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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
September 30, 1995 0-17111
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PHOENIX TECHNOLOGIES LTD.
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(Exact name of registrant as specified in its charter)
Delaware 04-2685985
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2770 De La Cruz Boulevard, Santa Clara, California 95050-2624
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 654-9000
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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
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(Title of Class)
Preferred Stock Purchase Rights
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(Title of 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 December 15, 1995, was $163,430,556 based upon the last
reported sales price of the Common Stock in the National Market System, as
reported by NASDAQ.
The number of shares of the registrant's Common Stock outstanding as of December
15, 1995 was 14,021,227.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A in connection with the 1996 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
PART I
Item 1. BUSINESS
GENERAL
Phoenix Technologies Ltd. was incorporated in the Commonwealth of
Massachusetts on September 17, 1979, and was reincorporated in the State of
Delaware on December 24, 1986. Unless the context indicates otherwise, the
"Company" or "Phoenix" refers to Phoenix Technologies Ltd. and its subsidiaries.
Phoenix designs, develops and markets essential software to manufacturers
of personal computer products ("PCs"). This software presently consists of
system software and related applications software products for PCs. The Company
provides these products to PC manufacturers, PC peripheral equipment
manufacturers, and system board manufacturers ("OEMs"). Phoenix's products
permit OEMs to enter new markets quickly while enabling product differentiation
and increasing system value. Phoenix system software products can reduce an
OEM's product time to market, development risks, and support costs.
The Company markets and licenses its products and services worldwide,
primarily to OEMs. The Company's system software customers range from large PC
manufacturers to small system integrators. The Company's revenue consists of
license and engineering fees. Phoenix markets its products and services through
a direct sales force, regional distributors, and sales representatives. Phoenix
also promotes its products through Company newsletters and technical bulletins,
coverage in trade and business press articles, advertising, and participation in
industry trade shows and conferences.
Rapid technological change and the frequent introduction of new products
incorporating new technologies characterize the personal computer industry. The
introduction of products embodying new technologies often results in the
emergence of new industry standards, rendering existing products obsolete. To
remain competitive, manufacturers must respond quickly to such technological
changes. This rapid pace of PC industry change can benefit Phoenix as it
provides a continuous flow of opportunities for the Company to provide high
value technology and support to its customers. However, if the Company or its
customers are unable, for technological or other reasons, to develop products in
a timely manner in response to changes in the PC industry, the Company's
business would be materially and adversely affected.
The Company develops, and licenses (or purchases) from others, software
products to market to PC OEMs. Because the PC industry is subject to rapid
technological changes, the Company expects to continue to dedicate significant
resources to the development and acquisition of new products and enhancements to
existing products. However, there can be no assurance that the Company's
product development efforts will be successful or, even if they are successful,
that any resulting products will achieve market acceptance.
Research and development costs from continuing operations, before the
capitalization of internally developed software costs, were 25% of total revenue
in fiscal 1995, and 11% in fiscal 1994 and 1993. On an actual dollar basis,
these costs grew to $12,374,000 in fiscal 1995, a 35% increase from fiscal 1994.
Fiscal 1994 research and development costs rose 30% from $7,045,000 in fiscal
1993. With respect to continuing operations, the Company capitalized
approximately $1,336,000, $2,246,000, and $961,000, of internally developed
software in fiscal 1995, 1994, and 1993, respectively. The Company believes
continued investment in new and evolving technologies is essential to meet
rapidly changing industry requirements. As a result, the Company purchased or
licensed additional technology related assets for use in its continuing
operations in the amount of $338,000 in fiscal 1995, $405,000 in fiscal 1994,
$7,145,000 in 1993 (a substantial portion of the 1993 amount was written off in
fiscal 1994). These assets consist primarily of prepaid royalties under licenses
from third parties for PC compatibility, sub-notebook and fax modem products.
In fiscal 1995, none of the Company's customers accounted for more than 10%
of total revenue. Packard Bell Corporation ("Packard Bell") and Compaq Computer
Corporation ("Compaq") did, however, account for more than 10% of the Company's
total revenue during fiscal years 1994 and 1993. Revenue from Packard Bell and
its subsidiaries was $16,211,000 or 18.8% and $9,474,000 or 14.3% of revenue
from continuing operations for fiscal years 1994 and 1993, respectively. Revenue
from Compaq and its subsidiaries was $11,630,000 or 13.5% in fiscal 1994 and
$15,455,000 or 23.3% of revenue from continuing operations in fiscal 1993. In
fiscal 1995, 1994, and 1993, approximately 47%, 44%, and 45%, respectively, of
the Company's revenue from continuing operations was attributable to customers
outside the United States. For purposes of this report, revenue from
continuing operations includes all revenue from the Publishing Division and
excludes revenue from the Printer Software Division.
In December 1995, the Company announced that it had entered into a long-
term technology licensing agreement with Intel Corporation ("Intel") under which
Phoenix licensed key Phoenix desktop and server products to Intel. The
agreement also provides for Phoenix and Intel to work closely to develop new
product features and technologies to enhance the performance, functionality and
ease-of-use of desktop and server systems. In addition to the technology
agreement, Intel will invest approximately $10.9 million to purchase Phoenix
stock representing 6% of the outstanding shares and a warrant to purchase an
additional 7.2% of the outstanding shares. Both the continuation of the
technology agreement and the sale of the stock and warrant are subject to
approval by Intel and the Company of a detailed plan relating to the transition
by Intel to Phoenix's systems software in 1996. While there are no assurances
that the plan will be completed, the Company believes that the plan will be
completed and approved on schedule by February 15, 1996.
DESCRIPTION OF BUSINESS
The Company is divided into two related product groups: the PC system-level
software group and the OEM consumer software group.
PC SYSTEM-LEVEL SOFTWARE: In the PC system-level software product area the
Company develops and markets software products that enable PC, peripheral, and
system board manufacturers to integrate existing and emerging industry standards
and new technologies into PC platforms. The Company offers a complete line of
system software, including BIOS (Basic Input/Output System) products, for
desktop, portable, and special purpose PC systems based on the family of x86
microprocessors. The system software products include system BIOS products and
configuration management software solutions for new x86 microprocessors, new
system core logic chipsets, new system busses, video subsystems, keyboard
controllers, power management chipsets, PCMCIA PC cards, flash read-only memory
("ROM") chips, and other emerging PC technologies.
The introduction of new hardware architectures, microprocessors, peripheral
equipment and operating systems within the PC industry have increased the
complexity, time, and cost to develop system-level, firmware-based,
configuration software products. The Company believes that OEM customers license
the Company's system software products, rather than develop these products
internally, in order to release products to market faster, diminish product
development risks, reduce product development and support costs, and
differentiate their system offerings with advanced features. A number of
computer manufacturers develop their own BIOS products to achieve compatibility
with other computers based on the IBM PC and to integrate new technologies.
Price competition and time to market pressures are causing manufacturers to re-
examine in-house development and deployment of their new systems. The Company
believes there is an increasing trend of OEMs to outsource system software
requirements to third parties.
The demand for the Company's PC system software products depends
principally on 1) PC manufacturers licensing rather than developing their own PC
system software, 2) the sales success of the Company's OEM customers, 3) the
emergence of new PC technologies requiring system-level software to achieve
increased system functionality, user value, and performance, and (4) the
functions and features offered in the Company's products compared to those of
its competitors. Sales in the personal computer industry fluctuate from time to
time based on numerous factors, including general economic conditions, capital
spending levels, new product introductions and shortages of key components. In
addition, the market for personal computers is intensely competitive, and the
Company's OEM customers compete among themselves and with others.
