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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-17111
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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 No.)
411 EAST PLUMERIA DRIVE, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices, including zip code)
(408) 570-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
PREFERRED STOCK PURCHASE RIGHTS
(Title of each Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 30, 2000, was $378,808,235 based upon the last
reported sales price of the Common Stock in the Nasdaq National Market, as
reported by the Nasdaq Stock Market.
The number of shares of the registrant's Common Stock outstanding as of
November 30, 2000 was 26,583,034.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant
to Regulation 14A in connection with the 2001 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including without limitation the Business section
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include, but are
not limited to, statements concerning expected price erosion, plans to make
acquisitions, dispositions or strategic investments, expectation of increased
sales to original equipment manufacturers, and plans to improve and enhance
existing products and develop new products.
The forward-looking statements of the Company are subject to risks and
uncertainties. Some of the factors that could cause future results to materially
differ from the recent results or those projected in the forward-looking
statements include, but are not limited to, significant increases or decreases
in demand for Phoenix's products, increased competition, lower prices and
margins, failure to successfully develop and market new products and
technologies, competitor introductions of superior products, continued industry
consolidation, instability and currency fluctuations in international markets,
product defects, failure to secure intellectual property rights, results of
litigation, and failure to retain and recruit key employees. For a more detailed
discussion of certain risks associated with the Company's business, see the
"Business Risks" section of this Form 10-K. The Company undertakes no obligation
to update forward-looking statements to reflect events or circumstances
occurring after the date of this Form 10-K.
GENERAL DEVELOPMENT OF THE BUSINESS
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. The Company markets and licenses its products and services
primarily through a direct sales force, as well as through regional distributors
and sales representatives.
The global electronics industry is characterized by rapid technology
changes, including increasing processor speeds, hardware
miniaturization/portability, and new and improved ways to connect devices
(including the Internet). As these rapid changes evolve, computing hardware
manufacturers and software developers seek to rapidly bring products to market
that incorporate the latest features and functionality. The Company believes
that its products and services enable manufacturers of PCs, information
appliances, and semiconductors to bring leading edge products to market more
quickly and hence increase their competitiveness.
The Company was incorporated in the Commonwealth of Massachusetts in
September 1979, and was reincorporated in the State of Delaware in
December 1986.
In the fourth quarter of fiscal 2000, the Company expanded its research and
development efforts in Asia with the opening of a new facility in Nanjing,
China. This new center represents Phoenix's long-term commitment to support its
Asian-based customers and will provide a center for developing solutions for
configurable information appliances. The expansion of the Phoenix R&D efforts
into China will strengthen the company's opportunity to set and leverage
standards, like Bluetooth, into the emerging information appliance market. The
new facility will allow Phoenix to develop new Internet-enabling software and
platform solutions to help customers compete in the rapidly expanding Internet
appliance marketplace.
2
On March 27, 2000, the Company's majority-owned subsidiary, inSilicon
Corporation ("inSilicon"), closed its initial public offering of 3.5 million
shares of its common stock. Proceeds, net of issuance costs, to inSilicon were
approximately $37.0 million. The principal purposes of the offering were to
increase inSilicon's equity capital, to create a public market for its common
stock, to facilitate future access to public equity markets, to improve the
effectiveness of its stock option plan in attracting and retaining key
employees, to provide liquidity to the Company and to provide increased
visibility of inSilicon in the marketplace. At September 30, 2000, the Company
owned approximately 73.6% of inSilicon's outstanding common stock.
DESCRIPTION OF BUSINESS
The Company's three operating segments are the Platform Enabling Division,
inSilicon and the PhoenixNet-TM- Division. Information regarding revenues, gross
margin and operating profit by segments, and revenues from unaffiliated
customers by geographic region, can be referenced under Note 12 "Segment
Reporting" of Phoenix's 2000 Annual Report.
PLATFORM ENABLING DIVISION
The Platform Enabling Division of Phoenix has been instrumental in
advancement of the PC architecture for the past twenty years. This division's
system enabling software, referred to as Basic Input Output System ("BIOS")
products, continues to play an essential role in the design of PCs and other
devices by providing the critical link between hardware platforms and operating
systems.
PC systems and other electronic devices consist of four basic components:
hardware, BIOS software, operating system software and applications software.
The BIOS is stored on a Read Only Memory ("ROM") chip that typically resides on
the device's motherboard, and is the software that is initially executed when
the system is turned on. BIOS tests and initializes the hardware components,
initiates the operating system and then provides certain advanced interface
functions. The Company believes that the introduction of new hardware
architectures, microprocessors, peripheral equipment and operating systems
within the PC industry has increased the complexity, time and cost to develop
new systems, and that the system BIOS can help reduce these factors.
Products. The Platform Enabling Division is currently offering or
developing the following BIOS products:
Desktop/Server
- PHOENIXBIOS 4.0-TM-. The Company provides various versions of PhoenixBIOS
4.0-TM- as its core system firmware for desktop and server systems. The
Company believes that the success of this product is attributable to its
reliability and advanced features, including its fourth generation modular
architecture and advanced development tools and methodology.
- AWARD BIOS-TM-. The Platform Enabling Division also includes the products
of Award Software, acquired in September 1998. The Company believes that
the Award BIOS-TM- products and engineering services enable customers to
rapidly develop new motherboard designs for state-of-the-art computer
systems.
- IA-64 BIOS-TM-. The Company worked closely with Intel to develop BIOS
compatible with the Intel 64-bit processor (IA-64 or Itanium). Intel's
64-bit architecture delivers significantly increased capability over
current 32-bit processors, and is designed initially into servers and
high-end workstations. The Intel IA-64 processor was released in 2000.
3
Notebook/Portable
- NOTEBIOS 4.0-TM- FOR PORTABLE SYSTEMS. The Company offers its NoteBIOS-TM-
system software for use with portable or notebook computers. The product
adds extensive power management capabilities, such as Save-to-Disk and
smart batteries, to the modular architecture of PhoenixBIOS 4.0-TM-.
Information Appliance
- INDUSTRIAL BIOS. The Company developed the industrial BIOS for
configuration and control of information appliances, also referred to as
embedded platforms. The industrial BIOS as well as additional other
informational appliance products are designed using small form factors in
order to meet the requirements of embedded platforms.
Customers and Sales. The Company generates a significant portion of its
Platform Enabling Division revenue from customers outside of the United States.
See discussion under "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--RESULTS OF OPERATIONS." The Company has
licensed its BIOS technology to over 600 global technology leaders, including:
PC SYSTEMS PC MOTHERBOARDS EMBEDDED SYSTEMS
- -------------------------------------------- --------------------- ---------------------
Acer IBM Asustek Force Computers
Compaq Samsung Gigabyte JVC
Fujitsu Siemens Nixdorf PC Chips Motorola
Hewlett-Packard Sony FIC NCR
Hitachi Toshiba GVC NEC
Radisys
The Company licenses its BIOS products and provides professional services to
major OEMs of PCs, motherboards and other computing devices. In general, license
fees are generated on a per unit basis for each system shipped, and professional
service fees are generated based upon the amount of time expended. The Platform
Enabling Division utilizes a global direct sales force in North America, Asia
and Europe, and resellers and distributors on a limited, regional basis.
Some product modifications are generally required in order for the customer
to deploy its Platform Enabling Division products on specific hardware
platforms. To support its worldwide customer base, the Company employs over 170
deployment engineers in field engineering offices in Germany, Japan, Korea,
Taiwan, California, Oregon and Massachusetts. The Company also provides support
services by telephone, via the Internet and on-site.
One customer, Fujitsu, accounted for 19%, 11% and 11% of revenues in fiscal
2000, 1999 and 1998 respectively. No other customer accounted for more than 10%
of revenue in fiscal 2000, 1999 or 1998.
Competition. The Platform Enabling Division competes primarily with
in-house research and development departments of PC manufacturers that may have
significantly greater financial and technical resources than those of the
Company. These companies include Acer Incorporated, Compaq Computer Corporation,
Dell Computer Corporation, IBM and Toshiba Corporation. The Company also
competes for system software business with other independent suppliers, ranging
from small, privately-held companies to Acer Softech, a division of Acer Labs, a
major Taiwan chip and motherboard supplier. The Company believes that OEM
customers often license the Company's system software products rather than
develop these products internally in order to: (1) enhance compatibility with
the latest industry standards, (2) improve time to market, (3) reduce product
development risks, (4) reduce product development and support costs, and/or
(5) to differentiate their system offerings with advanced features.
4
INSILICON
inSilicon Corporation ("inSilicon") is a leading provider of communications
platforms that are used by semiconductor and systems companies to design the
complex semiconductors called system-on-a-chip that are critical components of
digital devices. Over 500 customers use inSilicon's communications technology in
hundreds of different digital devices ranging from network routers to cellular
phones. inSilicon's modular approach emphasizes customer-proven reusable
semiconductor intellectual property that focuses on communications and
connectivity, and is compatible with a wide range of microprocessor designs.
Semiconductor and systems companies integrate inSilicon's communications
technology into their overall semiconductor designs, saving time and money and
allowing them to focus on their core competencies that differentiate their
products. By integrating inSilicon's communications technology into their
complex designs, inSilicon's customers are better able to solve the widening
"design gap" caused by the difficulty of designing the complex system-on-a-chip
in the time necessary to get to market with their products. InSilicon offers:
- PROVEN SOLUTIONS. inSilicon estimates more than 500 companies have
implemented its technology in more than 800 integrated circuit designs.
Millions of individual products include inSilicon technology. inSilicon's
technologies have been implemented in over 25 semiconductor fabrication
facilities using some of the most advanced semiconductor processing
technology, including 0.18 micron process technology. The customer- and
systems-proven nature of its technologies make the substantial
interoperability issues and costly development delays that its customers
might experience from in-house or other third-party designs less likely,
thereby reducing risk.
- A BROAD PORTFOLIO OF COMMUNICATIONS TECHNOLOGY. inSilicon provides
semiconductor and systems companies with a broad portfolio of
communications and connectivity technology. InSilicon believes its
semiconductor intellectual property fulfills many of the communications
technology needs of those companies.
- INTEGRATED PLATFORM-BASED SOLUTIONS. inSilicon partners with other
intellectual property suppliers, which enable inSilicon to sell more
complete system-on-chip IP platforms. For example, it has redistribution
agreements with MIPS Technologies and ARM Holdings that allows it to
bundle and sell MIPS processor and ARM integration IP together with its
communications technology. With these agreements, inSilicon is able to
offer more complete IP solutions that enable customers to get to market
sooner with fewer suppliers.
- INTEGRATED SOFTWARE SOLUTION. For the USB and IEEE 1394 communications
standards, inSilicon partners with software suppliers for essential
software that allow operating systems to communicate with its USB and IEEE
1394 technology. By using this software, semiconductor and systems
companies may integrate its technology into their designs in a
cost-effective and timely manner.
- EXTENSIVE TEST AND VERIFICATION TOOLS. inSilicon provides its customers
with extensive verification and test modules to ensure the functionality
of its technology within their designs. This allows its customers to
implement its communications technology into their designs with a higher
degree of first time success.
- PORTABILITY AND FLEXIBILITY. inSilicon designs its semiconductor
intellectual property to be foundry independent and easy to use. It uses
popular hardware languages that fit readily into its customers' design
flows, which provide its customers significant manufacturing flexibility.
inSilicon's Rapidscript-TM- configuration tool and its adoption of VCI
facilitate customer integration of its semiconductor property into their
system-on-a-chip designs.
- STANDARDS LEADERSHIP. inSilicon was the first to market with merchant
semiconductor intellectual property solutions for many communications
standards including PCI, AGP, USB, IrDA, IEEE 1394 and VCI. inSilicon is a
member of numerous industry standard bodies, including the IEEE 1394 trade
association, USB Implementator Forum, Infrared Data Association and PCI
Special Interest
5
Group. InSilicon's involvement with these bodies helps itself to stay on
the leading edge of evolving standards.
inSilicon targets high growth markets requiring high performance, quick time
to market, design flexibility and compliance with industry standards. The
following represents its four primary market segments, including representative
applications using its products within each:
- TELECOMMUNICATIONS AND DATA COMMUNICATIONS. Telecommunications and data
communications equipment companies design and manufacture equipment that
must comply with many industry standards. For example, communications
technologies such as Ethernet, UTOPIA, PCI and USB are used in network
switches and routers, network adapters, concentrators, public switched
telephone network central office equipment, cable set-top boxes and
modems.
- CONSUMER ELECTRONICS. Consumer electronic devices are rapidly converting
to digital methods of signal transmission, processing and storage, and
they require standard connectivity interfaces such as IEEE 1394, IrDA,
USB, and PCI. For example, digital still cameras, digital video cameras,
video games, digital video cassette recorders and DVD players all use such
digital transmission technology. New application of this technology is
anticipated in digital audio equipment and emerging video devices such as
personal video recorders. Additionally, mobile phone and wireless Internet
applications are creating the demand for performance enhanced Java
technologies.
- COMPUTERS. Computation equipment such as personal computers, workstations
and servers require implementation of standard interfaces such as PCI,
USB, AGP, IrDA and Ethernet. inSilicon's communications technology can be
found in standard products and application specific implementations for
these types of platforms.
- OFFICE AUTOMATION. Computer peripherals require a means of connection to
both their host computer and to larger networks. These connections are
generally made with standard interfaces, including USB, Ethernet, IEEE
1394 and IrDA. These interface technologies are used in printers,
scanners, keyboards, display terminals, pointing devices, and mass storage
devices such as hard disk drives, floppy disk drives, removable media disk
drives, tape drives and optical drives.
Products. inSilicon's communications technology includes semiconductor
intellectual property and related software. Its semiconductor intellectual
property includes a wide variety of both standards-based and proprietary
communications technology. inSilicon's semiconductor intellectual property
platforms vertically combine many of these technologies into functional blocks
tailored for ease of use and faster integration by its customers.
inSilicon supplies its technology as Verilog, VHDL or C source code, which
are the primary chip design languages in use today. Semiconductor and systems
companies then integrate its communications technology into their overall
semiconductor designs using electronic design automation tools, such as those
provided by Synopsys and Cadence. It uses a modular approach that emphasizes
silicon-proven reusable, licensable technology and software that are compatible
with a wide range of processor designs.
inSilicon's technologies are outlined in the following chart. Each family
consists of its technologies that relate to a specific industry standard.
6
COMMUNICATIONS TECHNOLOGY FAMILIES TECHNOLOGY APPLICATIONS
STANDARDS
AGP AGP Master, AGP Host and AGP Accelerated Graphics Port is an
Simulation Models interconnect standard used in high
performance graphics for personal
computers.
Ethernet 10/100 Ethernet Media Access Ethernet is a widely used local area
Controller and Ethernet Simulation networking communications standard, used
Model in such devices such as modems, cable
modems, home networking, routers and
switches.
IEEE 1394 1394 Device Controller Link, 1394 IEEE 1394 is a high-speed digital
A/V Link, 1394 Cable Phy and 1394 interface standard used in digital
Simulation Model. cameras, audio-visual disk drives and
scanners.
IrDA VFIR and VFIR Simulation Model, IrDA is a wireless standard that enables
IrDA and IrDA Simulation Model communication between appliances across
short distances. It is used in mobile
phones, handheld and laptop computers and
electronic games.
Java-TM- Technology JVX-TM- Java Accelerator JVX is a proprietary hardware and
software solution that accelerates
applications written in the Java
programming language. JVX is primarily
targeted for wireless Internet
applications.
PCI PCI Suite and PCI Simulation Model Peripheral Component Interconnect is an
internal communications standard that
connects various elements of computer
systems to each other. It is used in many
computers as well as in embedded systems.
PCI-X PCI-X and PCI-X Simulation Model PCI-X is the latest revision of the PCI
standard. It is used in many high
performance computing applications,
including multiprocessor servers,
communications switches and routers and
storage area networks.
USB USB PHY, USB OHCI Host Controller, Universal Serial Bus is a standard
USB Hub, USB Device Controller designed to simplify connections between
personal computers and peripheral
devices, such as printers, digital
cameras and scanners.
