 Financial Data Schedule.
</TABLE>
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