FISCAL 1995 DEVELOPMENTS: During fiscal 1995, Phoenix focused on expanding
the capabilities of its PC firmware through enhancements to its core PhoenixBIOS
4.0 product, playing a significant role in new PC industry initiatives with
Intel, Microsoft and IBM, developing and delivering Plug and Play firmware,
enhancing its PCMCIA software and creating the PhoenixPICO product line for the
emerging embedded "Special Purpose PC" system market.
PHOENIXBIOS 4.0: Phoenix introduced PhoenixBIOS 4.0 as its core desktop
systems firmware product at Fall Comdex `93. Since then, it has become the
Company's most successful system firmware product. The Company believes the
success of this product is attributable to its reliability and advanced
features, including its fourth generation architecture and Plug and Play
support. PhoenixBIOS 4.0 is designed to help PC manufacturers gain important
market advantages, by decreasing the time it takes those manufacturers to get
their products to market through increased reusability of firmware and
compatibility with evolving PC standards.
In fiscal 1995, Phoenix announced the PhoenixBIOS `95 extensions to
PhoenixBIOS 4.0. PhoenixBIOS `95 is firmware that further improves the
performance of desktop PCs and makes them easier for consumers to use. Advances
include QuietBoot, MultiBoot, Optimal Configuration Technology, System
Essentials, CD-ROM Boot and advanced Plug and Play capabilities including
PCI/PCI bridge support.
NOTEBIOS 4.0 AND ADVANCED SYSTEMS SOFTWARE AND APPLICATIONS FOR PORTABLE
SYSTEMS: Phoenix offers its NoteBIOS system software for use with portable or
notebook computers. The product's capabilities include advanced power
management, SMI support, Save to Disk, Plug and Play, Portable Pentium CPU
support, and Smart Battery. The Company believes that a majority of notebook
PCs shipped worldwide in fiscal 1995 with commercial BIOS were delivered with
Phoenix's NoteBIOS. Phoenix worked with PC manufacturers to bring some of the
first Microsoft Windows 95-based and Intel Pentium-based notebook PCs to market.
During fiscal 1995, the Copmpany announced and began shipping NoteBIOS 4.0,
Power Panel and Smart Battery Manager products. NoteBIOS 4.0 provides a highly
modular, robust structure for the NoteBIOS product line based on the fourth
generation of PhoenixBIOS core software. Power Panel is a Windows-based
application that provides portable PC users with an advanced, intuitive, easy-
to-use way to manage power use and battery life. Smart Battery Manager
incorporates technology developed by Phoenix, DuraCell, Intel and Microsoft to
extend battery life in portable PCs.
PHOENIXCARD MANAGER PCMCIA SOFTWARE: Phoenix introduced PhoenixCard Manager
version 4.0 at Fall Comdex `95 in November 1995. PhoenixCard Manager is a
Phoenix's latest software for PCMCIA cards with an easy-to-use Windows-based
user interface, automatic de-install features to remove old software, support
for multifunciton cards, and event logging capabilities to reduce PCMCIA
technical support costs. A number of major PC suppliers -- including IBM,
Canon, Olivetti, Texas Instruments, and Toshiba -- licensed and shipped
Phoenix's PC Card PCMCIA software.
PHOENIXPICO: The PhoenixPICO product line provides system enabling and
system enhancing software for Industrial, Hand-held, and Home Appliances in the
emerging new Special Purpose PC market. Examples of these appliances are PDAs,
Smart Phones, Point-of-Sale Terminals, Factory Automation Devices, Car
Navigation Units, or Smart Home Entertainment (TV, stereo) units. Key alliances
in fiscal 1995 include Intel, AMD, Geoworks (hand held operating systems), and
Microsoft. PhoenixPICO BIOS provides leading edge PC software technology for
these appliances, while PhoenixPICO Embedded Extensions provide unique and
innovative software technologies to enhance these appliances. PhoenixPICO OAK
(OEM Adaptation Kit) was launched in fiscal 1995, providing Special Purpose PC
OEMs a self-contained kit that provides key system enabling and system enhancing
software, plus educational tools on x86 architecture design, in a single
package.
LEADERSHIP IN MAJOR INDUSTRY INITIATIVES: Phoenix has entered into a
number of major initiatives with industry leaders and standards-setting
organizations to develop next generation, firmware-level software products.
These initiatives include: (1) developing the Plug and Play system enumerator
which was licensed to Microsoft Corporation ("Microsoft") for its Windows 95
operating system; (2) developing specifications and firmware for the new
SmartBattery program with Duracell and Intel; (3) developing a CD Boot
specification with IBM to allow direct PC system booting from CD-ROMs; and (4)
developing the "CardBus" (PCMCIA 3.0) specifications as an executive member of
the Personal Computer Memory Card International Association (PCMCIA).
Phoenix's relationships with Intel, Microsoft, IBM, Compaq, and other
industry leaders give the Company early access to new technology requirements,
which the Company believes facilitates the development of its products. By
building upon its core technology base, the Company is able to tailor its system
software products to conform to the specific requirements of its OEM customers,
allowing its customers to integrate new technologies and introduce their
products to market more effectively.
WORLDWIDE DEPLOYMENT SERVICES AND SUPPORT: To support its worldwide
customer base, Phoenix employs over 200 BIOS engineers and has offices in Japan,
Taiwan, England, California and Massachusetts. The Company's support services
are provided by means of telephone and on-site service.
COMPETITION: In marketing its PC system software products, the Company
encounters competition from a number of domestic and foreign companies. These
competitors range from small independent engineering businesses to in-house
development organizations of companies with financial and engineering resources
much larger than Phoenix. In addition, American Megatrends Inc. is Phoenix's
primary competitor in the motherboard market and Systemsoft is the primary
competitor of the Company in the PCMCIA and embedded PC system markets. The
bases for competition for the PC system-level software business's products are
primarily product performance and availability, engineering experience and
expertise, product support, and price. Phoenix believes it competes favorably
on these bases.
REVENUE: Revenue attributable to the Company's PC system-level software
products accounted for 91%, 41%, and 43% of the Company's revenue from
continuing operations in fiscal 1995, 1994, and 1993, respectively.
PC APPLICATION SOFTWARE: In the PC application software product area, the
Company develops, acquires and markets essential application software designed
to bring new functionality to the consumer and small office/home office (SOHO)
PC environment. The application software products are marketed through the OEM
channel, which focuses on products that will be bundled by PC and peripheral
card manufacturers addressing the consumer and SOHO markets.
The OEM Consumer Software Group was established during fiscal 1994 to
assist OEMs in integrating consumer applications with their products for sale to
end-users. OEM Consumer Software Products are designed to let the OEM to
differentiate its particular implementation of these products. Phoenix makes
available to OEMs various marketing, development, deployment and customization
services to enable OEM-specific characteristics or functionality and to
otherwise accomplish OEM brand identification through differentiation. For
example, Compaq contracted with Phoenix develop and deploy certain core OEM
Consumer Software products for Compaq's MediaPilot user interface for several
applications including telephone answering machine, fax and multimedia software.