UTOPIA DMA UTOPIA Controller and UTOPIA is a broadband interface widely
Simulation Model used in Asynchronous Transfer Mode (ATM)
communications, network processors, and
DSL chipsets.
VCI TymeWare-TM- VCI Virtual Component Interface is a standard
interface that simplifies the
mix-and-match of semiconductor
intellectual property. inSilicon's
TymeWare-TM- VCI enables integration of
multiple communications standards.
Customers and Sales. inSilicon focuses its sales efforts in the following
areas: direct sales; indirect sales through application specific integrated
circuit, or ASIC, manufacturers, software resellers and authorized design
centers; and Internet distribution.
7
DIRECT SALES. inSilicon maintains a direct worldwide sales network
consisting of its own employees and a limited number of sales representatives
and field applications engineers. The primary responsibility of the sales force
is to secure and maintain direct account relationships with semiconductor and
systems companies. It has over 500 customers for which the sales force maintains
the relationship. inSilicon documents these relationships with a technology
license agreement for the first purchase. For subsequent purchases from existing
customers, inSilicon generally obtains a customer purchase order for the desired
technology under the terms of the license agreement or an amendment to the
license agreement. The sales force is distributed in key geographic areas around
the world with employees in the following locations: Atlanta; Austin; Boston;
Irvine; San Jose; Geneva, Switzerland; London, England; Munich, Germany; and
Tokyo, Japan. In addition, it has a distribution agreement with Phoenix
Technologies Ltd. covering Hong Kong, Japan, Korea, Singapore and Taiwan.
INDIRECT SALES. In addition to the direct sales force, inSilicon also uses
the following indirect sales channels:
- ASIC MANUFACTURERS. Application specific integrated circuit, or ASIC,
manufacturers provide customized build-to-order chips to their customers.
Several ASIC manufacturers have access to inSilicon's technology and are
able to license its products directly to their customers and include its
communications technology in their complex semiconductors. inSilicon
receives revenues from the ASIC vendors for each of its technologies that
is used in a customer chip.
- SOFTWARE RESELLERS. inSilicon also has a group of software resellers whose
primary function is the development and resale of firmware and drivers.
These companies perform both licensing and servicing of firmware customers
for inSilicon. inSilicon receives revenues from its software resellers for
its technologies that they provide to their customers.
- AUTHORIZED DESIGN CENTERS. inSilicon's authorized design center program
provides access to its communications technologies to enable design houses
to develop expertise with its semiconductor intellectual property. This
encourages design houses to incorporate its semiconductor intellectual
property when they design custom semiconductors for their customers.
inSilicon receives revenue from customers who are referred to it by its
design center partners.
INTERNET DISTRIBUTION. In addition, inSilicon allows semiconductor
designers to download and test, via the Internet, encrypted versions of its
technology before committing to any economic arrangement.
inSilicon has developed a strong customer base among semiconductor and
systems companies that use its communications technology to design complex
semiconductors. The top ten customers for fiscal 2000, listed alphabetically,
excluding related party revenue from Phoenix are as follows: Agilent
Technologies, Alchemy, Broadcom, C-Cube, Fujitsu, Hewlett Packard, Hitachi,
Intel, Pitney Bowes, and ST Microelectronics.
Competition. inSilicon is one of the top five merchant IP companies
according to an October 2000 report by Dataquest, holding a leading position in
the highest volume segment of system-on-a-chip technology. The other top vendors
include ARM Holdings, Aware, Inc., MIPS Technologies and Rambus, Inc. The
industry is very competitive and is characterized by constant technological
change, rapid rates of product obsolescence, and frequently emerging new
suppliers. inSilicon's existing competitors include other merchant semiconductor
intellectual property (or "SIP") suppliers, such as the Mentor Graphics'
Inventra Division, Synopsys, Enthink and VAutomation; and suppliers of
application specific integrated circuits, or ASICs, such as LSI Logic, and the
ASIC divisions of IBM, Lucent, Toshiba and NEC. inSilicon also competes with the
internal development groups of large, vertically integrated semiconductor and
systems companies, such as Intel, Motorola, Cisco and Hewlett-Packard. In these
companies, SIP developed for an individual project sometimes is subject to
efforts by inSilicon to re-use the SIP in multiple projects. Companies whose
principal business is providing design services as work-for-hire, such as
Intrinsix, Sican and the Tality service division of Cadence, also provide
competition. These companies
8
generally build a portfolio of internally developed SIP over time and then
re-use that SIP as applicable in new service projects in order to gain
productivity leverage. For firmware, its primary competitors are in-house
research and development departments of system companies and small
privately-held companies. As inSilicon introduces new SIP technologies, it will
face competition from both existing SIP suppliers and new SIP suppliers that it
anticipates will enter the market. inSilicon also may face competition from new
suppliers of technologies based on new or emerging standards.
inSilicon believes that important competitive factors in its market include:
performance; functionality; customizability; length of development cycle; price;
compatibility with prevailing design methodologies; interoperability with other
devices or subsystems; ease of use; reputation for successful designs and
installed base; technical service and support; technical training;
configurability of technologies for specific designs; and regional sales and
technical support.
PHOENIXNET-TM- DIVISION
The Company's PhoenixNet-TM- division delivers products, services and web
destinations to new and existing users of personal computers, Internet
Appliances and mobile devices for leading providers worldwide.
Services. PhoenixNet-TM- services are built into PCs with the Company's
BIOS to enable online PC users worldwide to communicate with PhoenixNet-TM-, and
to automatically receive ongoing free, customized software services to support
PC hardware and software and to turn the PC into a powerful tool for
communication, entertainment, education or business. In addition, PhoenixNet-TM-
features a graphical launch screen, which displays valuable system information
each time a PC is launched--information that previously was not readily
available to the average PC user.
Customers and Sales. The activities of PhoenixNet-TM- are focused on
delivering Internet configuration services to PhoenixNet-TM- enabled
motherboards. When these motherboards are built into a PC that connects to the
Internet, the free configuration services are performed from the PhoenixNet-TM-
data center. During fiscal year 2001, the Company will emphasize the delivery of
port services and the launch screen. Further, the Company will expand its
offerings with an Internet security infrastructure product to be developed in
cooperation with its Operating Systems and Tools division. This key strategic
offering will allow a reseller to offer a trusted platform. The product will use
digital signatures and an online enrollment process to establish device
authentication for applications, such as, access control, transaction integrity
and content security.
Four customers, RSA, Advanced Micro Devices Inc., NEC Corporation and Efax,
accounted for more than 10% of revenues generated by PhoenixNet-TM- in fiscal
2000.
Competition. There are many distribution vehicles for the Company's
customers to reach PC end users, including PC OEM companies, PC and hardware
registration companies and Internet web sites. Many have greater resources than
the Company.
PRODUCT DEVELOPMENT
The company's research and development expenditures in fiscal years 2000,
1999 and 1998 was $39.1 million, $39.9 million and $40.5 million, respectively.
At November 30, 2000, its research and development group included 436 full-time
equivalent persons. The Company's research and development expenditures
demonstrate its continuous commitment to maintain and enhance its current
product lines, develop new products, maintain technological competitiveness and
meet continually changing customer and market requirements. In fiscal 2001,
Phoenix plans to maintain its competitive edge without significantly increasing
research and development costs.
9
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on U.S. and foreign patents, trade secrets,
trademarks, copyrights and contractual agreements to establish and maintain
proprietary rights in its technology. The Company has an active program to file
applications for and obtain patents in the U.S. and in selected foreign
countries where a potential market for its products exists. At September 30,
2000, the Company had been issued twenty-one patents in the U.S. and had more
than sixty-five patent applications in process in the United States Patent and
Trademark Office. There can be no assurance that any of these patents would be
upheld as valid if challenged.
The Company's general policy has been to seek patent protection for those
inventions and improvements likely to be incorporated in its products or
otherwise expected to be of value. The Company protects the source code of its
products as trade secrets and as unpublished copyrighted works and initiates
litigation where appropriate to protect its rights in that intellectual
property. The Company licenses the source code for its products to its customers
for limited uses. Wide dissemination of its software products makes protection
of its proprietary rights difficult, particularly outside the United States.
Although it is possible for competitors or users to make illegal copies of its
products, the Company believes the rate of technology change and the continual
addition of new product features lessen the impact of illegal copying.
In recent years, there has been a marked increase in the number of patents
applied for and issued with respect to software products. Although the Company
believes that its products do not infringe on any copyright or other proprietary
rights of third parties, the Company has no assurance that third parties will
not obtain, or do not have, intellectual property rights covering features of
its products, in which event the Company or its customers might be required to
obtain licenses to use such features. If an intellectual property rights holder
refuses to grant a license on reasonable terms or at all, the Company may be
required to alter certain products or stop marketing them.
EMPLOYEES
As of November 30, 2000, Phoenix employed 673 full-time equivalent persons
worldwide, of whom 391 were in research and development and customer
engineering, 151 were in sales and marketing, and 131 were in general and
administration. Of the 673 total full-time equivalent persons, 14 were
contractors. Phoenix's employees are not represented by a labor organization,
and the Company has never experienced a work stoppage. The Company considers its
employee relations to be satisfactory.
As of November 30, 2000, inSilicon employed 100 full-time equivalent persons
worldwide, of whom 45 were in research and development and customer engineering,
36 were in sales and marketing, and 19 were in general and administration. Of
the 100 total full-time equivalent persons, 3 were contractors. inSilicon's
employees are not represented by a labor organization, and the Company has never
experienced a work stoppage. inSilicon considers its employee relations to be
satisfactory.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To Phoenix's present knowledge, compliance with federal, state and local
provisions enacted or adopted for protection of the environment has had no
material effect upon its operations.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a facility in San Jose,
California, which the Company leases pursuant to a lease agreement expiring in
November 2003. This facility also includes its Platform Enabling division,
inSilicon and its PhoenixNet-TM- division. In fiscal 1997, the Company entered
into a five-year lease agreement for a facility in Irvine, California. The
Company also leases smaller office facilities in other locations including:
Norwood, Massachusetts; Beaverton, Oregon; Houston and Austin, Texas; Taipei,
Taiwan; Hong Kong and Nanjing, China; Tokyo and Osaka, Japan; Seoul, Korea; and
10
Munich, Germany. These offices generally provide sales and technical support to
its customers. In November 2000, inSilicon relocated its sales and marketing
function to a small office facility in San Jose, California under a two-year
lease.
The Company's facilities are near capacity and are fully utilized. The
Company considers its leased properties to be in good condition, well
maintained, and generally suitable for their present and foreseeable future
needs. The Company believes its facilities are adequate for its current needs
and that suitable additional or substitute space will be available as needed to
accommodate any expansion of its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, becomes involved in litigation claims and
disputes in the ordinary course of business. There are currently no pending
legal proceedings to which either the Company or any of its subsidiaries are a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF PHOENIX TECHNOLOGIES LTD.
The executive officers of the Company, each of whom, with the exception of
Wayne C. Cantwell, serves at the discretion of the Board of Directors of
Phoenix. Wayne C. Cantwell serves at the discretion of the Board of Directors of
inSilicon. As of the filing date of this Form 10-K, executive officers of the
Company are as follows:
NAME AGE POSITION
- ---- -------- --------
Albert E. Sisto................ 51 President and Chief Executive Officer
Wayne C. Cantwell.............. 35 President and Chief Executive Officer, inSilicon
Steven S. Chan................. 51 Vice President, Engineering,--Operating Systems & Tools
Division
Mitchell D. Dimler............. 42 Vice President, Chief Information Officer
David A. Everett............... 57 Senior Vice President and General Manager, Platform Enabling
Division
John M. Greeley................ 53 Senior Vice President, Finance and Chief Financial Officer
Kendall S. Larsen.............. 43 Senior Vice President and General Manager, PhoenixNet-TM-
Division
Magda M. Madriz................ 48 Vice President, Human Resources
Linda V. Moore................. 54 Vice President, General Counsel and Secretary
BIOGRAPHIES
Mr. Sisto joined the Company as President and Chief Executive Officer and
was appointed to the Board in June 1999. He was elected Chairman of the Board in
January 2000. Mr. Sisto was formerly Chief Operating Officer of RSA Data
Security, Inc. from 1997 to 1999. He served as President, Chairman and CEO of
DocuMagix from 1994 to 1997. From 1989 to 1994 Mr. Sisto served as the President
and CEO of PixelCraft, Inc. Mr. Sisto also serves on the Board of Directors of
Insignia Solutions, Plc., hi/fn, Inc., and Tekgraf, Inc.
Mr. Cantwell has served as inSilicon's President and Chief Executive Officer
since its incorporation in November 1999. Mr. Cantwell held various sales, sales
management and general management roles with Phoenix since joining in
March 1991, including Senior Vice President and General Manager, Worldwide
11
Field Operations for Semiconductor IP Division; Vice President and General
Manager, Worldwide Field Operations; Vice President, Asia/America Operations and
General Manager, Asia Operations. Prior to joining the company, Mr. Cantwell
held various roles in sales and engineering at Intel and NEC Technologies. He
received a B.S. in Electrical Engineering from DeVry Institute of Technology.
Mr. Chan became Vice President of Engineering--Operating Systems and Tools
Division of the Company in October 2000. He joined Phoenix in October 1999 as
Vice President of Engineering, Platform Enabling Division. Mr. Chan has held
positions of Director of Applications for Monterey Design Systems from May 1998
to September 1999 and President of AuraVision Corporation from October 1995 to
May 1998. Mr. Chan graduated from Worcester Polytechnic Institute with B.S. and
M.S. degrees in Electrical Engineering.
Mr. Dimler joined the Company as Vice President and Chief Information
Officer in November 1999. Prior to joining Phoenix, he was Vice President of
Architecture & Technology at Transamerica Corporation. From 1996 to 1998,
Mr. Dimler served as Director of Systems Architecture & Object Oriented
Development at DIRECTV, and from 1994 to 1996, Mr. Dimler served as Directors of
Marketing Information and Technology at International Tours. Mr. Dimler received
an M.B.A and B.A. from MidAmerica Nazarene University.
Mr. Everett rejoined the Company as Senior Vice President and General
Manager of the Platform Enabling Division in April 1999. Prior to rejoining the
Company, he was CEO of 3D Labs, Inc. In September 1997, he became President and
CEO of Dynamic Pictures, Inc. In January 1996, he joined the Company as Vice
President, Worldwide Field Operations. Through December 1995, Mr. Everett worked
for SyQuest Technology as Executive Vice President, Sales and Marketing. He also
worked for Wyse Technology as Senior Vice President, Sales and Corporate
Marketing. Mr. Everett earned a B.A. in Business from Michigan State University.
Mr. Greeley joined the Company as Senior Vice President of Finance and Chief
Financial Officer in May 2000. From April 1999 to May 2000, he was Chief
Operating and Financial Officer of Leasing Solutions, Inc. Mr. Greeley spent
over sixteen years at GE Capital Corporation in various finance and general
management positions. While at GE Capital, Mr. Greeley served as President of
Telecom Financial Services, a wholly owned subsidiary of GE Capital specializing
in the financing of telecom and data networks, from September 1996 to
April 1999. From June 1994 to September 1996, he was President of NTFC Capital,
acquired by GE Capital and supported Northern Telecom and its distributors. He
started his career in New York City with PricewaterhouseCoopers LLP, and is a
CPA. Mr. Greeley is a graduate of St. John's University with a B.S. in
accounting and an M.B.A. in Finance.
Mr. Larsen joined the Company as Senior Vice President and General Manager
of the PhoenixNet-TM- Division in October 2000. He joined Phoenix from RSA
Security, Inc. where he was most recently Senior Vice President of Worldwide
Alliances and OEM Sales from May 1998 to October 2000. Prior to joining RSA,
Mr. Larsen was Vice President of International Sales and Vice President of
Worldwide Sales at Ramp Networks from September 1996 to April 1998. From
January 1994 to August 1996, he was Managing Director of the Americas for
General Magic. He has also served as Director of National Accounts, Director of
OEM Sales, and Director of the western area for Novell, Inc., and he has held
various management sales positions at IBM and Xerox Corporation. Mr. Larsen
holds a B.S. degree in Economics from the University of Utah.