The OEM Consumer Software Group product line is focused on three primary
product offerings:
PHOENIX MUSE is a Windows 95 user interface development product that can be
used as an alternative user interface to Windows 95 or to develop other
applications, such as a software-based "welcome center". The product is
designed to provide end users with the ability to instantly use their PCs
and enhance the value of Windows 95 to novice users. Phoenix MUSE was also
designed to give OEMs an economic multimedia based graphical interface
which allows for branding their products through graphical and visual
differentiation.
PHOENIX TELEPHONY SUITE is a product which integrates fax, voicemail,
speakerphone and address book capabilities in software for Windows 3.1 and
Windows 95-based PC products. This product is designed to provide users
with instant use of the communications capabilities of their PCs. This
product is presently bundled with the IBM Aptiva and Acer Aspire systems.
REVENUE: Revenue from the OEM Consumer Software Group's products
represented 9% of Phoenix's total fiscal 1995 revenues from continuing
operations, compared to 6% for fiscal 1994. In fiscal year 1993, revenue from
these products was not material as a percentage of the Company's total revenue.
During fiscal 1995, the Company discontinued the retail channel for application
products, revenue from which was not material during any of the last three
fiscal years.
SALE OF PUBLISHING AND PRINTER SOFTWARE DIVISIONS:
During fiscal 1994, Phoenix disposed of majority interests in its
Publishing and Printer Software Divisions as part of its strategy to refocus on
essential enabling software for OEMs.
PUBLISHING DIVISION: Throughout fiscal 1994, the Company operated its
Publishing Division (formerly named the Packaged Products Division), which
provided technical publishing software, documentation and services for OEM
licensees of Microsoft and IBM operating systems and other software. The
division supplied the documentation and disk duplication services required for
bundling software with OEM system offerings.
In September 1994, the Company sold 80% of its Publishing Division to
Softbank Corporation of Japan ("Softbank") for total cash consideration of
$30,000,000. Also in September 1994, Softbank and the Company established a new
entity, Phoenix Publishing Systems, Inc. ("PPSI"), and each contributed their
respective interests in the Publishing Division to PPSI in exchange for 80% and
20%, respectively, of the equity of PPSI. PPSI assumed substantially all of the
liabilities of the Division's business. The Company has certain rights to
designate nominees to PPSI's board of directors and to require PPSI
to purchase the PPSI shares owned by the Company at a price equal to the greater
of $7.5 million or a performance-based price.
By maintaining an ownership interest in the entity which acquired the
Division, Phoenix can participate in any future growth of PPSI and continue to
leverage the technologies now owned by PPSI to support the Company's customers,
while freeing up new resources for advancing the Company's PC firmware and end
user application software products.
REVENUE: Phoenix's revenue attributable to the Company's Publishing
Division accounted for 53% and 55% of the Company's total revenue from
continuing operations in fiscal 1994 and 1993, respectively.
PRINTER SOFTWARE DIVISION Throughout 1994, the Company operated its Printer
Software Division (formerly named the Peripherals Division) which designed,
developed and supplied printer emulation software, page description languages,
and controller hardware designs for the printer industry. In the printer
market, where multiple standards exist, OEMs and software developers have been
required to adapt their products to accommodate diverse page description
languages, different font libraries and other printer standards. The business
developed the PhoenixPage imaging software architecture to enable OEMs to design
and manufacture printers that can support multiple page description languages
(such as the PostScript language and the HP-PCL language), printer emulations,
and font technologies. More than 40 printer manufactures have used PhoenixPage
in their printer product lines.
In November 1994, the Company sold all the assets of its Printer
Software Division. The Company received a promissory note in the principal
amount of $4,849,000, collateralized by the assets sold and payable in twenty
quarterly installments commencing January 15, 1997. Interest at 8% per year
is payable quarterly. The Company also received a minority equity interest
in the purchaser and the right to a future contingent payment based on
operating performance. In fiscal 1995, the Company provided an additional loan
of $350,000 to the purchaser. Subsequently, the Company participated in a
stock offering to new and existing investors by exchanging $1,900,000 of
principal under these two notes for additional shares. The Company has the
right to convert up to $340,000 of additional principal into shares of stock
on or before June 30, 1998. Because of the risk of collection, the Company
will recognize proceeds from the note and contingent payment as cash
payments are received. The current estimated fair market value of the
shares, which has a book value of zero, is not significant.
As was the case in the sale of the Publishing Division business, the
maintenance of a minority ownership position in Xionics will let Phoenix
participate in that business's future growth, while making new resources
available for its remaining businesses.
REVENUE: The consolidated financial statements were restated to reflect
the Printer Software Division as a discontinued operation. Revenues from
discontinued operations were $9,439,000 and $9,947,000 for fiscal 1994 and
1993, respectively. The net liabilities of discontinued operations of
$724,000 and $5,203,000 at September 30, 1995 and 1994, respectively, consist
primarily of accrued costs to be incurred in conneciton with the sale of the
division, offset by accounts receivable. Payments were $4,479,000 and
$223,000 in fiscal 1995 and 1994, respectively.
EMPLOYEES
As of September 30, 1995, the Company employed 362 persons worldwide, of
whom 231 are in research and development, 90 are in sales and marketing, and 41
are in finance and administration.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on trade secret, trademark and copyright laws
and contractual agreements to protect its proprietary rights. The Company
protects the source code of its products as trade secrets and as unpublished
copyrighted works. The Company from time to time makes the source code for its
products available to its customers for limited uses. The Company licenses its
software products to its customers. Wide dissemination of the Company's software
products makes protection of the Company's proprietary rights difficult,
particularly outside the United States. Although it is possible for competitors
or users to make illegal copies of the Company's products, the Company believes
the rate of technology change and the continual addition of new product features
lessen the impact of illegal copying. At September 30, 1995, the Company had
been issued one patent and had four patent applications pending.
Although the Company believes that its products do not infringe on any
copyright or other proprietary rights of third parties, there are currently
significant legal uncertainties relating to the application of copyright and
patent law in the field of software. The Company has no assurance that third
parties will not obtain, or do not have, patents covering features of the
Company's products, in which event the Company or its customers might be
required to obtain licenses to use such features. If a patent 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. In recent years, there has been
a marked increase in the number of patents applied for and issued with respect
to software products.
The Company makes certain of its application software products available
pursuant to shrink-wrap licenses that are not signed by customers and,
therefore, may be unenforceable under the laws of certain jurisdictions.
Item 2. PROPERTIES
The Company's principal offices are located in a 29,108 square foot
building in Santa Clara, California which the Company leases pursuant to a lease
expiring in December 1999. The Company has an option to extend the term of the
lease for an additional 5 years. Minimum annual lease payments for the Santa
Clara facility are approximately $237,521 plus certain additional costs.
The Company also leases smaller office facilities in other locations
including: Irvine, California; San Jose, California; Norwood, Massachusetts,
Houston, Texas; Taipei, Taiwan; Tokyo, Japan; Guildford, England; and Archamps,
France.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the Nasdaq National Market under the
symbol PTEC. The following table presents the high and low selling prices for
the Company's Common Stock, as reported by Nasdaq, for the periods shown.