Ms. Madriz came to Phoenix from Xicor, Inc. in October 2000. She joined
Xicor, Inc. in 1984 as Director of Human Resources, and was promoted to Vice
President in 1990. In addition to her responsibilities as the senior executive
for Human Resources, she also assumed responsibility for Safety and
Environmental Compliance. Prior to Xicor, Ms. Madriz served as Division Senior
HR Manager for Atari, Inc. from 1980 to 1984. She has also worked for Dysan
Corporation, and Federated Department Stores in various HR capacities. She
serves as an appointed Commissioner for The City of San Jose since
12
1994, and is on the Board of several non-profit organizations. Ms. Madriz earned
a B.A. degree in Business Administration from the University of Pavia, Italy.
Ms. Moore joined the Company in November 1999. Prior to joining the Company
she was Vice President and General Counsel of NHancement Technologies, Inc., a
distributor of computer-telephony products based in Fremont, California from
1998 to 1999. From 1989 to 1998, she served as General Counsel and Secretary of
Jabil Circuit, Inc., an electronics contract manufacturer headquartered in
St. Petersburg, Florida. She has also served as a consultant to Internet
start-ups and has 6 years experience in equipment leasing. Ms. Moore received a
BA from the University of Michigan, an M.A. from Eastern Michigan University and
a J.D. from Detroit College of Law at Michigan State University.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol PTEC. The following table presents the quarterly high and low bid
quotations in the over-the-counter market, as quoted by the Nasdaq National
Market. These quotations reflect the inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
HIGH LOW
-------- --------
YEAR ENDED SEPTEMBER 30, 2000:
Fourth quarter............................................ $20.50 $14.44
Third quarter............................................. 21.50 12.38
Second quarter............................................ 30.25 13.38
First quarter............................................. 18.13 8.63
YEAR ENDED SEPTEMBER 30, 1999:
Fourth quarter............................................ $18.00 $ 9.75
Third quarter............................................. 18.19 7.25
Second quarter............................................ 9.50 7.25
First quarter............................................. 8.69 5.00
The Company had 253 shareholders of record as of November 30, 2000. To date,
the Company has paid no cash dividends on its common stock. The Company
currently intends to retain all earnings for use in its business and do not
anticipate paying any dividends in the foreseeable future. In addition,
inSilicon's line of credit agreement restricts the payment of cash dividends.
See Note 14 to the Consolidated Financial Statements included herein for the
terms of exercise of stock options and warrants to purchase shares of common
stock.
160,784 shares of our common stock were issued to our employees who
purchased shares under our 1991 Employee Stock Purchase Plan. We issued 89,176
shares of our common stock on May 31, 2000, at a purchase price of $11.9531 per
share and 71,608 shares of our common stock on November 30, 2000 at a purchase
price of $12.1125 per share.
From August 27, 1999 to November 30, 2000, our employees, directors and
consultants purchased shares of our common stock by exercising options granted
under our 1999 Stock Plan. As of November 30, 2000, 352,236 shares have been
purchased, at prices ranging from $0.01 to $15.8125
We may have had an exemption from registration for the shares issued under
our 1991 Employee Stock Purchase Plan and our 1999 Stock Plan. Those shares may
be subject to rescission, and we may make a rescission offer to the holders of
those shares. Under such a rescission offer, we may be required to make an
aggregate payment of approximately $4,250,340 plus interest from the date each
share was purchased. There is no assurance that we will not otherwise be subject
to possible penalties or fines relating to these issuances. We believe that the
rescission offer could provide the Company with defenses to future claims.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below include business combinations described in
Note 8 of the Notes to Consolidated Financial Statements, included herein. The
tables in Part II include selected unaudited quarterly consolidated data for
fiscal 2000 and 1999. This information was derived from its unaudited
consolidated financial statements that, in the opinion of management, reflect
all recurring adjustments necessary to fairly present this information, when
read in conjunction with its annual Consolidated Financial Statements. The
results of operations for any period are not necessarily indicative of the
results to be expected for any future period.
14
SELECTED ANNUAL CONSOLIDATED DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Revenue:
License fees............................ $125,817 $103,326 $100,344 $ 89,884 $ 75,366
Services................................ 18,568 22,500 22,541 15,612 10,841
-------- -------- -------- -------- --------
Total revenue....................... 144,385 125,826 122,885 105,496 86,207
Gross margin.............................. 122,922 97,506 98,833 86,857 70,485
Merger, acquisition and restructuring
charges................................. 1,270 14,454 14,730 -- 889
Income (loss) from operations............. 26,825 (4,661) (431) 16,407 14,637
Income from continuing operations......... 20,902 1,804 722 20,335 11,932
Net income................................ 20,902 1,804 722 20,335 15,684
Diluted earnings per share:
Income from continuing operations....... $ 0.77 $ 0.07 $ 0.03 $ 0.74 $ 0.48
Net income.............................. $ 0.77 $ 0.07 $ 0.03 $ 0.74 $ 0.63
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Cash and short-term investments........... $107,718 $ 55,592 $ 71,297 $ 72,168 $ 80,287
Working capital........................... 124,532 52,929 77,143 96,383 87,328
Total assets.............................. 198,760 141,998 159,102 163,192 141,959
Long-term obligations..................... 1,449 1,546 1,428 530 155
Long-term deferred tax liabilities........ 3,865 -- 2,618 7,159 8,561
Stockholders' equity...................... 148,300 98,922 125,336 133,539 114,668
Cash dividends declared per common
share................................... -- -- -- -- --
15
SELECTED UNAUDITED QUARTERLY CONSOLIDATED DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2000, QUARTERS ENDED
-----------------------------------------
DEC 31 MAR 31 JUN 30 SEP 30
-------- -------- -------- --------
Revenue................................................. $32,371 $34,725 $36,503 $40,786
Gross margin............................................ 26,557 29,475 30,308 36,582
Merger, acquisition and restructuring charges........... -- -- -- 1,270
Income from operations.................................. 3,505 6,528 7,226 9,566
Net income.............................................. 2,749 5,007 5,852 7,294
Earnings per share--basic............................... $ 0.11 $ 0.20 $ 0.23 $ 0.28
Earnings per share--diluted............................. $ 0.10 $ 0.17 $ 0.21 $ 0.26
FISCAL 1999, QUARTERS ENDED
-----------------------------------------
DEC 31 MAR 31 JUN 30 SEP 30
-------- -------- -------- --------
Revenue................................................. $30,541 $31,560 $31,314 $32,411
Gross margin............................................ 24,241 25,516 25,064 22,685
Merger, acquisition and restructuring charges........... 1,944 -- 2,532 9,978
Income (loss) from operations........................... 97 4,657 91 (9,506)
Net income (loss)....................................... 902 3,584 3,209 (5,891)
Earnings (loss) per share--basic........................ $ 0.03 $ 0.13 $ 0.12 ($ 0.24)
Earnings (loss) per share--diluted...................... $ 0.03 $ 0.13 $ 0.11 ($ 0.24)
On March 27, 2000, the Company's majority-owned subsidiary, inSilicon,
closed its initial public offering of 3.5 million shares. Proceeds, net of
issuance costs, to inSilicon were approximately $37.0 million. The principal
purpose of the offering was to increase inSilicon's equity capital, to create a
public market for its common stock, to facilitate future access to public equity
markets, to improve the effectiveness of its stock option plan in attracting and
retaining key employees, to provide liquidity to the Company and to provide
increased visibility of inSilicon in the marketplace. The Company owns
approximately 73.6% of inSilicon's common stock.
In September 1998, the Company completed the acquisition of Sand, a supplier
of synthesizable cores for the computer industry. Synthesizable cores are
pre-packaged circuit descriptions used as building blocks for system-level
application specific integrated circuits ("ASICs"). These ASICs are used to
connect computers and peripheral devices using PCI, AGP, USB, IEEE 1394, IrDA
and other emerging industry standard protocols. The purchase price consisted of
$18.6 million in cash, 464,000 shares of its common stock, stock options to
purchase approximately 264,000 shares of its 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 its
consolidated results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Phoenix is a global leader in system-enabling software solutions for PCs and
connected digital devices. Our software provides compatibility, connectivity,
security, and manageability of the various components and technologies used in
such devices. 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
16
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 global electronics industry is characterized by rapid technology
changes, including increasing processor speeds, hardware
miniaturization/portability, and new and improved ways to connect devices
(including the Internet). As these rapid changes evolve, computing hardware
manufacturers and software developers seek to rapidly bring products to market
that incorporate the latest features and functionality. The Company believes
that its products and services enable manufacturers of PCs, information
appliances, and semiconductors to bring leading-edge products to market more
quickly and hence increase competitiveness.
The Company'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 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 system-on-a-chip
that is critical components of digital devices. inSilicon provides cores,
related silicon subsystems and firmware to over 500 customers that use its
technologies in hundreds of different digital devices ranging from network
routers to cellular phones.
PHOENIXNET-TM-: Provides PC users worldwide with a solution to configure
their web browsers and desktops, directs users to web destinations and offers
software download tools through a graphical launch screen, and provides the
licensing of machine profile data. In fiscal year 2001, PhoenixNet-TM- is
focusing on an Internet security infrastructure product.
On March 27, 2000, the Company's majority-owned subsidiary, inSilicon,
closed its initial public offering of 3.5 million shares. Proceeds, net of
issuance costs, to inSilicon were approximately $37.0 million. The principal
purpose of the offering was to increase inSilicon's equity capital, to create a
public market for its common stock, to facilitate future access to public equity
markets, to improve the effectiveness of its stock option plan in attracting and
retaining key employees, to provide liquidity to the Company and to provide
increased visibility of inSilicon in the marketplace. On September 30, 2000, the
Company owned approximately 73.6% of inSilicon's common stock.
In September 1998, Award Software International, Inc. ("Award") was merged
with a majority-owned subsidiary of Phoenix. Award was a leading provider of
system enabling and management software that includes a suite of BIOS products
for designers and manufacturers of motherboards, PC systems and other
microprocessor-based (or embedded) devices. In the merger, each share of Award
common stock was exchanged for 1.225 shares of its common stock (an aggregate of
approximately 8.8 million shares of its 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 its common stock, respectively. The transaction was
accounted for as a pooling of interests for financial reporting purposes, and
was structured to qualify as a tax-free reorganization. All prior period
financial statements have been restated as if the merger took place at the
beginning of such periods.
Also in September 1998, the Company completed the acquisition of Sand
Microelectronics ("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 its common stock, stock options to purchase approximately 264,000 shares of
its
17
common stock (in exchange for Sand stock options), and an earn-out agreement of
up to $3.7 million payable through fiscal 2001, subject to the achievement of
certain performance objectives. Under the terms of the earn-out agreement, the
selling stockholders may earn additional purchase price consideration for each
of the three years ending September 30, 2001, contingent upon the financial
performance of inSilicon. The maximum contingent consideration is $3.7 million,
of which approximately $1.6 million represents minimum anticipated payments that
were recorded as accrued merger costs. Future payments are due subsequent to the
end of each of the three fiscal years ending September 2001, and payments in
excess of amounts accrued, if any, will be recorded as additional goodwill and
amortized over the remaining life of the original goodwill recorded.
Approximately $800,000 was earned in fiscal year 2000 and is scheduled to be
paid in the first quarter of fiscal 2001. Approximately $867,000 was earned in
fiscal year 1999 and paid in fiscal year 2000. 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 its consolidated
results of operations.
RESULTS OF OPERATIONS
The following table includes Consolidated Statement of Operations data for
the years ended September 30, 2000, 1999 and 1998, as a percentage of total
revenue:
2000 1999 1998
-------- -------- --------
Revenue:
License fees.............................................. 87% 82% 82%
Services.................................................. 13 18 18
--- --- ---
Total revenue........................................... 100 100 100
Cost of revenue:
License fees.............................................. 2 6 7
Services.................................................. 12 15 13
Amortization of purchased technology...................... 1 2 --
--- --- ---
Total cost of revenue................................... 15 23 20
--- --- ---
Gross margin................................................ 85 77 80
Operating expenses:
Research and development.................................. 27 32 33
Sales and marketing....................................... 23 23 22
General and administrative................................ 14 13 13
Amortization of goodwill and acquired intangible assets... 2 2 --
Stock-based compensation.................................. -- -- --
Merger, acquisition and restructuring charges............. 1 11 12
--- --- ---
Total operating expenses................................ 67 81 80
--- --- ---
Income (loss) from operations............................... 18 (4) --
Interest income, net........................................ 3 3 4
Other income, net........................................... -- 3 1
--- --- ---
Income before income taxes.................................. 21 2 5
Provision for income taxes.................................. 7 1 4
--- --- ---
Net income.................................................. 14% 1% 1%
=== === ===
18
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 years ended September 30, 2000, 1999 and 1998
were as follows (DOLLARS IN THOUSANDS):
AMOUNT % CHANGE % OF CONSOLIDATED REVENUE
------------------------------ ------------------- ------------------------------
2000 1999 1998 2000 1999 2000 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
Platform Enabling............... $119,396 $106,872 $114,093 12% -6.3% 82.7% 84.9% 92.8%
inSilicon....................... 25,428 18,954 8,792 34% 115.6% 17.6% 15.1% 7.2%
PhoenixNet-TM-.................. 1,107 -- -- n/a n/a 0.8% -- --
Intercompany eliminations....... (1,546) -- -- n/a n/a -1.1% -- --
-------- -------- -------- ----- ------ ------
Total revenue................... $144,385 $125,826 $122,885 15% 2.4% 100% 100.0% 100.0%
======== ======== ======== ===== ====== ======
In the fourth quarter of fiscal 2000, the Company recorded $9 million of
revenues from two OEM customers relating to volume royalty license agreements.
These agreements were non refundable and due and payable within 30 days. Those
amounts were collected within the 30-day period. These two customers previously
purchased on a monthly royalty basis. As a result of the change in these
customers' buying strategies, revenues from these two customers are expected to
resume in the second half of the fiscal year 2001. The Company will derive
future revenues throughout fiscal year 2001 from existing and new customers as
well as existing and new products. The amount of future revenues cannot be
quantified at this time.
inSilicon revenue increased 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-TM- revenues in fiscal
2000 to the fiscal 1999 is not applicable, since PhoenixNet first generated
revenues in the second quarter of fiscal 2000.
Platform Enabling revenue decreased by $7.2 million (or 6%) in fiscal 1999
due to declines in average selling prices due to PC price declines, the loss of
a significant North American customer due to acquisition and the discontinuation
of the PICO and PC Enhancing Division and some of its products. PICO and PC
Enhancing Division provided system software and services for PCs and industrial,
hand-held and consumer information appliances based on the Intel x86 and UNIX
architectures. inSilicon revenue increased by $10.2 million (or 116%) in fiscal
1999 due to the acquisition of Sand and the continued demand for outsourced
circuit IP.
Revenue by geographic region for the three years ended September 30, 2000,
1999 and 1998 was as follows (DOLLARS IN THOUSANDS):
AMOUNT OF REVENUE % CHANGE % OF CONSOLIDATED REVENUE
------------------------------ ------------------- ------------------------------
2000 1999 1998 2000 1999 2000 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
North America................. $ 41,121 $ 40,907 $ 49,021 1% -16.6% 28.5% 32.5% 39.9%
Asia.......................... 93,808 73,423 62,209 28% 18.0% 65.0% 58.4% 50.6%
Europe........................ 9,456 11,496 11,655 -18% -1.4% 6.5% 9.1% 9.5%
-------- -------- -------- ------ ------ ------
Total revenue................. $144,385 $125,826 $122,885 15% 2.4% 100.0% 100.0% 100.0%
======== ======== ======== ====== ====== ======
In fiscal 2000, Asian revenue increased while North American revenue
remained relatively flat 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,
growth in Japan PC shipments in the Platform Enabling segment, and a shift in
revenue from the European market to the Asian market. Asian revenue in fiscal
2000 increased despite lower average selling prices of its BIOS
19
products than in fiscal 1999 partly due to a recent shift in demand for personal
computers from desktop to notebook computers. In fiscal 1999, U. S. and European
revenue declined while Asian revenue increased primarily due to the increased
insourcing by U. S. and European PC OEMs of systems and to increased Japan PC
shipments.