HIGH LOW
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Year ended September 30, 1995:
First quarter $ 8.13 $ 5.38
Second quarter 8.50 6.13
Third quarter 10.75 6.75
Fourth quarter 14.38 10.25
Year ended September 30, 1994:
First quarter $ 5.00 $ 3.50
Second quarter 6.25 4.00
Third quarter 5.63 4.38
Fourth quarter 6.00 4.38
The number of record holders of the Company's common stock as of September 30,
1995, was approximately 324. The Company has never paid cash dividends on its
common stock. The Company currently intends to retain all earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's line of credit agreement
restricts the payment of cash dividends.
Item 6. SELECTED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992 1991
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PRO FORMA* ACTUAL
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Revenue:
Software $49,941 $40,589 $40,589 $29,651 $27,125 $25,117
Publishing -- -- 45,584 36,662 33,237 22,100
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Total revenue 49,941 40,589 86,173 66,313 60,362 47,217
Income (loss) from continuing operations 8,815** 5,595 19,230 3,565 2,641 (2,088)
Net income (loss) 8,815** 5,595 6,794 2,599 2,186 (1,316)
Income (loss) per common share:
Income (loss) from continuing operations $0.58** $0.40 $1.37 $0.26 $0.19 $(0.18)
Net income (loss) 0.58** 0.40 0.48 0.19 0.16 (0.11)
Cash and short-term investments $32,944 $33,889 $33,889 $8,122 $12,787 $19,055
Working capital 36,796 28,586 28,586 15,301 18,663 17,496
Total assets 62,390 63,235 63,235 51,616 42,296 41,855
Stockholders' equity 50,418 39,446 39,446 31,481 27,644 23,930
* EXCLUDING CHARGE FOR OTHER OPERATING EXPENSES, GAIN ON SALE OF PUBLISHING
DIVISION, AND LOSS FROM DISCONTINUED OPERATIONS.
** INCLUDES $1,300,000 OR $0.08 PER SHARE FOR NON-RECURRING TAX BENEFITS.
-7-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain cost, expense and income items.
YEAR ENDED SEPTEMBER 30,
1994
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1995 PRO FORMA ACTUAL 1993
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Revenue:
License fees 87.0% 86.0% 93.4% 94.6%
Services 13.0 14.0 6.6 5.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees 7.3 10.0 43.8 41.4
Services 11.9 13.0 6.1 5.1
----- ----- ----- -----
Total cost of revenue 19.2 23.0 49.9 46.5
----- ----- ----- -----
Gross margin 80.8 77.0 50.1 53.5
Operating expenses:
Research and development 22.1 16.6 8.0 9.2
Sales and marketing 28.7 27.0 19.2 21.5
General and administrative 13.4 15.8 9.8 11.6
Other operating expenses -- -- 10.6 2.2
----- ----- ----- -----
Total operating expenses 64.2 59.4 47.6 44.5
----- ----- ----- -----
Income from operations 16.6 17.7 2.5 9.0
Gain on sale of Publishing Division -- -- 27.3 --
Other income, net 4.1 3.5 0.0 0.0
----- ----- ----- -----
Income before income taxes 20.7 21.2 29.8 9.0
Provision for income taxes 3.0 7.4 7.5 3.6
----- ----- ----- -----
Income from continuing operations 17.7 13.8 22.3 5.4
Loss from discontinued operations -- -- 14.4 1.5
----- ----- ----- -----
Net income 17.7% 13.8% 7.9% 3.9%
----- ----- ----- -----
----- ----- ----- -----
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, which are included
elsewhere in this report.
PRO FORMA RESULTS FOR FISCAL 1994 In fiscal 1994, the Company sold its
Publishing and Printer Software Divisions. The Publishing Division accounted
for 53% of fiscal 1994 revenue. The Printer Software Division was classified as
discontinued operations. The pro forma results for fiscal 1994 exclude the
charge for other operating expenses, reflect the elimination of the revenue and
direct expenses for the Publishing Division, treat the sale of the Publishing
Division as if it had occurred at the beginning of fiscal 1994, and exclude the
loss from discontinued operations.
RESULTS OF CONTINUING OPERATIONS
REVENUE The Company's revenue is comprised of licenses of PC system-level and
application software and engineering services to manufacturers and integrators
of personal computers ("PC OEMs") and other special purpose computers or
terminals using Intel X86 microprocessors. Prior to the sale of its Publishing
and Printer Software Divisions, the Company sold technical publishing software
and documentation to PC OEMs and system software for laser printers. In fiscal
1993 the Company acquired Eclipse Systems, Inc. ("Eclipse"), which marketed its
software products through the retail channel. Eclipse was acquired for its
technology, and the retail operations were discontinued in fiscal 1995.
Revenue decreased 42% to $49,941,000 in fiscal 1995 from $86,173,000 in
fiscal 1994 and increased 30% in fiscal 1994 from $66,313,000 in fiscal 1993.
Revenue from the Company's core PC software products increased 24% and 34% in
fiscal 1995 over fiscal 1994 and in fiscal 1994 over fiscal 1993, respectively.
These increases were primarily due to adding new customers and increased
revenues from existing customers. Prices have been relatively stable during the
periods reported.
-8-
GROSS MARGIN Gross margin decreased 6% to $40,359,000 in fiscal 1995 from
$43,152,000 in fiscal 1994 and increased 22% in fiscal 1994 from $35,497,000 for
fiscal 1993. The decrease in 1995 reflects the sale of the Publishing Division,
partially offset by the growth in the higher margin PC software business. As a
percentage of revenue, gross margin increased to 81% in fiscal 1995 from 50% in
fiscal 1994 and 54% in fiscal 1993. The increase in fiscal 1995 resulted from
the sale of the lower margin Publishing Division in fiscal 1994. The decrease
in fiscal 1994 is primarily the result of a reduction in per unit revenue in the
Publishing Division.
On a pro forma basis, gross margin as a percentage of revenue for the PC
software business was 81% and 77% for fiscal 1995 and 1994, respectively. The
increase in fiscal 1995 gross margin resulted from lower revenue from the retail
channel, which has a lower gross margin caused in part by higher packaging and
shipping costs. The retail business was discontinued in fiscal 1995.
RESEARCH AND DEVELOPMENT Research and development costs ("R&D"), before the
capitalization of internally developed software, were 25% of total revenue in
fiscal 1995 and 11% in fiscal 1994 and fiscal 1993. R&D as defined above grew
to $12,374,000 in fiscal 1995, a 35% increase from $9,133,000 in fiscal 1994.
Fiscal 1994 costs increased 30% from $7,045,000 in fiscal 1993. The growth in
R&D in fiscal 1995 and fiscal 1994 is primarily the result of increased
investment, primarily additional employees, in the development of system-level
software.
The Company capitalized approximately $1,336,000, $2,246,000 and $961,000
of internally developed software costs in fiscal 1995, 1994 and 1993,
respectively. The higher capitalization of internally developed software in
fiscal 1994 versus fiscal 1995 and 1993 is primarily due to the development of
several next generation system-level software and application software products
designed to make it easier for OEMs to deploy new models of PCs and to make
those PCs easier to use. The Company believes that continued investment in new
and evolving technologies is essential to meet rapidly changing industry
requirements.
SALES AND MARKETING EXPENSES Costs related to sales and marketing decreased 14%
in fiscal 1995 to $14,355,000 from $16,585,000 in fiscal 1994. Fiscal 1994
expenses increased 17% from $14,232,000 in fiscal 1993. The decrease in fiscal
1995 resulted from the sale of the Publishing Division. The growth in fiscal
1994 over fiscal 1993 is primarily attributable to increased advertising costs
related to retail distribution of PC application software products. The growth
is also the result of higher commission expense associated with higher revenue.
The pro forma increase in fiscal 1995 is primarily due to additional sales
and marketing personnel, increased commission expense on higher revenue volume,
and increased promotion and trade show activity, particularly outside the United
States.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses ("G&A")
decreased 21% to $6,696,000 in fiscal 1995 from $8,460,000 in fiscal 1994.
Fiscal 1994 expenses increased 10% over 1993. The decrease in fiscal 1995 was
primarily due to the sale of the Publishing Division, offset partially by
increases in the cost of salaries and fringe benefits. The increase in fiscal
1994 over 1993 is primarily attributable to increased provisions for bad debts
and increased management consulting expenses relating to the Company's expansion
into the PC application software business. As a percent of revenue, G&A
decreased to 13% in fiscal 1995 from 16% in the pro forma results for fiscal
1994. Actual G&A was 10% of fiscal 1994 revenue, as compared to the 12% rate
for fiscal 1993. The reductions were due to the employment of fewer people and
less use of outside services, resulting from improved operating efficiency.
OTHER OPERATING EXPENSES Other operating expenses in fiscal 1994 consist of a
write-off of $6,777,000 of prepaid royalties and provision of $2,318,000 for the
planned relocation of the Company's administrative and support functions, which
occurred in fiscal 1995. Other operating expenses in fiscal 1993 consist of
acquisition related charges.
INCOME TAXES The Company recorded an income tax provision of $1,483,000 in
fiscal 1995 as compared to $6,420,000 in fiscal 1994 and $2,376,000 in fiscal
1993. The provision for fiscal 1995 includes an income tax benefit in the
fourth quarter of $1,300,000 resulting from a decision to reduce the Company's
valuation allowance related to its deferred tax assets in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" Statement No. 109 requires recognition of deferred tax assets when the
probability of recovery is more likely than not. During fiscal 1995, the
Company achieved a consistent level of pretax profits, thus improving the
predictability of continued achievement of this level of profitability. This
also allowed the Company to deduct a significant portion of the accruals
provided in fiscal 1994 for restructuring and relocation.
-9-
Taxable income from continuing operations in fiscal 1994 included the gain
on the sale of the Publishing Division, which was partially offset by the
accrual for other operating expenses. The provision for 1994 reflects the
utilization of certain tax credits and the remaining net operating loss
carryforwards. Prior to 1994, the provision primarily represented foreign
withholding taxes, based on license fee revenues in certain foreign countries,
for which tax credit utilization is subject to certain limitations.
FINANCIAL CONDITION
CHANGES IN FINANCIAL CONDITION The ratio of current assets to current
liabilities increased 4.1-to-1 in fiscal 1995 from 2.2-to-1 in fiscal 1994,
primarily as a result of reducing current liabilities by one-half in fiscal
1995. The cash used for these payments was generated primarily from operations.
The Company also improved its days of sales outstanding in accounts receivable
to 82 days as of September 30, 1995 from 108 days at the end of fiscal 1994 and
received payment on the amount due from a related party. The reduction in
inventory resulted primarily from the discontinuance of the Company's retail
software business.
The increases in other current assets and other assets are both due
primarily to the reduction in the valuation allowance for deferred tax assets.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" in fiscal
1995. It did not have a material impact on the Company's financial condition or
operating results.
LIQUIDITY AND CAPITAL RESOURCES The Company's cash and short-term investments
decreased by 3% to $32,944,000 at September 30, 1995 from $33,889,000 at
September 30, 1994. Cash provided by operating activities was $3,229,000 in
fiscal 1995. Investing activities used $6,047,000 for short-term investments,
purchases of property and equipment, and additions to computer software costs.
Financing activities used $904,000 for repurchases of the Company's common stock
and payment of notes payable, which was partially offset by proceeds from stock
issuances under employee stock plans.
The Company expects funding requirements for fiscal 1996 and the
foreseeable future to be met from its current cash position and future
operations. In fiscal 1994, the Company initiated a plan to repurchase up to
1,000,000 shares of its common stock for use in the Company's stock option plans
and for general corporate purposes. During fiscal 1995, the Company repurchased
369,300 shares and retired 399,313 shares.
The Company has a $10,000,000 unsecured line of credit agreement with a
domestic commercial bank. There were no borrowings under the line as of
September 30, 1995.
-10-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements which are filed as a part of Item 14 of
this report are incorporated herein by this reference:
Consolidated Balance Sheets as of September 30, 1995 and 1994.
Consolidated Statements of Operations for the years ended September
30, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended September
30, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
Selected Quarterly Financial Data.
Item 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors of the
Company will be contained in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A in connection with the 1996 annual meeting of
its stockholders (the "Proxy Statement") and is incorporated herein by this
reference.
The executive officers of the Company, each of whom serve at the discretion
of the Board of Directors, as of the date of this Form 10-K are as follows:
Name Age Position
- ---- --- --------
Jack Kay 49 President and Chief Executive Officer
Robert J. Riopel 53 Vice President, Finance, Chief Financial
Officer and Treasurer
Gayn B. Winters 52 Vice President, Engineering and
Chief Technology Officer
David A. Everett 52 Vice President, Worldwide Field Operations
Mr. Kay joined the Company as Vice President of Worldwide Sales in May
1990. In January, 1992, he was appointed Senior Vice President and Chief
Operating Officer. In June, 1994, he was promoted to President and Chief
Operating Officer. Effective October 1, 1995, Mr. Kay was promoted to President
and Chief Executive Officer.
Mr. Riopel joined the Company as Vice President, Finance, Chief Financial
Officer, and Treasurer in February 1995. For two years before joining the
Company, Mr. Riopel was Senior Vice President, Finance and Administration and
Chief Financial Officer for OpenVision Technologies, Inc., a developer of system
management software for client-server systems. From 1989 to 1993, Mr. Riopel
served as vice president, finance for the international division of Silicon
Graphics, Inc.
-11-
Dr. Winters joined the Company as Vice President, Engineering and Chief
Technology Officer in August 1995. For more than five years before joining the
Company, Dr. Winters worked for Digital Equipment Corporation, a leading
supplier of computer systems, most recently as Group Engineering Manager and
Corporate Consulting Engineer.
Mr. Everett joined the Company as Vice President, Worldwide Field
Operations, in December 1995. From 1993 until joining the Company, Mr. Everett
was Executive Vice President, Sales and Marketing, for Syquest Technology, a
manufacturer of Winchester removable cartridge disk drives. From 1984 to 1993,
Mr. Everett was employed by Wyse Technology, a worldwide supplier of video
display and computer products, in sales and marketing positions, most recently
as its Senior Vice President, Sales and Corporate Marketing.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during, and with respect to, its most recent
fiscal year and written representations that no other reports were required, if
any, the filing requirements of Section 16(a) applicable to its officers,
directors and 10% Stockholders were satisfied, except that the Form 3 for Dr.
Winters was filed 21 days late.
Item 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference
from 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 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference
from the Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September
30, 1995 and 1994.
Consolidated Statements of Operations for the
years ended September 30, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the
years ended September 30, 1995, 1994 and 1993.