One customer, Fujitsu, accounted for 19%, 11% and 11% of revenue in fiscal
2000, 1999 and 1998 respectively. No other customer accounted for more than 10%
of revenue in fiscal 2000, 1999 or 1998.
Service revenue decreased $3.9 million (or 17.5%) in fiscal 2000 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 toward 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. Service revenue was unchanged at 18% of
revenue in fiscal 1999 and 1998.
GROSS MARGIN
Gross margin as a percentage of revenue was 85%, 77% and 80% for fiscal
2000, 1999 and 1998, respectively. Included in the costs of revenue was
$1.3 million and $2.1 million of amortization of purchased technologies from
Sand for fiscal 2000 and 1999. Also included in the costs of revenue in fiscal
2000 and 1999 was a reversal of $1.9 million of previous year's Year 2000
("Y2K") support cost and $3.2 million of Y2K support cost. For fiscal 2000, 1999
and 1998, gross margin as a percentage of revenue before the amortization of
purchased technology and Y2K support costs (reversal of Y2K support costs) was
85%, 82% and 80%, respectively. The increase in gross margin in fiscal 2000 from
fiscal 1999 was due to an increase in license revenues from the Platform
Enabling division and inSilicon, especially in Asia, as discussed above. The
increase in gross margin in fiscal 1999 from fiscal 1998 was attributable to an
increase in inSilicon revenue discussed above. License fee gross margin as a
percentage of license fee revenue was 98%, 92% and 92% in fiscal 2000, 1999 and
1998, respectively. Service gross margin as a percentage of revenue was 8%, 19%
and 28% in fiscal 2000, 1999 and 1998, respectively. Amortization of capitalized
software development costs charged to cost of revenue in fiscal 2000, 1999 and
1998, was $2.5 million, $4.8 million and $4.3 million, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $39.1 million, $39.9 million and
$40.5 million in fiscal 2000, 1999 and 1998, respectively. As a percentage of
revenue, these expenses represented 27%, 32% and 33%, respectively. In fiscal
2000, research and development expenses decreased $0.8 million (or 2%) 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 partially offset by an increase in variable compensation due to
the attainment of increased revenue. In fiscal 1999, research and development
expenses decreased $0.6 million (or 1%) due to decreased personnel resulting
from the consolidation of operations between the Company and Award and
reductions in development spending on PICO and PC Enhancing products.
The Company capitalized approximately $1.4 million, $2.4 million and
$5.2 million of internal software development costs in fiscal 2000, 1999 and
1998, respectively. These decreases were due to a higher proportion of costs
being incurred on non-capitalizable projects.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $33.1 million, $29.0 million and
$27.8 million in fiscal 2000, 1999 and 1998, respectively. As a percentage of
revenue, these expenses represented 23% in fiscal 2000 and 1999, and 22% in
fiscal 1998. In fiscal 2000, sales and marketing expenses increased
$4.0 million (or 14%)
20
due primarily to an increase in variable compensation due to the attainment of
increased revenue, costs related to sales meetings and an increase in
outsourcing of non-recurring engineering work. In fiscal 1999, sales and
marketing expenses increased $1.2 million (or 4%) due to increased branding and
marketing activities associated with the establishment of the PhoenixNet-TM-
Division. 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 were approximately $19.7 million,
$16.3 million and $16.1 million in fiscal 2000, 1999, and 1998, respectively,
and represented 14%, 13% and 13% of total revenue, respectively. The cost
increase in fiscal 2000 was primarily due to increases in personnel, especially
in the PhoenixNet-TM- segment and inSilicon, and increased variable compensation
due to higher profitability.
MERGER, ACQUISITION AND RESTRUCTURING COSTS
Merger, acquisition and restructuring charges during the years ended
September 30, 2000, 1999, and 1998, were as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Out-of-pocket merger and acquisition costs........ $ -- $ -- $ 5,677
Severance and other exit costs.................... 1,270 7,108 3,434
Asset write-offs.................................. -- 7,346 1,369
In-process research and development............... -- -- 4,250
------ ------- -------
$1,270 $14,454 $14,730
====== ======= =======
2000 CHARGES
In the fourth quarter of fiscal 2000, the Company recorded a restructuring
charge of approximately $1.3 million for severance benefits associated with the
elimination of three management positions. The charges were related to the
streamlining of certain management functions in Taiwan and North America. All
terminations have been completed as of September 30, 2000.
Approximately $0.2 million of the fiscal 1999 restructuring charges were
unpaid as of September 30, 2000, which will be paid through fiscal 2008.
1999 CHARGES
The charges in fiscal 1999 were related to realigning the business into
three operating divisions, the consolidation of certain facilities and
operations, and steps to integrate Award and Sand.
Included in the fourth quarter of fiscal 1999 was a restructuring charge of
$10.0 million associated with streamlining certain operations, facilities
consolidations (including closing the office in the United Kingdom), and
discontinuing or de-emphasizing certain products of inSilicon. The restructuring
plan included $3.6 million in severance benefits associated with the elimination
of approximately 54 positions in engineering, sales, marketing, and
administration from various product divisions, field operations including field
engineering and sales, and management (primarily in the United Kingdom and North
America), $5.7 million of asset write-offs (mostly capitalized software of the
inSilicon division), $0.6 million in facilities abandonment, and $0.9 million of
other business exit costs pursuant to the re-organization plan. The Company also
reversed $0.8 million of severance charges from prior restructuring plans as a
result of the decision to retain certain positions. Of the 54 terminations, all
had been completed as of September 30, 2000.
21
Included in the third quarter of fiscal 1999 was a restructuring charge of
$2.5 million associated with the discontinuation of the PICO and PC Enhancing
Division and severance related to certain management positions. Of the
$2.5 million, $1.6 million were associated with the write-off of PICO and PC
Enhancing related capitalized software, $0.8 million for severance benefits for
a management position, and $0.1 million for other general administrative
expenses.
In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $1.9 million related to the facilities consolidations and streamlining
certain field operations and other functions, including closing the offices in
Texas and France. The restructuring charge included $1.8 million of severance
benefits associated with the elimination of approximately 38 positions in
engineering, sales, marketing, and administration from various product
divisions, field operations, and general administrative functions, as well as
$0.1 million related to facilities abandonment.
1998 CHARGES
Included in the fourth quarter of fiscal 1998 was a charge of $14.0 million
related to the acquisitions of Award and Sand. The charge consisted of
$5.7 million of out-of-pocket costs, $3.4 million of asset write-offs,
$0.5 million in severance benefits associated with the elimination of 4
positions in North America in various departments, $0.1 million in facilities
abandonment, and a $4.3 million of in-process research and development charge.
Included in the third quarter of 1998 is a restructuring charge of $0.8 million
related to the severance benefits for eliminating approximately 20 positions in
engineering, sales, marketing, and administration from various divisions as a
result of the consolidation of certain functions and the elimination of certain
management positions.
Out-of-pocket merger and acquisition costs of $5.7 million in fiscal 1998
include legal, accounting and investment banking fees associated with the
acquisition of Award. Asset write-offs of $3.4 million include the carrying
value of assets that were determined to be redundant as a result of either
merger or restructuring activities. As of September 30, 2000, substantially all
fiscal 1998 restructuring charges have been paid.
The in-process research and development charge in fiscal 1998 was an
allocation of a portion of the purchase price for Sand for projects that were
not yet capitalizable under the provisions of Statement of Financial Accounting
Standards No. 86, "COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED."
The allocation was based upon an independent appraisal. The appraised value was
determined by estimating the future net cash flows from such projects and
discounting the net cash flows back to their present value. The discount rate
applied includes a factor that takes into account the uncertainty surrounding
the successful development of the purchased in-process technology. If these
projects are not successfully developed, future revenue and profitability of its
Company may be adversely affected. Additionally, the value of other intangible
assets acquired may become impaired.
STOCK-BASED COMPENSATION
The stock-based compensation charges in fiscal 2000 were 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.
INTEREST AND OTHER INCOME, NET
Net interest income is primarily derived from cash, short- and long-term
investments and marketable securities. The income generated each period is
highly dependent on available cash and fluctuations in government interest
rates. The average interest rate earned in fiscal 2000 was approximately 4.7%.
In addition, certain trade balances are denominated in foreign currencies, and
therefore are subject to fluctuations in foreign currency exchange rates.
22
Net interest income was $4.4 million, $3.4 million and $4.7 million in
fiscal 2000, 1999 and 1998, respectively, of which $1.2 million in 2000 was
inSilicon interest. The increase in fiscal 2000 was primarily due to interest
received on higher cash balances as a result of proceeds inSilicon received from
the initial public offering of inSilicon stock. The decrease in fiscal 1999 was
primarily due to the decrease in the average cash balances available for
investment as a result of cash payments related to the acquisition of Sand and
stock repurchases.
Net other income decreased from $4.0 million in fiscal 1999 to
($0.4 million) in fiscal 2000 and increased from $1.5 million in fiscal 1998 to
$4.0 million in 1999, mainly due to the sale of additional shares of Xionics
Document Technologies, Inc. ("Xionics") common stock. The Company recorded a
gain of $4.0 million on the sale of 1,048,881 shares (all of its remaining
ownership interest) of Xionics common stock in fiscal 1999, as compared to a
gain of $1.5 million on the sale of 156,500 shares of Xionics common stock in
fiscal 1998.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $9.8 million, $0.9 million and
$5.0 million in fiscal 2000, 1999 and 1998, respectively. Excluding
non-deductible in-process research and development and transaction costs related
to the acquisitions of Award and Sand in fiscal 1998, its effective tax rate was
32% in fiscal 2000, 1999 and 1998. The Company's effective tax rate (excluding
non-deductible acquisition charges and transaction costs) has been lower than
the statutory rate due to various federal and state tax credits and lower tax
rates imposed on foreign earnings in certain jurisdictions. inSilicon is not
consolidated for income tax purposes, as the Company owns less than 80% of the
voting stock issued and outstanding as of September 30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company will be required to adopt
for the year ending December 31, 2001. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS 133 is not expected to have a
material impact on its financial condition or results of operations.
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.
FLUCTUATIONS IN OPERATING RESULTS
The tables in Part II, Item 6 of this Form 10-K include selected unaudited
quarterly consolidated data for fiscal 2000 and 1999. This information was
derived from its unaudited consolidated financial statements
23
that, in the opinion of management, reflect all recurring adjustments necessary
to fairly present this information, when read in conjunction with its annual
Consolidated Financial Statements. The results of operations for any period are
not necessarily indicative of the results to be expected for any future period.
The Company's future operating results may vary substantially from period to
period. The timing and amount of its license fees are subject to a number of
factors that make estimating revenue and operating results prior to the end of a
quarter uncertain. While the Company receives recurring revenue on royalty-
based license agreements and some agreements contain minimum quarterly royalty
commitments, a significant amount of license fees in any quarter is dependent on
signing agreements and delivering the licensed software in that quarter.
Generally, the Company has experienced a pattern of recording 50% or more of its
quarterly revenue in the third month of the quarter. The Company has
historically monitored its revenue bookings through regular, periodic worldwide
forecast reviews within the quarter. These reviews keep management informed of
areas where additional selling efforts may be needed in order to meet the
internal plans and market expectations. There can be no assurances that this
process will result in its meeting revenue expectations. Operating expenses for
any year are normally based on the attainment of planned revenue levels for that
year and are incurred ratably throughout the year. As a result, if revenue were
less than planned in any period while expense levels remain relatively fixed,
its operating results would be adversely affected for that period. In addition,
unplanned expenses could adversely affect operating results for the period in
which such expenses were incurred.
BUSINESS RISKS
The additional following factors should be considered carefully when
evaluating its Company and its business.
PRODUCT DEVELOPMENT
The Company's long-term success will depend on its ability to enhance
existing products and to introduce new products timely and cost-effectively that
meet the needs of customers in present and emerging markets. There can be no
assurance that the Company will be successful in developing new products or in
enhancing existing products or that new or enhanced products will meet market
requirements. Delays in introducing new products can adversely impact acceptance
and revenue generated from the sale of such products. The Company has, from time
to time, experienced such delays. The Company's software products and their
enhancements contain complex code that may contain undetected errors and/or bugs
when first introduced. There can be no assurance that new products or
enhancements will not contain errors or bugs that will adversely affect
commercial acceptance of such new products or enhancements. The introduction of
new products depends on acceptance of e-commerce and adoption of digital
devices.
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright, and
trademark laws and contractual provisions to protect its proprietary rights in
its software products. There can be no assurance that these protections will be
adequate or that competitors will not independently develop technologies that
are substantially equivalent or superior to its technology. In addition,
copyright and trade secret protection for its products may be unavailable or
unreliable in certain foreign countries. The Company has been issued twenty-one
patents with respect to its current product offerings and has more than
sixty-five patent applications pending with respect to certain of the products
the Company markets. The Company maintains an active internal program designed
to identify internally developed inventions worthy of being patented. There can
be no assurance that any of the applications pending will be approved and
patents issued or that its engineers will be able to develop technologies
capable of being patented. As the number of software patents increases, the
Company believes that software developers may become increasingly subject to
infringement claims.
24
There can be no assurance that a third party will not assert that its
patents or other proprietary rights are violated by products offered by it. Any
such claims, whether or not meritorious, may be time consuming and expensive to
defend, can trigger indemnity obligations owed by it to third parties, and may
have an adverse effect on its business, results of operations and financial
condition. Infringement of valid patents or copyrights or misappropriation of
valid trade secrets, whether alleged against it, or its customers, and
regardless of whether such claims have merit, could also have an adverse effect
on its business, results of operations and financial condition.
IMPORTANCE OF MICROSOFT AND INTEL
For a number of years, the Company has worked closely with leading software
and semiconductor companies in developing standards for the PC industry. The
Company remains optimistic regarding relationships with these industry leaders.
However, there can be no assurance that leading software and semiconductor
companies will not develop alternative product strategies that could conflict
with its product plans and marketing strategies. Action by such companies may
adversely impact its business and results of operations. Presently, there is
little overlap or conflict in the Company's product offerings, although these
companies now incorporate some functionality that has traditionally resided in
the BIOS. These leading software and semiconductor companies, in their endeavors
to add value, incorporate features or functions provided by the Company either
in the silicon or in the operating system. Therefore, the Company must
continually create new features and functions to sustain, as well as increase,
its software's added value to OEMs. There can be no assurances that the Company
will be successful in these efforts.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company's ability to achieve its revenue and operating performance
objectives will depend in large part on its ability to attract and retain
technically qualified engineering, sales, marketing and finance personnel. In
particular, approximately 50% to 60% of its employees are involved in
engineering efforts. Semiconductor SIP and Internet products are based on new
and emerging technologies that are different from BIOS technologies. The
available pool of engineering talent is limited for all three operating
segments. Accordingly, failure to attract, retain and grow its research and
development teams could adversely affect its business and operating results. All
of its executive officers and key personnel are employees at-will. The Company
might not be able to execute its business plan if the Company were to lose the
services of any of its key personnel. Several of its executives and other
employees joined the Company only recently and have had only a limited time to
work together. The Company's management team might not be able to work
effectively together or with the rest of its employees to develop its technology
and manage its continuing operations.
DEPENDENCE ON KEY CUSTOMERS; CONCENTRATION OF CREDIT RISK
The loss of any key customer and its inability to replace revenue provided
by a key customer may have a material adverse effect on its business and
financial condition. The Company's customer base includes large OEMs in the PC,
semiconductor and Internet markets, large Internet portals and motherboard
manufacturers. As a result, the Company maintains individually significant
receivable balances due from some of them. If these customers fail to meet
guaranteed minimum royalty payments and other payment obligations, the Company's
operating results could be adversely affected. As of September 30, 2000, its
largest receivable balance from any one customer represented approximately 18%
of total accounts receivable.
COMPETITION
The market for its BIOS products is very competitive, resulting in downward
pricing pressure. In marketing its BIOS products, the Company competes primarily
with in-house research and development
25
departments of PC manufacturers that may have significantly greater financial
and technical resources than ours. These companies include Acer Incorporated,
Compaq Computer Corporation, Dell Computer Corporation, International Business
Machines Corporation and Toshiba Corporation. The Company also competes for
system software business with other independent suppliers, ranging from small,
privately held companies to Acer Softech, a division of Acer Labs, a major
Taiwan chip and motherboard supplier. There can be no assurance that the Company
will continue to compete successfully with its current competitors or potential
new competitors. There can be no assurance that intense competition in the
industry and particular actions of its competitors will not have an adverse
effect on its business, operating results and financial condition. Due to the
competitive nature of the business and the overall price pressures within the PC
market, the Company expects that prices on many of its products may decrease in
the future and that such price decreases could have an adverse impact on its
results of operations or financial condition.
The SIP industry is very competitive and is characterized by constant
technological change, rapid rates of product obsolescence, and frequently
emerging new suppliers. The Company's existing competitors include other
merchant SIP suppliers, such as the Mentor Graphics' Inventra Division,
Synopsys, VAutomation and Zayante; suppliers of ASIC semiconductors, such as LSI
Logic, and the ASIC divisions of IBM Microelectronics, Lucent, Toshiba and NEC;
and to a lesser degree suppliers of Field Programmable Gate Array, or FPGA,
semiconductors, such as Altera, Xilinx, Actel and Quicklogic. The Company also
competes with the internal development organizations of large, vertically
integrated semiconductor and systems companies, such as Intel, Motorola, Cisco
and HP. In these companies, SIP developed for an individual project sometimes is
subject to efforts by the company to re-use the SIP in multiple projects.
Companies whose principle business is providing design services as
work-for-hire, such as Intrinsix, Sican, and Tality also provide competition.
In the Internet business, there are many distribution vehicles for its
partners to reach PC end users, including PC OEM companies, PC and hardware
registration companies and Internet web sites. Many have greater resources than
the Company.
INTERNATIONAL SALES AND ACTIVITIES
Revenue derived from the international operations of its Platform Enabling
Division comprises a majority of total revenue. There can be no assurances that
the Company will not experience significant fluctuations in international
revenue. While the major portion of its license fee or royalty contracts are
U.S. dollar denominated, the Company is entering into an increasing number of
contracts denominated in local currencies. The Company has sales and engineering
offices in Germany, Japan, Korea and Taiwan and uses a software engineering firm
in India. The Company's operations and financial results may be adversely
affected by factors associated with international operations, such as changes in
foreign currency exchange rates, uncertainties relative to regional economic
circumstances, political instability in emerging markets, difficulties in
attracting qualified employees, and language, cultural and other difficulties
managing foreign operations.
VOLATILE MARKET FOR PHOENIX STOCK
The market for its stock is highly volatile. The trading price of its common
stock has been, and will continue to be, subject to fluctuations in response to
operating and financial results, announcements of technological innovations, new
products or customer contracts by the Company or its competitors, changes in its
or its competitors' product mix or product direction, changes in its revenue mix
and revenue growth rates, changes in expectations of growth for the PC industry,
as well as other events or factors which the Company may not be able to
influence or control. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms and industry analysts relating to the market
in which the Company does business, companies with which the Company competes or
relating to it specifically could have an immediate and adverse effect on the
market price of its stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price
26
for many small capitalization, high-technology companies and that have often
been unrelated to the operating performance of these companies.
CERTAIN ANTI-TAKEOVER EFFECT
The Company's Certificate of Incorporation, Bylaws and Stockholder Rights
Plan and the Delaware General Corporation Law include provisions that may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that stockholders might consider in their best interests. These include
provisions under which members of the Board of Directors are divided into three
classes and are elected to serve staggered three-year terms. In addition, in
connection with the February 1996 sale of shares representing 6% of its
outstanding common stock and of a warrant to purchase an additional 7% of the
Company's then outstanding stocks, the Company granted Intel Corporation certain
rights in the event of solicited or unsolicited offers to acquire the Company.
RAPID CHANGE WITH THE INTERNET
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility, quality of service,
potential tax or other government regulation, may affect the use of the Internet
as a medium to distribute or support its software products and the functionality
of some of its products. If the Company is unsuccessful in timely assimilating
changes in the Internet environment in its business operations and product
development efforts, its future net revenue and operating results could be
adversely affected.
BUSINESS DISRUPTIONS
While the Company has not been the target of software viruses specifically
designed to impede the performance of its products, such viruses could be
created and deployed against its products in the future. Similarly, experienced
computer programmers or hackers may attempt to penetrate its network security or
the security of its web sites from time to time. A hacker who penetrates its
network or web sites could misappropriate proprietary information or cause
interruptions of its services. The Company might be required to expend
significant capital and resources to protect against, or to alleviate, problems
caused by virus creators and/or hackers.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity include cash, cash equivalents and
short-term investments. Phoenix reported $55.0 million consolidated cash in
fiscal 2000, of which $10.8 million was restricted and owned by inSilicon. The
Company believes that current cash, short-term investment balances and cash flow
from operations will be sufficient to meet its operating and capital
requirements on a short-term and long-term basis. In the second quarter of
fiscal 2000, inSilicon raised net proceeds of approximately $37.0 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 September 30, 2000.
In fiscal 2000, the Board of Directors authorized a program to repurchase up
to $30 million worth of outstanding shares of common stock over a 24-month
period. In fiscal 2000, the company repurchased a total of 836,000 shares at a
cost of approximately $14.5 million under the 2000 repurchase program. The
company also repurchased 175,000 shares at a cost of approximately
$34.1 million and completed the 1999 repurchase program in first quarter of
fiscal 2000. The Company has repurchased an additional 810,000 shares during the
first two months of fiscal 2001 at a cost of $12.1 million.
27
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 programs were completed in first quarter of 2000.
CHANGES IN FINANCIAL CONDITION
Phoenix reported $55.0 million consolidated cash in fiscal 2000, of which
$10.8 million was restricted and owned by inSilicon. Net cash generated from
operating activities during fiscal 2000 was $11.0 million, consisting primarily
of $20.9 million of net income, adjusted for non-cash items, partially offset by
increases in accounts receivable, other current assets and other assets and
decreases in payroll, other accrued liabilities and income taxes payable. Net
cash used in investing activities in fiscal 2000 was $18.5 million, consisting
primarily of $13.3 million of net purchases of short-term and long-term
investments, $4.8 million in purchases of property and equipment and
$0.4 million in additions to computer software costs. Net cash provided by
financing activities during fiscal 2000 was $36.6 million, consisting of
approximately $37.0 million generated from the initial public offering of
inSilicon common stock, $19.9 million 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 $20.3 million of cash used to
repurchase the Company's common stock.
Net cash generated from operating activities during fiscal 1999 was
$21.6 million, resulting primarily from cash provided by net income, adjusted
for non-cash items. Net cash used in investing activities was $13.7 million,
which consisted primarily of $6.2 million of net purchases of short-term and
long-term investments and marketable securities, $5.0 million in purchases of
property and equipment, and $2.4 million in addition to computer software costs.
Cash used for financing activities during fiscal 1999 was $28.3 million,
consisting primarily of $34.1 million to repurchase its common stock, partially
offset by $5.8 million generated from the exercise of common stock options and
the issuance of stock under its employee stock purchase plan.
Net cash generated from operating activities during fiscal 1998 was
$13.2 million, resulting primarily from cash provided by net income, adjusted
for non-cash items. Net cash used in investing activities was $14.5 million,
which consisted primarily of the Company's investment in Sand (net of cash
acquired) of $15.6 million, purchases of property and equipment of
$5.5 million, and additions to computer software costs of $5.2 million,
partially offset by $7.5 million received from the sale of the Company's
interest in its publishing operation in fiscal 1997. Cash used for financing
activities during fiscal 1998 was $0.6 million resulting from purchases of
$3.6 million of treasury stock, partially offset by $2.9 million from the
exercise of common stock options and issuance of stock under the Company's
employee stock purchase plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company was exposed to the impact of interest rate changes, foreign
currency fluctuations, and change in the market values of its investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to its investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company's
investments are in debt instruments of the U.S. Government and its agencies, and
in high-quality corporate issuers and, by policy, limit the amount of credit
exposure to any one issuer. The Company protects and preserves its invested
funds by limiting default, market and reinvestment risk. Investments in both
fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if there is a decline in
interest rates. Due in part to these factors, its future investment income may
fall short of expectations, or the
28
Company may suffer a loss in principal if it is forced to sell securities, which
have declined in market value due to changes in interest rates. The Company has
the ability to hold its fixed income investments until maturity and, therefore,
the Company would not expect its operating results or cash flows to be affected
to any significant degree by a sudden change in market interest rates on its
short-term investment portfolio.
FOREIGN CURRENCY RISK
International revenues from its foreign subsidiaries were 71%, 67% and 60%
of total revenues in fiscal 2000, 1999 and 1998, respectively. International
sales are primarily from its foreign sales subsidiaries in their respective
countries and are typically denominated in the local currency of each country.
These subsidiaries incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency. The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
its future results could be materially adversely impacted by changes in these or
other factors. The Company's exposure to foreign exchange rate fluctuations
arises in part from intercompany accounts in which costs incurred in the United
States are charged to its foreign sales subsidiaries. These intercompany
accounts are typically denominated in the functional currency of the foreign
subsidiary in order to centralize foreign exchange risk with the parent company
in the United States. The Company is also exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. A hypothetical 10 percent appreciation/depreciation of the U.S.
Dollar from September 30, 2000 market rates would decrease/ increase net income
by $0.6 million.
INVESTMENT RISK
The Company invests in equity instruments of privately held, information
technology companies for business and strategic purposes. These investments are
included in other long-term assets and are accounted for under the cost method
when ownership is less than 20%. For these non-quoted investments, its policy is
to regularly review the assumptions underlying the operating performance and
cash flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on long-lived assets when events and circumstances
indicate that such assets might be impaired. To date, no such impairment has
been recorded. If certain of these investments in privately-held companies
became marketable equity securities when the investees completed initial public
offerings in the future, then they are subject to significant fluctuations in
fair market value due to the volatility of the stock market, and are recorded as
long-term investments. The Company also invests in publicly traded equity
securities that are subject to market price volatility. Equity security price
fluctuations of plus or minus 15 percent would have had a $0.7 million impact on
the value of these securities in fiscal 2000. Equity security price fluctuations
of plus or minus 50 percent would have had a $2.2 million impact on the value of
these securities in fiscal 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to its Company's
directors will be contained in its definitive proxy statement to be filed
pursuant to Regulation 14A in connection with the 2001 annual meeting of its
stockholders (the "Proxy Statement") and is incorporated herein by this
reference. The information required by this item with respect to its executive
officers is contained in Part I in the section captioned, "EXECUTIVE
COMPENSATION."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the information contained in the section captioned, "EXECUTIVE COMPENSATION" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information contained in the section captioned, "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information contained in the section captioned, "CERTAIN TRANSACTIONS" in
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of its Company and its
subsidiaries are filed as part of this report on Form 10-K:
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... 34
Consolidated Balance Sheets as of September 30, 2000 and
1999...................................................... 35
Consolidated Statements of Income for the years ended
September 30, 2000, 1999, and 1998........................ 36
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2000, 1999, and 1998............ 37
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998........................ 38-39
Notes to Consolidated Financial Statements.................. 40
2. Consolidated Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto. The consolidated financial statements and financial
statement schedules follow the signature page hereto.
3. See Item 14(c)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the year ended
September 30, 2000.
30
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
2.1 Agreement and Plan of Reorganization dated April 15, 1998,
among Phoenix, Portland Acquisition Corporation and Award
(incorporated herein by this reference to Exhibit 2.1 to the
Registration Statement on Form S-4 filed with the SEC on
May 26, 1998).
2.2 Agreement of Merger between Award and Portland Acquisition
Corporation (incorporated herein by this reference to
Exhibit 2.2 to the Registration Statement on Form S-4 filed
with the SEC on May 26, 1998).
3.1 Amended and Restated Certificate of Incorporation of Phoenix
dated June 29, 1998 (incorporated herein by this reference
to Exhibit 3.1 to the Registration Statement on Form S-4
filed with the SEC on May 26, 1998).
3.2 By-laws of Phoenix as amended through February 6, 1995
(incorporated herein by reference to Exhibit 4.2 to
Phoenix's Registration Statement on Form S-8, Registration
No. 333-03065).
4.1 Rights Agreement dated as of October 31, 1989 between
Phoenix and The First National Bank of Boston (incorporated
herein by reference to Exhibit 4.1 to Phoenix's Form 8-K
filed on October 31, 1989).
10.15 1994 Equity Incentive Plan, as amended through February 28,
1996 (incorporated herein by reference to Exhibit 10.17 to
Phoenix's Report on Form 10-K for the fiscal year ended
September 30, 1995 (the "1995 10-K")).
10.21 Amended and Restated Lease Agreement dated March 15, 1995
between The Prudential Insurance Company of America and
Phoenix with respect to certain facilities located at 846
University Avenue, Norwood, MA (incorporated herein by
reference to Exhibit 10.23 to the 1995 10-K).
10.22+ Agreement dated December 18, 1995 between Intel Corporation
and Phoenix (incorporated herein by reference to Exhibit
10.24 to Phoenix's Report on Form 10-Q for the quarter ended
December 31, 1995, as amended by a Form 10-Q/A-1 (the
"December 1995 10-Q")).
10.23 Common Stock and Warrant Purchase Agreement dated
December 18, 1995 by and between Phoenix and Intel
Corporation (incorporated herein by reference to
Exhibit 10.25 to the December 1995 10-Q).
10.24 Warrant to Purchase Shares of Common Stock of Phoenix dated
February 15, 1996 (incorporated herein by reference to
Exhibit 2 to the Schedule 13D of Intel Corporation dated
February 23, 1996 with respect to the purchase by Intel of
shares of Phoenix's common stock and of a warrant to
purchase shares of Phoenix's common stock (the "Intel
Schedule 13D")).
10.25 Investor Rights Agreement dated December 18, 1995 between
Phoenix and Intel Corporation (incorporated herein by
reference to Exhibit 3.2 to the Intel Schedule 13D).
10.26 Standard Industrial Lease--Full Net between The Equitable
Life Assurance Society of the United States as Landlord and
Phoenix as Tenant dated as of May 15, 1996 for that certain
property located at 411 E. Plumeria Drive, San Jose,
California (incorporated herein by reference to
Exhibit 10.20 to Phoenix's Report on Form 10-Q for the
quarter ended June 30, 1996).
31
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.28 Industrial Lease (Single Tenant; Net) dated October 1, 1996
by and between The Irvine Company and Phoenix for that
certain property located at 135 Technology Drive, Irvine,
California (incorporated herein by reference to
Exhibit 10.28 to the 1996 Form 10-K).
10.29 1996 Equity Incentive Plan, as amended through December 12,
1996 (incorporated herein by reference to Exhibit 4.2 to
Phoenix's Registration Statement on Form S-8 filed on
January 27, 1997 (Registration No. 333-20447)).
10.33 Amended and Restated Employee Stock Purchase Plan, as
amended June 4, 1998 (incorporated herein by reference to
Exhibit 99.2 to the 1998 Stock Plan and Amended 1991
Employee Stock Purchase Plan S-8).
10.52 Promissory Note dated March 1, 1998 issued by Pierre A.
Narath to Phoenix (incorporated herein by reference to
Exhibit 10.35 of the 10-K of Award for the year ended
December 31, 1997).
10.53 Letter Agreement dated March 1, 1998 between Pierre A.
Narath and Phoenix (incorporated herein by reference to
Exhibit 10.36 of the 10-K of Award for the year ended
December 31, 1997).
10.54+ Master Original Equipment Manufacturer (OEM) Software
License Agreement, dated September 10, 1997, between Phoenix
and Intel Corporation (incorporated herein by reference to
Exhibit 10.37 of the 10-K of Award for the year ended
December 31, 1997).
10.59 Employment Agreement dated June 8, 1999 between Phoenix and
Albert E. Sisto (incorporated herein by reference to
Exhibit 10.59 to the 1999 Form 10-K).
10.60 Phoenix Preferred Share Purchase Rights Plan dated
October 28, 1999 (incorporated herein by reference to
Exhibit 1 of Form 8-A as filed on October 28, 1999).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney. See signature page.
27.1 Financial Data Schedule.
- ------------------------
+ The Securities and Exchange Commission has granted confidential treatment
for portions of this document.