Consolidated Statements of Stockholders'
Equity for the years ended September 30, 1995,
1994 and 1993.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
Selected Quarterly Financial Data.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying
Accounts
-12-
Report of Independent Accountants
All other schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements or notes
thereto.
3. EXHIBITS
2.1 Agreement and Plan of Reorganization dated January 31, 1992,
as amended February 27, 1992, by and among the Registrant,
Phoenix Merger Corporation and Quadtel Corporation, and
related documents - filed as Exhibit 2.01 to the Company's
Form 8-K filed on March 16, 1992 and incorporated herein by
this reference.
3.1 Certificate of Incorporation of the Company, as amended -
filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-21793 (the "S-1"), and
incorporated herein by this reference.
3.2 By-laws of the Company, as amended - filed as Exhibit 3.2 to
the S-1 and incorporated herein by this reference.
3.3 Certificate of Correction to the Company's Certificate of
Incorporation - filed as Exhibit 3.3 to Amendment No. 2 to
the S-1 ("Amendment No. 2") and incorporated herein by this
reference.
3.4 Certificate of Amendment to the Company's Certificate of
Incorporation - filed as Exhibit 3.4 to Amendment No. 2 and
incorporated herein by this reference.
3.5 Certificate of Correction to the Company's Certificate of
Incorporation - filed as Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1988 (the "1988 Form 10-K") and incorporated herein by this
reference.
3.6 Certificate of Correction to the Company's Certificate of
Incorporation - filed as Exhibit 3.7 to the 1988 Form 10-K
and incorporated herein by this reference.
3.7 Certificate of Designation of the Company's Series A Junior
Participating Preferred Stock - filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated October 31, 1989
(the "October 31, 1989 Form 8-K"), and incorporated herein
by this reference.
4.1 Series A Convertible Preferred Stock and Warrant Purchase
Agreement dated March 18, 1988 among the Registrant, Neil J.
Colvin, Lance E. Hansche, Sigma Partners and Sigma
Associates, and the form of warrants issued thereunder -
filed as Exhibit 4.1 to the S-1 and incorporated herein by
this reference.
4.2 Registration Agreement dated March 18, 1988, among the
Registrant, Neil J. Colvin, Lance E. Hansche, Sigma Partners
and Sigma Associates, as amended - filed as Exhibit 4.2 to
the S-1 and incorporated herein by this reference.
4.3 Rights Agreement dated as of October 31, 1989 between the
Company and The First National Bank of Boston - filed as
Exhibit 4.1 to the October 31, 1989 Form 8-K, and
incorporated herein by this reference.
10.1 1986 Incentive Stock Option Plan, as amended - filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8, Registration No. 33-30940, and incorporated herein by
this reference.
10.2 Senior Management Stock Option Plan, as amended - filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-8, Registration No. 33-26996 (the "February 1989 Form S-
8"), and incorporated herein by this reference.
10.3 Senior Management Nonqualified Stock Option Plan, as amended
- filed as Exhibit 4.3 to the February 1989 Form S-8 and
incorporated herein by this reference.
-13-
10.4 Employment agreement dated June 9, 1994 between the
Registrant and Jack Kay - filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q filed on August 15,
1994 and incorporated herein by this reference.
10.5 Line of Credit Agreement dated November 25, 1991 between the
Registrant and Silicon Valley Bank -- filed as Exhibit 10.17
to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1991 (the "1991 Form 10-K") and
incorporated herein by this reference.
10.6 1992 Equity Incentive Plan - filed with the Company's
preliminary proxy materials filed on December 17, 1992 (the
"1992 Equity Incentive Plan") and incorporated herein by
this reference.
10.7 Amendment dated April 15, 1993 to the Line of Credit
Agreement dated November 25, 1991 between the Registrant and
Silicon Valley Bank filed as exhibit 10.23 to the Company's
Form 10-Q filed on August 16, 1993 and incorporated herein
by this reference.
10.8 Amendment dated June 28, 1993 to the Line of Credit
Agreement dated November 25, 1991 between the Registrant and
Silicon Valley Bank filed as exhibit 10.24 to the Company's
Form 10-Q filed on August 16, 1993 and incorporated herein
by this reference.
10.9 Replication Agreement dated March 15, 1993 between the
Company and Microsoft Corporation and Amendments One, Two,
Three and Four thereto, filed as exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993 and incorporated herein by this
reference.
10.10 Letter Amendment dated as of December 30, 1993 to Line of
Credit Agreement dated November 25, 1991 between the
Registrant and Silicon Valley Bank filed as exhibit 10.17 to
the Company's Form 10-Q filed on February 14, 1994 and
incorporated herein by this reference.
10.11 Purchase Agreement dated March 15, 1994 between the Company
and Softbank Corporation filed as exhibit 10.18 to the
Company's Form 10-Q filed May 16, 1994 and incorporated
herein by this reference.
10.12 Amendment Number 1 to the 1992 Equity Incentive Plan filed
as exhibit 10.19 to the Company's Form 10-Q filed May 16,
1994 and incorporated herein by this reference.
10.13 Amendment Number 1 to the 1991 Employee Stock Purchase Plan
filed as exhibit 10.20 to the Company's Form 10-Q filed May
16, 1994 and incorporated herein by this reference.
10.14 Amendment No. 1 to Purchase Agreement by and between Phoenix
Technologies Ltd. and Softbank Corporation dated as of March
15, 1994 - filed as Exhibit 2.02 to the Company's Current
Report on Form 8-K dated September 30, 1994 and incorporated
herein by this reference.
10.15 Asset Purchase Agreement made as of September 30, 1994 by
and between the Registrant and Xionics International
Holdings, Inc. - filed as Exhibit 2.01 to the Company's
Current Report on Form 8-K dated November 8, 1994 and
incorporated herein by this reference.
10.16 Lease dated as of May 3, 1994 between the Company and the
Equitable life Assurance Society of the United States -
filed as Exhibit 10.24 to the Company's Report on Form 10-K
for the fiscal year ended September 30, 1994.
10.17 1994 Equity Incentive Plan, as amended by the Board of
Directors through September 28, 1995.
10.18 Amended and Restated Employee Stock Purchase Plan, as
amended by the Board of Directors through December 6, 1995.
10.19 Employment offer letter between the Company and Gayn B.
Winters.
10.20 Loan Modification Agreement dated January 25, 1995 to the
Line of Credit Agreement dated November 25, 1991 between
Silicon Valley Bank and the Company.
-14-
10.21 Third Amendment dated as of June 8, 1995 to the Line of
Credit Agreement dated November 25, 1991 between Silicon
Valley Bank and the Company.
10.22 Amendment dated as of June 30, 1995 to the Line of Credit
Agreement dated November 25, 1991 between Silicon Valley
Bank and the Company.
10.23 Amended and Restated Lease Agreement dated March 15, 1995
between The Prudential Insurance Company of America and the
Company with respect to certain facilities located at 846
University Avenue, Norwood, MA.
11.1 Statement re computation of earnings per share (primary
earnings per share).
11.2 Statement re computation of earnings per share (fully
diluted earnings per share).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
fourth quarter of fiscal 1995.
(c) EXHIBITS FILED
See listing under Item 14(a)(3) above for a list of
Exhibits filed with this report.
(d) FINANCIAL STATEMENT SCHEDULES
See Schedule II - Valuation and Qualifying Accounts for
the Three Years Ended September 30, 1995.