(d) See Item 14(a)2
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
By: /s/ ALBERT E. SISTO
-----------------------------------------
Albert E. Sisto
Director, President and Chief Executive
Officer
Date: December 19, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ ALBERT E. SISTO /s/ JOHN M. GREELEY
- ------------------------------------------- -------------------------------------------
Albert E. Sisto John M. Greeley
Director, President and Chief Executive Principal Financial and Accounting Officer
Officer Date: December 19, 2000
Date: December 19, 2000
/s/ TAHER ELGAMAL /s/ GEORGE C. HUANG
- ------------------------------------------- -------------------------------------------
Taher Elgamal George C. Huang
Director Director
Date: December 19, 2000 Date: December 19, 2000
/s/ EDMUND P. JENSEN /s/ ANTHONY SUN
- ------------------------------------------- -------------------------------------------
Edmund P. Jensen Anthony Sun
Director Director
Date: December 19, 2000 Date: December 19, 2000
/s/ ANTHONY P. MORRIS /s/ SHIH-CHIEN YANG
- ------------------------------------------- -------------------------------------------
Anthony P. Morris Shih-Chien Yang
Director Director
Date: December 19, 2000 Date: December 19, 2000
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the accompanying consolidated balance sheets of Phoenix
Technologies Ltd. as of September 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in Part IV, Item 14(a). These
consolidated financial statements and schedules are the responsibility of the
management of Phoenix Technologies Ltd. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Phoenix Technologies Ltd. at September 30, 2000 and 1999,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
[LOGO]
San Jose, California
October 19, 2000
34
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 55,017 $ 24,873
Short-term investments.................................... 52,701 30,719
Accounts receivable, net of allowances of $790 and $1,460
at September 30, 2000 and 1999.......................... 39,868 30,105
Deferred income taxes..................................... 3,926 5,881
Other current assets...................................... 4,494 2,881
-------- --------
Total current assets.................................... 156,006 94,459
Other marketable securities................................. -- 8,684
Property and equipment, net................................. 13,272 12,588
Computer software costs, net................................ 5,385 7,471
Goodwill and other intangible assets, net................... 7,937 10,165
Other assets................................................ 16,160 8,631
-------- --------
Total assets................................................ $198,760 $141,998
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,945 $ 3,810
Payroll and related liabilities........................... 10,554 10,612
Deferred revenue.......................................... 4,733 5,414
Other accrued liabilities................................. 6,988 14,147
Income taxes payable...................................... 5,254 7,547
-------- --------
Total current liabilities............................... 31,474 41,530
Long-term obligations....................................... 1,449 1,546
Long-term deferred tax liabilities.......................... 3,865 --
Total liabilities......................................... 36,788 43,076
-------- --------
Minority interest........................................... 13,672 --
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares authorized,
none issued or outstanding.............................. -- --
Common stock, $.001 par value, 60,000 shares authorized,
25,608 and 24,036 shares issued and outstanding at
September 30, 2000 and 1999............................. 30 28
Additional paid-in capital................................ 153,530 109,448
Retained earnings......................................... 53,890 32,988
Accumulated other comprehensive loss...................... (380) (869)
Less: Cost of treasury stock (1,011 shares at September
30, 2000; 2,542 shares at September 30, 1999)........... (58,770) (42,674)
-------- --------
Total stockholders' equity.............................. 148,300 98,922
-------- --------
Total liabilities and stockholders' equity.................. $198,760 $141,998
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
License fees.............................................. $125,817 $103,326 $100,344
Services.................................................... 18,568 22,500 22,541
-------- -------- --------
Total revenue........................................... 144,385 125,826 122,885
Cost of revenue:
License fees.............................................. 3,133 7,844 7,828
Services.................................................. 17,074 18,344 16,224
Amortization of purchased technology...................... 1,256 2,132 --
-------- -------- --------
Total cost of revenue................................... 21,463 28,320 24,052
-------- -------- --------
Gross margin................................................ 122,922 97,506 98,833
Operating expenses:
Research and development.................................. 39,055 39,910 40,476
Sales and marketing....................................... 33,050 29,020 27,771
General and administrative................................ 19,713 16,287 16,137
Amortization of goodwill and acquired intangible assets... 2,220 2,496 150
Stock-based compensation.................................. 789 -- --
Merger, acquisition and restructuring charges............. 1,270 14,454 14,730
-------- -------- --------
Total operating expenses................................ 96,097 102,167 99,264
-------- -------- --------
Income (loss) from operations............................... 26,825 (4,661) (431)
Interest income, net........................................ 4,433 3,361 4,659
Other income (expense), net................................. (436) 3,954 1,505
Minority interest........................................... (81) -- --
-------- -------- --------
Income before income taxes.................................. 30,741 2,654 5,733
Provision for income taxes.................................. 9,839 850 5,011
-------- -------- --------
Net income.................................................. $ 20,902 $ 1,804 $ 722
======== ======== ========
Earnings per share:
Basic..................................................... $ 0.85 $ 0.07 $ 0.03
======== ======== ========
Diluted................................................... $ 0.77 $ 0.07 $ 0.03
======== ======== ========
Weighted average number of shares used in computation:
Basic..................................................... 24,720 25,966 25,543
======== ======== ========
Diluted................................................... 27,120 27,250 27,009
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT EARNINGS EARNINGS INCOME (LOSS) STOCK
-------- -------- ---------- -------- ------------- --------
BALANCE, SEPTEMBER 30, 1997.................. 25,399 $25 $ 95,203 $32,088 $11,240 $ (5,015)
Stock purchases under option and purchase
plans...................................... 681 1 3,055 -- -- --
Issuance of common shares and stock options
related to purchase of Sand................ 464 -- 4,372 -- -- --
Effect of Award fiscal year conversion....... -- -- -- (1,660) -- --
Note receivable from stockholder............. -- -- (123) -- -- --
Repurchase of common stock................... (258) -- -- -- -- (3,553)
Deferred stock-based
compensation............................... -- -- 122 -- -- --
Comprehensive loss:
Net income................................. -- -- -- 722 -- --
Change in unrealized gain on investments,
net of a tax benefit of $4,952........... -- -- -- -- (10,524) --
Translation adjustment, net of tax of
$289..................................... -- -- -- -- (615) --
Comprehensive loss.......................
-------- --- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1998.................. 26,286 26 102,629 31,150 101 (8,568)
Stock purchases under option and purchase
plans...................................... 1,028 2 5,334 -- -- --
Stock warrants exercised..................... 49 -- 40 -- -- --
Repurchase of common stock................... (3,327) -- -- -- -- (34,106)
Stock-based compensation..................... -- -- 1,101 -- -- --
Tax benefit on exercise of stock options..... -- -- 186 -- -- --
Purchase of minority interest in Award
Japan...................................... -- -- 158 37 -- --
Comprehensive income:
Net income................................. -- -- -- 1,804 -- --
Change in unrealized gain on investments,
net of a tax benefit of $963............. -- -- -- -- (2,046) --
Translation adjustment, net of tax of
$506..................................... -- -- -- -- 1,076 --
Comprehensive income.....................
-------- --- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1999.................. 24,036 28 109,448 32,988 (869) (42,674)
Stock purchases under option and purchase
plans...................................... 2,481 2 19,473 -- -- --
Stock warrants exercised..................... 102 -- -- -- -- --
Net proceeds under inSilicon IPO............. -- 4 36,972 -- -- --
Minority interest in inSilicon............... -- (4) (13,588) -- -- --
Repurchase of common stock................... (1,011) -- -- -- -- (16,096)
Tax benefit on exercise of stock options..... -- -- 455 -- -- --
Stock-based compensation..................... -- -- 770 -- -- --
Comprehensive income:
Net income................................. -- -- -- 20,902 -- --
Translation adjustment, net of tax of
$230..................................... -- -- -- -- 489 --
Comprehensive income.....................
-------- --- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 2000.................. 25,608 $30 $153,530 $53,890 $ (380) $(58,770)
======== === ======== ======= ======= ========
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- -------------
BALANCE, SEPTEMBER 30, 1997.................. $133,539
Stock purchases under option and purchase
plans...................................... 3,056
Issuance of common shares and stock options
related to purchase of Sand................ 4,372
Effect of Award fiscal year conversion....... (1,660)
Note receivable from stockholder............. (123)
Repurchase of common stock................... (3,553)
Deferred stock-based
compensation............................... 122
Comprehensive loss:
Net income................................. 722 $ 722
Change in unrealized gain on investments,
net of a tax benefit of $4,952........... (10,524) (10,524)
Translation adjustment, net of tax of
$289..................................... (615) (615)
--------
Comprehensive loss....................... $(10,417)
-------- ========
BALANCE, SEPTEMBER 30, 1998.................. 125,336
Stock purchases under option and purchase
plans...................................... 5,336
Stock warrants exercised..................... 40
Repurchase of common stock................... (34,106)
Stock-based compensation..................... 1,101
Tax benefit on exercise of stock options..... 186
Purchase of minority interest in Award
Japan...................................... 195
Comprehensive income:
Net income................................. 1,804 $ 1,804
Change in unrealized gain on investments,
net of a tax benefit of $963............. (2,046) (2,046)
Translation adjustment, net of tax of
$506..................................... 1,076 1,076
--------
Comprehensive income..................... $ 834
-------- ========
BALANCE, SEPTEMBER 30, 1999.................. 98,922
Stock purchases under option and purchase
plans...................................... 19,475
Stock warrants exercised..................... --
Net proceeds under inSilicon IPO............. 36,976
Minority interest in inSilicon............... (13,592)
Repurchase of common stock................... (16,096)
Tax benefit on exercise of stock options..... 455
Stock-based compensation..................... 770
Comprehensive income:
Net income................................. 20,902 $ 20,902
Translation adjustment, net of tax of
$230..................................... 489 489
--------
Comprehensive income..................... $ 21,391
-------- ========
BALANCE, SEPTEMBER 30, 2000.................. $148,300
========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-------------------------------
2000 1999 1998
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 20,902 $ 1,804 $ 722
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 8,811 12,558 8,124
Effect of Award fiscal year conversion.................. -- -- (1,660)
Asset write-offs related to merger and restructuring
activities............................................ -- 7,346 3,434
Write-off of computer software costs.................... -- -- --
Acquired in-process research and development............ -- -- 4,250
Realized gain on sale of marketable securities.......... -- (4,034) (1,507)
Stock-based compensation................................ 770 1,101 --
Minority interest....................................... 81 -- --
Deferred income taxes................................... 232 (8,570) (4,123)
Change in operating assets and liabilities:
Accounts receivable................................... (9,678) (1,193) (256)
Other current assets and other assets................. (3,610) 2,210 (1,545)
Accounts payable...................................... 149 (3,167) 2,455
Payroll and other related liabilities................. (1,322) 3,130 1,265
Other accrued liabilities............................. (3,037) 9,827 2,845
Income taxes payable.................................. (2,280) 610 (691)
Discontinued operations............................... -- -- (135)
--------- -------- --------
Total adjustments................................... (9,885) 19,818 12,457
--------- -------- --------
Net cash provided by operating activities............... 11,017 21,622 13,179
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term and long-term
investments............................................. 505,251 50,227 58,430
Purchases of short-term and long-term investments......... (518,550) (60,533) (58,085)
Proceeds from sale of marketable securities............... 0 4,073 1,570
Purchases of property and equipment....................... (4,829) (5,003) (5,454)
Additions to computer software costs...................... (411) (2,423) (5,198)
Acquisition of Sand, net of cash acquired................. -- -- (15,573)
Proceeds from sale of equity investment................... -- -- 7,500
Proceeds from collection of note receivable............... -- -- 2,310
--------- -------- --------
Net cash used in investing activities................... (18,539) (13,659) (14,500)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of inSilicon common
stock................................................... 36,976 -- --
Net proceeds from stock purchases under option plans,
purchase plans and warrants............................. 19,930 5,376 2,930
Repurchase of common stock................................ (20,322) (34,106) (3,553)
Other financing activities................................ -- 383 --
--------- -------- --------
Net cash provided by (used in) financing activities..... 36,584 (28,347) (623)
--------- -------- --------
Effect of exchange rate changes on cash and equivalents..... 1,081 1,023 (622)
--------- -------- --------
Increase (decrease) in cash and cash equivalents............ 30,144 (19,361) (2,566)
Cash and cash equivalents at beginning of fiscal year....... 24,873 44,234 46,800
--------- -------- --------
Cash and cash equivalents at end of fiscal year............. $ 55,017 $ 24,873 $ 44,234
========= ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Supplemental cash flow information is as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Supplemental disclosure of cash flow information:
Income taxes paid during the year, net of refunds......... $12,413 $6,155 $8,165
Supplemental schedule of non-cash investing and financing
activities:
Issuance of common shares and stock options related to the
purchase of Sand........................................ -- -- 4,372
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF OPERATIONS
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is a global leader in
system-enabling software solutions for PCs and connected digital devices. Its
software provides compatibility, connectivity, security, and manageability of
the various components and technologies used in such devices. Phoenix provides
these products primarily to platform and peripheral manufacturers (collectively,
"OEMs") that range from large PC manufacturers to small system integrators.
Phoenix also provides training, consulting, maintenance and engineering services
to its customers. It markets and licenses its products and services primarily
through a direct sales force, as well as through regional distributors and sales
representatives. The Company 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. See Note 12.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and inSilicon
after the elimination of all significant intercompany balances. Certain amounts
in the prior years' financial statements have been reclassified to conform to
the fiscal 2000 presentation.
FOREIGN CURRENCY TRANSLATION. The Company has determined that the
functional currency of its foreign operations is the local currency. Therefore,
assets and liabilities are translated at year-end exchange rates and income
statement transactions are translated at average exchange rates prevailing
during each period.
USE OF ESTIMATES. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Such estimates include, but are not limited to, the allowance for
doubtful accounts, sales returns and customer credits, net realizable value of
capitalized computer software costs, accrued user support costs, restructuring
charges, and the valuation allowance on deferred tax assets.
REVENUE RECOGNITION. The Company adopted Statement of Position 98-9, ("SOP
98-9"), Modification of SOP 97-2, "Software Revenue Recognition, With Respect to
Certain Transactions", as of October 1, 1999. SOP 98-9 and SOP 97-2 provide
guidance for recognizing revenue on software transactions and supersede
Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION," ("SOP 91-1"). The
adoption of SOP 98-9 did not have a material impact on the Company's
consolidated financial results.
The Company licenses software under non-cancelable license agreements and
provides services including training, non-recurring engineering and maintenance
consisting of product support services and periodic updates. License fee
revenues are generally recognized when a non-cancelable license agreement has
been signed, the software product has been shipped, there are no uncertainties
surrounding product acceptance, the fees are fixed or determinable, and
collection is considered probable. For customer license agreements which meet
these recognition criteria, the portion of the fees related to software licenses
are generally recognized in the current period, while the portion of the fees
related to services is recognized as the services are performed. When the
Company enters into a license agreement with a customer requiring significant
customization of the software products, it recognizes revenue related to the
license agreement using contract accounting. Revenues from maintenance
agreements are recognized ratably over the maintenance period, which in most
instances is one year.
40
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Royalty revenues from OEMs are generally recorded in each period based on
estimates of shipments by the OEMs of products containing the Company's software
during the period. Revenues from OEMs for fully paid up, non-refundable
royalties is recorded when the revenue recognition criteria described above has
been met.
Customers entering into license agreements with the Company for engineering
services are typically charged fees that vary according to the amount of
engineering work performed. Engineering fees are recognized as revenue on a time
and materials basis or when contractual milestones are met. Maintenance revenue
is generally recognized ratably over the contract period, which in most cases is
one year.
Provisions are made for doubtful accounts, estimated returns and customer
credits.
One customer, Fujitsu, accounted for 19%, 11% and 11% of revenue in fiscal
2000, 1999 and 1998 respectively. No other customer accounted for more than 10%
of revenue in fiscal 2000, 1999 or 1998.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity of
less than three months are considered cash equivalents. Phoenix reported
$55.0 million consolidated cash in fiscal 2000, of which $10.8 million was
restricted and owned by inSilicon.
SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES. Short-term
investment securities consist of U.S. government agency obligations, corporate
debt securities, certificates of deposit and commercial paper with original
maturities generally ranging from three months to one year. Short-term
investments are classified as held-to-maturity, as Phoenix has the intent and
the ability to hold them until maturity. Such investments are recorded at
amortized cost. At September 30, 2000 and 1999, the fair value of such
short-term investments approximated amortized cost and gross unrealized holding
gains and losses were not material. The cost of securities sold and the fair
value of securities are based on the specific identification method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in other income (expense), net in the consolidated statements of
income.
Other marketable securities consist of shares of marketable equity
securities and U.S. government agency obligations and corporate debt securities
with maturities greater than one year. For debt securities other than those
classified as short-term, maturities range from one to five years and are
considered held-to-maturity. The shares of marketable equity securities are
recorded at fair value based on quoted market prices and are classified as
available-for-sale. Unrealized gains, less deferred income taxes, are recorded
as a separate component of stockholders' equity. There were no other marketable
securities as of September 30, 2000.
The U.S. government agency obligations and corporate debt securities are
recorded at amortized cost, as the Company has the intent and ability to hold
them until maturity. At September 30, 2000, the fair value of such securities
approximated amortized cost and gross unrealized holding gains were not
material. There were no U.S. government agency obligations and corporate debt
securities classified as long-term as of September 30, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of the Company's
financial instruments, including accounts receivable, accounts payable and
accrued liabilities, approximate their fair values due to their short
maturities. The estimated fair values may not be representative of actual values
of the financial instruments that could be realized as of the period end or that
will be realized in the future.
41
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CREDIT RISK. Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company places its cash investments with high credit qualified
financial institutions. The Company extends credit on open accounts to its
customers and does not require collateral. The Company performs ongoing credit
evaluations of all customers and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. On September 30, 2000, one customer accounted for
18% of accounts receivable, whereas on September 30, 1999, no customer accounted
for more than 10% of accounts receivable.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of the
assets, which is typically three to five years. Leasehold improvements are
recorded at cost and amortized over the lesser of the useful life of the assets
or the remaining term of the related lease.
COMPUTER SOFTWARE COSTS. Computer and software costs consist of internally
developed and purchased software capitalizable under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 86, "COMPUTER SOFTWARE TO BE
SOLD, LEASED OR OTHERWISE MARKETED" ("SFAS 86"). Costs incurred in the research
and development of new software products and enhancements to existing products
are expensed as incurred until technological feasibility (beta test version) has
been established, at which time, such costs are capitalized. Capitalized
computer software costs are amortized over the economic life of the product,
generally three to six years, using the straight-line method or a ratio of
current revenue to total anticipated revenue.
The Company evaluates the net realizable value and amortization periods of
computer software costs on an ongoing basis and records charges to reduce
carrying value to net realizable value, as necessary. In assessing net
realizable value, the Company relies on a number of factors including operating
results, business plans, budgets and economic projections. In addition, the
Company's evaluation considers non-financial data such as market trends and
customer relationships, buying patterns and product development cycles.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill is amortized using the
straight-line method over the estimated life of the assets, which is typically
from five to seven years. Goodwill was $6.4 million and $8.0 million, net, as of
September 30, 2000 and 1999, respectively. Accumulated amortization amounted to
$5.2 million on September 30, 2000, and $3.7 million on September 30, 1999.
Intangible assets were $1.6 million and $2.2 million, net, as of
September 30, 2000 and 1999, respectively. Accumulated amortization amounted to
$1.2 million on September 30, 2000, and $0.6 million on September 30, 1999.
INCOME TAXES. Income taxes are accounted for in accordance with SFAS
No. 109 "ACCOUNTING FOR INCOME TAXES" ("SFAS 109"). Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of enactment.
42
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" ("APB 25"). The Company has adopted the disclosure only criteria,
described in SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS 123"). See Note 14 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities, which the Company
will be required to adopt for the year ending December 31, 2001." FAS 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and do not currently engage in hedging activities, adoption of
FAS 133 is not expected to have a material impact on its financial condition or
results of operations.
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, and will not have a material
impact on the Company's financial position, results of operations or cash flows.
NOTE 3. SALE OF INTEREST IN INSILICON CORPORATION
The initial public offering of 3.5 million shares of common stock of the
Company's subsidiary, inSilicon, closed on March 27, 2000. Proceeds, net of
issuance costs, to inSilicon were approximately $37.0 million; the Company owns
73.6% of inSilicon's outstanding common stock at September 30, 2000. The
accompanying 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 service and cost sharing agreement, employee matters
agreement, and a tax sharing agreement that will govern the ongoing relationship
of the parties.
43
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. SHORT TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES
Short-term investments and other marketable securities consist of the
following:
OTHER
SHORT-TERM MARKETABLE
INVESTMENTS SECURITIES
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
U.S. government agency obligations.......... $34,575 $21,066 $ -- $8,684
Commercial paper............................ 16,123 6,623 -- --
Certificates of deposit..................... -- 2,003 -- --
Corporate debt securities................... 2,003 1,027 -- --
------- ------- ---- ------
$52,701 $30,719 $ -- $8,684
======= ======= ==== ======
On September 30, 2000, the contractual maturities of all debt securities
were less than one year.
On September 30, 1999, the contractual maturities of held-to-maturity debt
securities were as follows:
(IN THOUSANDS)
Less than one year.......................................... $30,719
One to five years........................................... 8,684
-------
Total....................................................... 39,403
=======
There were no available-for-sale securities as of September 30, 2000 and
1999.
Proceeds received from the sales of available-for-sale securities for the
year ended September 30, 1999 were approximately $4.0 million. Gross realized
gains realized on the sales of available-for-sale securities for the year ended
September 30, 1999 were approximately $4.0 million.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
YEAR ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Equipment................................................... $19,486 $16,519
Leasehold improvements...................................... 7,843 5,725
Furniture and fixtures...................................... 3,003 3,299
------- -------
30,332 25,543
Less accumulated depreciation and amortization.............. (17,060) (12,955)
------- -------
$13,272 $12,588
======= =======
Depreciation expense related to property and equipment totaled $5.1 million
for fiscal 2000 and 1999 and $4.0 million for 1998.
44
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMPUTER SOFTWARE COSTS
Additional costs associated with purchased and internally developed computer
software of $0.4 million, $2.4 million and $5.2 million, were capitalized during
fiscal 2000, 1999 and 1998, respectively. In addition, the Company capitalized
approximately $12.8 million of software costs in conjunction with its
September 1998 acquisition of Sand Microelectronic, Inc. ("Sand"), a leading
supplier of standards-based system software and semiconductor intellectual
property for PCs and information appliances. Amortization charged to cost of
revenue was $2.5 million, $4.8 million and $4.3 million, during fiscal 2000,
1999 and 1998, respectively. Accumulated amortization of capitalized computer
software costs was $3.5 million, $8.1 million and $5.0 million at September 30,
2000, 1999 and 1998, respectively.
NOTE 7. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings
per share required under Statement of Financial Accounting Standards No. 128
("SFAS 128"):
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income......................................... $20,902 $1,804 $ 722
======= ====== ======
Weighted average common shares outstanding......... 24,720 25,966 25,543
Effect of dilutive securities (using the treasury
stock method):
Stock options.................................... 2,125 1,160 1,202
Warrants......................................... 275 124 264
------- ------ ------
Total dilutive securities...................... 2,400 1,284 1,466
------- ------ ------
Weighted average diluted common and equivalent
shares outstanding............................... 27,120 27,250 27,009
======= ====== ======
Earnings per share:
Basic............................................ $ 0.85 $ 0.07 $ 0.03
======= ====== ======
Diluted.......................................... $ 0.77 $ 0.07 $ 0.03
======= ====== ======
Options to purchase 759,838 shares of common stock at a weighted average
price of $21.00 per share were outstanding on September 30, 2000, but were not
included in the computation of diluted earnings per share because their
inclusion would have been anti-dilutive.
NOTE 8. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES
In September 1998, the Company completed a merger with Award Software
International, Inc. ("Award"), a leading provider of system enabling and
management software for personal computers. The Company exchanged approximately
8.8 million shares of its common stock for all of the common stock of Award.
Each share of Award was exchanged for 1.225 shares of its common stock. In
addition, outstanding Award employee stock options were converted at the same
exchange ratio into options to purchase approximately 2.3 million shares of the
Company's common stock. The merger was accounted for as a pooling of interests,
and accordingly, the Company's consolidated financial statements have been
restated
45
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
to include the combined results of operations and financial position of Award
for all periods and dates presented.
Prior to the merger, Award's fiscal year ended on December 31. The Award
statement of income for the year ended December 31, 1997 has been combined with
the Company's statement of income for the year ended September 30, 1997. In
order to conform Award's year-end to the Company's year-end, the fiscal 1997
operating results include a three month period (ended December 31, 1997) that is
also included in the fiscal 1998 operating results. During this three month
period, Award generated revenue of $7,535,000 and net income of $1,660,000.
Accordingly, an adjustment has been made in fiscal 1998 to retained earnings for
the duplication of net income for such three month period. There were no
transactions between Award and the Company prior to the combination, and
immaterial adjustments were recorded to conform Award's accounting policies.
Certain reclassifications were made to the Award financial statements to conform
to the Company's presentation.
The results of operations for the separate companies prior to the merger and
the combined amounts included in the consolidated financial statements were as
follows:
NINE-MONTHS ENDED
JUNE 30, 1998
-----------------
(IN THOUSANDS)
(UNAUDITED)
Revenue:
Phoenix.................................................. $73,655
Award.................................................... 20,142
-------
Combined................................................. $93,797
=======
Net Income:
Phoenix.................................................. $ 7,403
Award.................................................... 3,992
-------
Combined................................................. $11,395
=======
In September 1998, the Company acquired Sand. The purchase price consisted
of approximately $18.6 million in cash, 464,000 shares of the Company's common
stock, approximately 264,000 stock options issued in exchange for Sand stock
options, and up to $3.7 million in performance incentives to be paid through
fiscal 2001. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired business are
included in the consolidated balance sheet as of September 30, 1998. The results
of operations of Sand from the date of acquisition through September 30, 1998
were included in the accompanying consolidated statement of income for the year
ended September 30, 1998.
46
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
The total purchase cost of approximately $33.7 million exceeded the assets
acquired as follows (in thousands):
Total consideration......................................... $24,494
Liabilities assumed......................................... 7,749
Acquisition costs........................................... 1,465
-------
Total purchase cost......................................... 33,708
Less: Assets acquired....................................... (19,831)
Less: Acquired in-process research and development.......... (4,250)
-------
Excess of purchase cost over assets acquired................ $ 9,627
=======
The assets acquired include $12.8 million of software development costs
(that are being amortized on a straight-line basis over six years) and
$2.8 million of other intangible assets (that are being amortized on a
straight-line basis over three to six years). The $9.6 million of excess of
purchase cost over assets acquired was recorded as goodwill, and is being
amortized on a straight-line basis over six years.
The following unaudited pro forma information shows the results of
operations for the year ended September 30, 1998, as if the Sand acquisition had
occurred at the beginning of the period and at the purchase price established in
September 1998. The results are not necessarily indicative of those which would
have occurred had the acquisition actually been made at the beginning of the
period or of future operations of the combined companies. The pro forma results
for fiscal 1998 combine the Company's results for the year ended September 30,
1998, with the results of Sand for the period from January 1, 1998 through the
date of acquisition and includes the $4.3 million write-off of acquired
in-process research and development discussed above. The following unaudited pro
forma results include the straight-line amortization of intangibles, primarily
over a period of six years:
PRO FORMA, UNAUDITED
YEAR ENDED
SEPTEMBER 30, 1998
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenue.................................................. $129,145
Net income (loss)........................................ $ (2,508)
Diluted earnings (loss) per share........................ $ (0.10)
Weighted average number of shares used in computation.... 26,007
47
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
Merger, acquisition and restructuring charges during the years ended
September 30, 2000, 1999, and 1998, were as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Out-of-pocket merger and acquisition costs........ $ -- $ -- $ 5,677
Severance and other exit costs.................... 1,270 7,108 3,434
Asset write-offs.................................. -- 7,346 1,369
In-process research and development............... -- -- 4,250
------ ------- -------
$1,270 $14,454 $14,730
====== ======= =======
2000 CHARGES
In the fourth quarter of fiscal 2000, the Company recorded a restructuring
charge of approximately $1.3 million for severance benefits associated with the
elimination of three management positions. The charges were related to the
streamlining of certain management functions in Taiwan and North America. All
terminations have been completed as of September 30, 2000.
Approximately $0.2 million of the fiscal 1999 restructuring charges were
unpaid as of September 30, 2000, which will be paid through fiscal 2008.
1999 CHARGES
The charges in fiscal 1999 were related to realigning the business into
three operating divisions, the consolidation of certain facilities and
operations, and steps to integrate Award and Sand.
Included in the fourth quarter of fiscal 1999 was a restructuring charge of
$10.0 million associated with streamlining certain operations, facilities
consolidations (including closing the office in the United Kingdom), and
discontinuing or de-emphasizing certain products of the Company's inSilicon
Division. The restructuring plan included $3.6 million in severance benefits
associated with the elimination of approximately 54 positions in engineering,
sales, marketing, and administration from various product divisions, field
operations including field engineering and sales, and management (primarily in
the United Kingdom and North America), $5.7 million of asset write-offs (mostly
capitalized software of the inSilicon division), $0.6 million in facilities
abandonment, and $0.9 million of other business exit costs pursuant to the
re-organization plan. The Company also reversed $0.8 million of severance
charges from prior restructuring plans as a result of the decision to retain
certain positions. Of the 54 terminations, all have been completed as of
September 30, 2000.
Included in the third quarter of fiscal 1999 was a restructuring charge of
$2.5 million associated with the discontinuation of the PICO and PC Enhancing
Division and severance related to certain management positions. Of the
$2.5 million, $1.6 million were associated with the write-off of PICO and PC
Enhancing related capitalized software, $0.8 million for severance benefits for
a management position, and $0.1 million for other general administrative
expenses.
In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $1.9 million related to the facilities consolidations and streamlining
certain field operations and other functions, including
48
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS COMBINATIONS AND RESTRUCTURING CHARGES (CONTINUED)
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.
1998 CHARGES
Included in the fourth quarter of fiscal 1998 was a charge of $14.0 million
related to the acquisitions of Award and Sand. The charge consisted of
$5.7 million of out-of-pocket costs, $3.4 million of asset write-offs,
$0.5 million in severance benefits associated with the elimination of 4
positions in North America in various departments, $0.1 million in facilities
abandonment, and a $4.3 million of in-process research and development charges.
Included in the third quarter of 1998 is a restructuring charge of $0.8 million
related to the severance benefits for eliminating approximately 20 positions in
engineering, sales, marketing, and administration from various divisions as a
result of the consolidation of certain functions and the elimination of certain
management positions.
Out-of-pocket merger and acquisition costs of $5.7 million in fiscal 1998
include legal, accounting and investment banking fees associated with the
acquisition of Award. Asset write-offs of $3.4 million include the carrying
value of assets that were determined to be redundant as a result of either
merger or restructuring activities.
The in-process research and development charge in fiscal 1998 was an
allocation of a portion of the purchase price for Sand for projects that were
not yet capitalizable under the provisions of Statement of Financial Accounting
Standards No. 86, "COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED."
The allocation was based upon an independent appraisal. The appraised value was
determined by estimating the future net cash flows from such projects and
discounting the net cash flows back to their present value. The discount rate
applied includes a factor that takes into account the uncertainty surrounding
the successful development of the purchased in-process technology. If these
projects are not successfully developed, future revenue and profitability of the
Company may be adversely affected. Additionally, the value of other intangible
assets acquired may become impaired.
NOTE 9. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In fiscal 1994, the Company sold a division to
Xionics Document Technologies, Inc. ("Xionics") in return for a promissory note
and shares of Xionics common stock. In fiscal 1999 and 1998, the Company sold
1,048,881 and 156,500 shares of Xionics stock for gains of $4.0 million and
$1.5 million, respectively.