-15-
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1995 1994
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $ 32,944,000 $ 33,889,000
Accounts receivable, net of allowances
of $430,000 in 1995 and $657,000 in 1994 12,064,000 12,316,000
Receivable from related party -- 3,768,000
Inventory 53,000 849,000
Other current assets 3,637,000 1,452,000
------------ ------------
Total current assets 48,698,000 52,274,000
Property and equipment, net 2,625,000 2,307,000
Computer software costs, net 3,823,000 3,392,000
Other assets 7,244,000 5,262,000
------------ ------------
Total assets $ 62,390,000 $ 63,235,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 1,241,000
Accounts payable 1,645,000 3,443,000
Payroll related liabilities 2,536,000 2,462,000
Accrued license fees and royalties 889,000 1,214,000
Other accrued liabilities 2,296,000 4,209,000
Income taxes payable 2,765,000 3,993,000
Relocation accrual 1,047,000 1,923,000
Net liabilities of discontinued operations 724,000 5,203,000
------------ ------------
Total current liabilities 11,902,000 23,688,000
Other liabilities 70,000 101,000
------------ ------------
Total liabilities 11,972,000 23,789,000
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $.10 par value,
500,000 shares authorized,none issued -- --
Common stock, $.001 par value,
20,000,000 shares authorized, 13,927,801
and 13,435,077 shares issued at September
30, 1995 and 1994 14,000 13,000
Additional paid-in capital 53,710,000 49,839,000
Accumulated deficit (3,232,000) (9,843,000)
Treasury stock at cost, none and 30,013
shares at September 30, 1995 and 1994 -- (563,000)
Accumulated translation adjustment (74,000) --
------------ ------------
Total stockholders' equity 50,418,000 39,446,000
Total liabilities and stockholders' equity $ 62,390,000 $ 63,235,000
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES.
-16-
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Revenue:
License fees $ 43,448,000 $ 34,913,000 $ 26,055,000
Services 6,493,000 5,676,000 3,596,000
Publishing -- 45,584,000 36,662,000
------------ ------------ ------------
Total revenue 49,941,000 86,173,000 66,313,000
Cost of revenue:
License fees 3,633,000 4,053,000 2,798,000
Services 5,949,000 5,270,000 3,387,000
Publishing -- 33,698,000 24,631,000
------------ ------------ ------------
Total cost of revenue 9,582,000 43,021,000 30,816,000
------------ ------------ ------------
Gross margin 40,359,000 43,152,000 35,497,000
Operating expenses:
Research and development 11,038,000 6,887,000 6,084,000
Sales and marketing 14,355,000 16,585,000 14,232,000
General and administrative 6,696,000 8,460,000 7,709,000
Other operating expenses -- 9,095,000 1,482,000
------------ ------------ ------------
Total operating expenses 32,089,000 41,027,000 29,507,000
------------ ------------ ------------
Income from operations 8,270,000 2,125,000 5,990,000
Gain on sale of Publishing Division -- 23,538,000 --
Interest income, net 1,725,000 213,000 253,000
Other income (expense), net 303,000 (226,000) (302,000)
------------ ------------ ------------
Income before income taxes 10,298,000 25,650,000 5,941,000
Provision for income taxes 1,483,000 6,420,000 2,376,000
------------ ------------ ------------
Income from continuing operations 8,815,000 19,230,000 3,565,000
Discontinued operations:
Loss from discontinued operations (after income tax
benefits of $1,199,000 and $644,000 respectively) -- (1,792,000) (966,000)
Loss on disposal (after income tax benefit of $425,000) -- (10,644,000) --
------------ ------------ ------------
Net Income $ 8,815,000 $ 6,794,000 $ 2,599,000
------------ ------------ ------------
------------ ------------ ------------
Income (loss) per common share:
Income from continuing operations $ 0.58 $ 1.37 $ 0.26
Loss from discontinued operations -- (0.89) (0.07)
------------ ------------ ------------
Net income per common share $ 0.58 $ 0.48 $ 0.19
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding 15,103,000 14,050,000 13,702,000
------------ ------------ ------------
------------ ------------ ------------
SEE ACCOMPANYING NOTES.
-17-
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income $ 8,815,000 $ 6,794,000 $ 2,599,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,050,000 5,401,000 5,586,000
Provision for doubtful accounts 60,000 351,000 --
Gain on sale and leaseback (152,000) (152,000) (152,000)
Equity interest in subsidiary (170,000) -- --
Deferred income taxes (1,300,000) -- --
Gain on sale of Publishing Division -- (23,538,000) --
Provision for loss on discontinued operations -- 10,006,000 --
Write-off of prepaid royalties and capitalized software -- 6,777,000 1,482,000
Change in operating assets and liabilities, net of effects
of acquisitions and divestitures:
Decrease (increase) in accounts receivable 192,000 (6,375,000) (4,492,000)
Decrease in related party receivable 3,768,000 -- --
Increase in inventory, other current assets
and other assets (351,000) (2,310,000) (1,333,000)
Increaes (decrease) in accounts payable, accrued
payroll and relocation, and other liabilities (4,869,000) 4,460,000 (814,000)
Increase (decrease) in income taxes payable (1,335,000) 2,991,000 68,000
Decrease in net liabilities of discontinued
operations (4,479,000) (223,000) --
------------ ------------ ------------
Total adjustments (5,586,000) (2,612,000) 345,000
------------ ------------ ------------
Net cash provided by operations 3,229,000 4,182,000 2,944,000
Cash flows from investing activities:
Proceeds from sale of Publishing Division -- 30,000,000 --
Maturity of short-term investments 23,086,000 1,000,000 --
Purchases of short-term investments (25,863,000) (4,370,000) (1,000,000)
Purchases of property and equipment (1,596,000) (1,787,000) (1,837,000)
Investments and acquisitions, net of cash acquired -- (1,467,000) (628,000)
Additions to computer software costs:
Internally developed software (1,336,000) (2,246,000) (2,566,000)
Purchased and licensed software (338,000) (3,060,000) (2,951,000)
Purchase of publishing rights -- (838,000) (758,000)
------------ ------------ ------------
Net cash provided (used) by investing activities (6,047,000) 17,232,000 (9,740,000)
Cash flows from financing activities:
Proceeds from stock purchases under stock option
and employee stock purchase plans 3,317,000 1,171,000 1,238,000
Repurchase of common stock (2,980,000) -- --
Repayment of short-term borrowings (1,241,000) (188,000) (107,000)
------------ ------------ ------------
Net cash provided by financing activities (904,000) 983,000 1,131,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,722,000) 22,397,000 (5,665,000)
Cash and cash equivalents at beginning of fiscal year 29,519,000 7,122,000 12,787,000
------------ ------------ ------------
Cash and cash equivalents at end of fiscal year $ 25,797,000 $ 29,519,000 $ 7,122,000
------------ ------------ ------------
------------ ------------ ------------
SEE ACCOMPANYING NOTES.