NOTE 10. UNSECURED LINE OF CREDIT
On September 30, 2000, there were no outstanding borrowings on inSilicon's
$5 million revolving bank line of credit. Borrowings on the line bear interest
at the bank's prime rate of interest plus 0.25% (9.5% at September 30, 2000).
The line of credit agreement contains various covenants that require inSilicon
to operate at a profit and meet certain financial ratios, and it restricts the
payment of cash dividends. The line of credit expires in January 2001.
49
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES
The components of the provision for income taxes from continuing operations
are as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Current:
Federal......................................... $ 882 $ 470 $2,286
State........................................... 802 1,356 561
Foreign......................................... 8,809 7,594 6,287
------- ------- ------
Total current............................... 10,493 9,420 9,134
Deferred:
Federal......................................... (1,224) (7,161) (3,745)
State........................................... 570 (1,409) (378)
------- ------- ------
Total deferred.............................. (654) (8,570) (4,123)
------- ------- ------
Provision for income taxes........................ $ 9,839 $ 850 $5,011
======= ======= ======
The reconciliation of the United States federal statutory rate to the
Company's effective tax rate is as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Tax at U.S. Federal statutory rate.................. $10,759 $ 928 $2,007
State taxes, net of Federal tax benefit............. 1,000 (34) 119
Research and development tax credits................ (892) (471) (605)
Nondeductible merger and acquisition costs.......... 562 562 3,475
Effect of foreign earnings taxed at less than U.S.
rate.............................................. (295) (251) (173)
Effect of foreign sales corporation................. (1,438) -- --
Other............................................... 143 116 188
------- ----- ------
Provision for income taxes.......................... $ 9,839 $ 850 $5,011
======= ===== ======
50
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES (CONTINUED)
The components of net deferred tax assets and liabilities are as follows:
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Foreign tax credits..................................... $ 6,459 $ 3,769
Research and development tax credits.................... 2,809 3,396
Minimum tax carryforward................................ 1,104 894
Reserves and accruals (timing differences).............. 5,066 7,021
Depreciation............................................ 751 1,862
Other................................................... -- 11
------- -------
Total................................................. 16,189 16,953
Less valuation allowance................................ 2,814 2,814
------- -------
Net deferred tax assets............................... 13,375 14,139
Deferred tax liabilities:
Capitalized software and other intangibles, net......... 2,613 3,560
Other................................................... 414 --
------- -------
Total deferred tax liabilities........................ 3,027 3,560
------- -------
Net deferred tax assets................................... $10,348 $10,579
======= =======
Due to the uncertainty surrounding the timing of the realization of the
benefit of certain tax attributes in future tax returns, the Company has
recorded a valuation allowance against otherwise recognizable net deferred tax
assets. Realization of the Company's net deferred tax assets is dependent upon
its generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.
Net undistributed earnings of certain foreign subsidiaries amounted to
approximately $15.0 million at September 30, 2000. These earnings are considered
to be indefinitely reinvested, and accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of these
earnings in the form of dividends or otherwise, the Company would be subject to
U.S. income taxes (subject to an adjustment for foreign tax credits) of
approximately $1.5 million.
On September 30, 2000, the Company had available for U.S. Federal income tax
purposes foreign tax credits of $4.2 million, which expire in the years 2003
through 2005, and research and development tax credits of $2.8 million, which
expire in the years 2003 through 2020.
NOTE 12. SEGMENT REPORTING
Segment information is presented in accordance with Statement of Financial
Account Standards No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." This standard requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. The Company has three reportable
segments: Platform Enabling, inSilicon and PhoenixNet-TM-.
51
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SEGMENT REPORTING (CONTINUED)
PLATFORM ENABLING: Develops and markets system enabling software, also
known as BIOS. This software allows information platform manufacturers to
increase design flexibility, shorten design cycles and lower overall
manufacturing costs.
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 customers that use its technologies
in hundreds of different digital devices ranging from network routers to
cellular phones.
PHOENIXNET-TM-: Provides worldwide PC users with a solution to configure
their web browsers and desktops, directs users to web destinations and offering
software download tools through a graphical launch screen, and provides the
licensing of machine profile data.
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.
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Revenue:
Platform Enabling........................... $119,396 $106,872 $114,093
inSilicon................................... 25,428 18,954 8,792
PhoenixNet-TM-.............................. 1,107 -- --
Intercompany eliminations................... (1,546) -- --
-------- -------- --------
Total....................................... $144,385 $125,826 $122,885
======== ======== ========
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Gross margin:
Platform Enabling............................. $100,269 $82,512 $91,998
inSilicon..................................... 21,558 14,994 6,835
PhoenixNet-TM-................................ 1,095 -- --
-------- ------- -------
Total......................................... $122,922 $97,506 $98,833
======== ======= =======
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Income (loss) from operations:
Platform Enabling............................. $37,485 $ 13,146 $ 6,670
inSilicon..................................... (1,903) (12,082) (7,101)
PhoenixNet-TM-................................ (8,757) (5,725) --
------- -------- -------
Total......................................... $26,825 $ (4,661) $ (431)
======= ======== =======
52
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SEGMENT REPORTING (CONTINUED)
The Company also records geographic information, which is categorized into
three regions: North America, Asia and Europe. The Company attributes revenues
based product delivery location.
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Revenue:
North America............................... $ 41,121 $ 40,907 $ 49,021
Asia........................................ 93,808 73,423 62,209
Europe...................................... 9,456 11,496 11,655
-------- -------- --------
Total....................................... $144,385 $125,826 $122,885
======== ======== ========
Net income (loss) from foreign operations was approximately $1.8 million,
($2.5 million), and $4.2 million for fiscal years ended September 30, 2000, 1999
and 1998, respectively.
Long-lived assets located in individual countries exceeding 10% of total
long-lived assets as of fiscal years ended September 30, 2000, 1999 and 1998
were as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Long-lived assets:
United States.................................. $24,849 $28,324 $38,397
Other.......................................... 1,745 1,900 2,211
------- ------- -------
Total.......................................... $26,594 $30,224 $40,608
======= ======= =======
As of September 30, 2000, 1999 and 1998, no other individual country had
long-lived assets exceeding 10 percent of total long-lived assets.
NOTE 13. COMMITMENTS
The Company has commitments related to office facilities under operating
leases. Total rent expense was $4.7 million, $4.5 million and $5.4 million in
fiscal 2000, 1999 and 1998, respectively.
On September 30, 2000, future minimum operating lease payments are required
as follows (IN THOUSANDS):
YEARS ENDING SEPTEMBER 30,
- --------------------------
2001........................................................ $ 4,038
2002........................................................ 2,621
2003........................................................ 2,191
2004........................................................ 821
2005........................................................ 561
2006 and thereafter......................................... 670
-------
Total minimum lease payments................................ $10,902
=======
53
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCKHOLDERS' EQUITY
SALES OF COMMON STOCK AND ISSUANCE OF WARRANTS. The Company recorded a
stock-based compensation cost of $1.1 million in the fourth quarter of fiscal
1999, in which $1.0 million was for accelerated vesting of stock options related
to a change in management.
In February 1996, the Company sold 894,971 newly issued, unregistered shares
of its common stock and a warrant to purchase 1,073,965 additional shares of its
common stock to Intel Corporation for $10.4 million. The purchase rights under
the warrant vest annually, beginning in December 1996, in increments of 214,793
shares for each of the first three years and 429,586 shares for the fourth year.
The warrant becomes fully exercisable in the event of an acquisition of the
Company or termination of a technology agreement between the two parties. The
price at which the warrant may be exercised is $13.46 per share at
September 30, 1998, increasing in annual increments to $15.22 per share. The
warrant expires in April 2001.
In connection with the issuance and sale of 698,290 shares of common stock
in January 1996, the Company issued 333,683 common stock warrants to Vobis
Microcomputer AG for $0.02 per warrant. These warrants were exercisable at a
price of $10.02 per share. However, the warrants expired on September 30, 2000.
STOCK REPURCHASE PROGRAM. In fiscal 2000, the company repurchased a total
of 1,011,000 shares at a cost of approximately $16.6 million under the 2000 and
1999 repurchase program. In fiscal 2000, the Board of Directors authorized a
program to repurchase up to $30 million worth of outstanding shares of common
stock over a 24-month period. Under this program, the Company repurchased and
retired approximately 836,000 shares during fiscal 2000 at a cost of
$14.5 million. The Company has repurchased an additional 810,000 shares during
the first 2 months of fiscal 2001 at a cost of $12.1 million
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.
STOCK OPTION PLANS. The Company has various incentive stock option plans
for employees, officers, consultants and independent contractors. Incentive
stock options may not be granted at a price less than 100% (110% in certain
cases) of the fair market value of the shares on the date of grant. Nonqualified
options may not be granted at a price less than 85% of the fair value of the
shares on the date of grant unless it is performance based. To date, all grants
of incentive stock options have been made at fair market value or greater.
Options vest evenly over a period determined by the Company's Board of
Directors, generally four years, and have a term not exceeding ten years.
In connection with the fiscal 1998 acquisitions of Award and Sand, the
Company issued options to purchase 2,273,781 and 264,074 shares of its common
stock, respectively, in exchange for options to purchase Award and Sand common
stock. The exercise prices of these options ranged from $0.11 to $9.18 per
share. The Award and Sand option plans were terminated in fiscal 1999.
54
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
The following table sets forth the option activity under the Company's
option plans, including the Award and Sand activity for all periods presented
and the fiscal 1998 option grants issued in exchange for Sand options:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Shares under option, September 30, 1997........... 5,899,910 $ 8.77
Options granted................................. 1,954,020 8.84
Options exercised............................... (298,911) 3.62
Options canceled................................ (928,634) 11.79
----------
Shares under option, September 30, 1998........... 6,626,385 8.52
Options granted................................. 3,279,370 9.07
Options exercised............................... (674,208) 4.80
Options canceled................................ (1,476,343) 9.46
----------
Shares under option, September 30, 1999........... 7,755,204 8.90
Options granted................................. 2,258,619 16.15
Options exercised............................... (2,253,902) 7.10
Options canceled................................ (1,860,735) 10.41
----------
Shares under option, September 30, 2000......... 5,899,186 $11.92
----------
On September 30, 2000, the number of shares exercisable under the stock
option plans was 2,458,481 and 618,263 shares were available for grant.
The following table summarizes information about stock options outstanding
at September 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED --------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OF REMAINING AVERAGE OF AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------- --------- ------------------------ -------------- --------- --------------
$0.0100-$7.5500............ 1,055,279 6.05 $ 4.7645 801,921 $4.4434
$7.6875-$9.6875............ 892,971 7.05 8.4791 554,573 8.7438
$10.1250-$11.1250.......... 905,172 8.62 10.9508 292,560 10.9421
$11.1875-$13.5000.......... 936,796 8.19 11.9254 298,518 12.2080
$13.8125-$16.7500.......... 989,647 8.13 15.2729 321,221 15.1771
$16.8750-$28.5625.......... 1,119,321 9.17 19.2268 189,688 18.2815
--------- ---- -------- --------- -------
$0.0100-$28.5625........... 5,899,186 7.88 $11.9206 2,458,481 $9.5389
========= ==== ======== ========= =======
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock
Purchase Plan ("Purchase Plan") allows eligible employees to purchase shares at
six month intervals, through payroll deductions, at 85% of the fair market value
of the Company's common stock at the beginning or end of the six-month period,
whichever is less. The maximum amount each employee may contribute during an
55
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
offering period is 10% of gross base pay. As of September 30, 2000, 1,234,314
shares had been issued under the Purchase Plan and 315,835 shares remained
reserved for future issuance.
DISCLOSURES OF STOCK-BASED COMPENSATION PLANS. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123. This
information is required to be determined as if the Company had accounted for its
employee stock options granted subsequent to September 30, 1995 under the fair
value method of that statement. The fair value of options granted in fiscal
2000, 1999 and 1998 reported below has been estimated as of the date of the
grant using a Black-Scholes multiple option pricing model with the following
assumptions for the years ended September 30, 2000, 1999 and 1998:
EMPLOYEE STOCK EMPLOYEE STOCK
OPTIONS PURCHASE PLAN
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Expected life from vest date (in years)............... 0.70 0.70 0.70 0.50 0.50 0.50
Risk-free interest rate............................... 6-7% 5-6% 5-6% 6-7% 5-6% 5-6%
Volatility............................................ 0.88 0.56 0.57 0.88 0.56 0.57
Dividend yield........................................ NONE None None NONE None None
The weighted average estimated fair value of employee stock options granted
during fiscal 2000, 1999 and 1998, was $9.60, $3.48 and $4.95 per share,
respectively. The weighted average estimated fair value of shares granted under
the Purchase Plan during fiscal 2000, 1999 and 1998 was $5.07, $2.58 and $3.98,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period of the options. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method of SFAS 123, the Company's net income and net
income per share would have been as follows:
YEARS ENDED SEPTEMBER 30,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income (loss):
As reported............................................... $20,902 $1,804 $ 722
Pro forma................................................. 19,290 (370) (7,583)
Basic earnings (loss) per share:
As reported............................................... $ 0.85 $ 0.07 $ 0.03
Pro forma................................................. 0.78 (0.01) (0.31)
Diluted earnings (loss) per share:
As reported............................................... $ 0.77 $ 0.07 $ 0.03
Pro forma................................................. 0.71 (0.01) (0.29)
NOTE 15. RETIREMENT PLANS
The Company has a retirement plan ("401(k) Plan") that is qualified under
Section 401(k) of the Internal Revenue Code. This plan covers U.S. employees who
meet minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. In
56
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. RETIREMENT PLANS (CONTINUED)
addition, the Company's contributions to the 401(k) Plan may be made at the
discretion of the Board of Directors. In January 1996, the Company began making
a matching contribution of 25% of each participant's contribution, up to a match
of $1,000 per year per participant. The matching contributions vest over a
four-year period, which starts with the participant's employment start date with
the Company. Effective January 1, 2000, the Company matches employee
contributions to the 401(k) plan at 100% up to the first 3% of salary
contributed to the plan and 50% on the next 3% of salary, up to a maximum
company match of $3,000 annually. The Company's contributions to the 401(k) Plan
for fiscal 2000, 1999 and 1998 were $763,000, $367,000 and $348,000,
respectively.
NOTE 16. SUBSEQUENT EVENT
In November 2000, inSilicon entered into an agreement to acquire Xentec.
Inc. ("Xentec"), a privately held developer of analog and mixed-signal
intellectual property. Under the terms of the Xentec agreement, inSilicon will
issue 634,056 shares of common stock and assume options to purchase an
additional 96,004 shares in exchange for all outstanding Xentec shares and
options as of the date of closing, which is currently anticipated to be in
December 2000. Also, inSilicon will issue up to an additional 415,000 shares of
common stock to the selling stockholders over a two-year period, contingent upon
the achievement of certain performance-based milestones.
The Xentec acquisition will be accounted for as a purchase. The initial
excess purchase price over tangible net assets acquired will be capitalized as
goodwill and other intangible assets, and amortized over three to six-year
periods. In addition, inSilicon will record approximately $150,000 per quarter
of stock-based compensation charges over the four quarters subsequent to the
closing of the acquisition related to the intrinsic value of inSilicon options
exchanged for Xentec options and certain stock-based retention programs.
Also in November 2000, inSilicon entered into an agreement to acquire the
wireless design group of HD Lab, K.K. ("HD Lab"). Under the terms of the HD Lab
agreement, inSilicon paid $1,530,000 to acquire certain Bluetooth baseband
technology under development by HD Lab. inSilicon also entered into employment
agreements to hire the team of Bluetooth development employees from HD Lab. The
cost of the technology acquired will be capitalized and amortized over the
future revenue anticipated to be generated from the underlying developed
technology.
57
SCHEDULE II
PHOENIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
BALANCE AT
BEGINNING OF BALANCE AT END
YEAR ENDED YEAR PROVISIONS DEDUCTIONS(1) OTHER OF YEAR
- ---------- ------------ ---------- ------------- -------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
September 30, 2000.................... $1,460 $272 $(877) $ (65) $ 790
September 30, 1999.................... 1,113 709 (362) -- 1,460
September 30, 1998.................... 697 355 (39) 100 1,113
- ------------------------
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
58