-18-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1995
ADDITIONAL ACCUMULATED TOTAL
COMMON PAID-IN ACCUMULATED TREASURY TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK ADJUSTMENT EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1992 $12,000 $47,431,000 $(19,236,000) $(563,000) $ -- $27,644,000
Stock purchases under stock
option and stock purchase
plansN 566,452 shares 1,000 1,237,000 -- -- -- 1,238,000
Net income -- -- 2,599,000 -- -- 2,599,000
------- ----------- ------------ --------- --------- -----------
Balance, September 30, 1993 13,000 48,668,000 (16,637,000) (563,000) -- 31,481,000
Stock purchases under stock
option and stock purchase
plansN 424,389 shares -- 1,171,000 -- -- -- 1,171,000
Net income -- -- 6,794,000 -- -- 6,794,000
------- ----------- ------------ --------- --------- -----------
Balance, September 30, 1994 13,000 49,839,000 (9,843,000) (563,000) -- 39,446,000
Stock purchases under stock
option and stock purchase
plans--892,037 shares 1,000 3,317,000 -- -- -- 3,318,000
Cancellation of 30,013
treasury shares -- (213,000) (350,000) 563,000 -- 0
Repurchase and cancellation of
369,300 shares -- (1,126,000) (1,854,000) -- -- (2,980,000)
Tax benefit on employee
sales of stock -- 1,893,000 -- -- -- 1,893,000
Net income -- -- 8,815,000 -- -- 8,815,000
Translation adjustment -- -- -- -- (74,000) (74,000)
------- ----------- ------------ --------- --------- -----------
Balance, September 30, 1995 $14,000 $53,710,000 $ (3,232,000) $ 0 $ (74,000) $50,418,000
------- ----------- ------------ --------- --------- -----------
------- ----------- ------------ --------- --------- -----------
SEE ACCOMPANYING NOTES.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF OPERATIONS
Phoenix Technologies Ltd. designs, develops and markets system-level and
application software products. Prior to the divestitures of the Publishing and
Printer Software Divisions in fiscal 1994, the Company also sold technical
publishing software and documentation, and printer software.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the financial
statements. Certain amounts in the prior years' financial statements have been
reclassified to conform to the fiscal 1995 presentation.
REVENUE RECOGNITION. The Company's revenue is derived from license and
engineering fees and packaged software sales, primarily to original equipment
manufacturers (OEMs). License fees for system software are recorded as revenue
when the products have been delivered to the OEMs. The amount of revenue
recognized under minimum license fee arrangements with extended payment terms is
restricted to payments due within 90 days. Certain license agreements for new
and customized products provide for customer acceptance periods that typically
run for 30 days. Revenues on such products are recognized when accepted by the
OEMs as determined by the Company.
Additional per copy license fees are recognized when the OEM ships products
incorporating the Company's software in excess of the quantity covered by the
initial license fee. Customers entering into license agreements with the
Company for customized products are typically charged engineering fees that vary
according to the amount of engineering work performed. Engineering fees are
recognized as revenue when contractual milestones are met or on a time and
materials basis. Revenue from sales of packaged products are recognized and the
related royalty expenses are accrued when the products are shipped. Maintenance
revenues are recognizable ratably over the contract period. Revenue generated
by independent representatives in certain international markets is recorded net
of the related commissions.
Allowances for uncollectable amounts, returns and credits are recorded in
the same period as the related revenues. At the time the Company recognizes
revenues from the license or sale of software products, no significant vendor
obligations remain, and the costs of insignificant support obligations are
accrued.
INVESTMENTS. Investments in certain highly liquid securities with maturities of
less than three months are considered cash equivalents. Investment securities
consist of U.S. Treasury and agency notes and municipal bonds with original
maturities generally ranging from three months to one year. The Company adopted
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on December
31, 1994. The adoption of Statement No. 115 had no effect on the Company's
financial position and results of operations. The Company classifies its
investment securities as held-to-maturity because, as provided in Statement No.
115, it has the ability and intent to hold them until maturity. Such securities
are reported at amortized cost.
CREDIT RISK. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit qualified financial institutions. The Company does not require
collateral for trade receivables, but related credit risk is limited due to the
Company's large number of customers and their geographic dispersion. As of
September 30, 1995 and 1994, no customer accounted for 10% or more of accounts
receivable.
INVENTORIES. Inventories, primarily finished goods, are stated at the lower of
cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and
depreciated using the straight-line method over their estimated useful lives,
typically three to five years. Leasehold improvements are amortized over the
lesser of their useful lives or the remaining term of the related lease. When
assets are sold or retired, the cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in income.
COMPUTER SOFTWARE COSTS. Computer software costs consist of internally
developed and purchased or licensed software. Development costs incurred in the
research and development of new software products and enhancements to existing
products are expensed in the period incurred unless they qualify for
capitalization. Capitalized computer software costs are amortized over the
economic life of the product, generally three years, using the straight-line
method or a ratio of current revenues to total anticipated revenues.
-20-
The Company evaluates the net realizable value of computer software costs
on an ongoing basis relying 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.
INCOME TAXES. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the
asset and liability method of Statement No. 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. Under Statement No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period of enactment. This accounting method was adopted in fiscal 1994, and it
is similar to the Company's prior method, Statement No. 96, except that under
the prior method, no recognition is given to future events other than the
recovery of assets and settlements of liabilities.
NET INCOME (LOSS) PER COMMON SHARE. Net income per common and common equivalent
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during each year. Dilutive common
equivalent shares consist of stock options and are calculated using the treasury
stock method. In loss periods, common stock equivalents are not used in the
calculation. Fully diluted earnings per share are not materially different from
reported primary earnings per share.
STOCK OPTIONS. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" was issued in October 1995 and applies to fiscal
years beginning after December 15, 1995. While the Company is studying the
impact of the pronouncement, it continues to account for employee stock options
under APB Opinion No. 25, "Accounting for Stock Issued to Employees."
NOTE 3. CASH AND INVENTORIES
Cash and short-term investments were comprised as follows:
SEPTEMBER 30,
1995 1994
-----------------------------------------------------------------
Cash and cash equivalents $ 25,797,000 $ 29,519,000
Short-term investments 7,147,000 4,370,000
------------ ------------
$ 32,944,000 $ 33,889,000
------------ ------------
------------ ------------
The carrying and market values of investments as of September 30, 1995 were as
follows:
HELD-TO-MATURITY
--------------------------------------------
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------
U.S. Government and Agency obligations $ 5,156,000 $ 7,000 $ 2,000 $ 5,161,000
Bankers' acceptances 998,000 -- -- 998,000
Commercial paper 993,000 -- -- 993,000
----------- ------- ------- -----------
$ 7,147,000 $ 7,000 $ 2,000 $ 7,152,000
----------- ------- ------- -----------
----------- ------- ------- -----------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
1995 1994
--------------------------------------------------------------------------
Equipment $ 7,833,000 $ 7,808,000
Furniture and fixtures 2,808,000 2,600,000
Leasehold improvements 1,258,000 1,079,000
----------- -----------
11,899,000 11,487,000
Less accumulated depreciation and amortization 9,274,000 9,180,000
----------- -----------
$ 2,625,000 $ 2,307,000
----------- -----------
----------- -----------
-21-
Depreciation and amortization expenses totaled $1,278,000, $1,860,000 and
$1,944,000 for fiscal 1995, 1994 and 1993, respectively.
NOTE 5. COMPUTER SOFTWARE COSTS
Computer software costs in the amounts of $1,674,000, $2,933,000 and $9,771,000
were capitalized during the years ended September 30, 1995, 1994 and 1993,
respectively. These costs consist of $1,336,000, $2,478,000 and $2,566,000 of
internally developed software and $338,000, $455,000 and $7,205,000 of purchased
or licensed software costs for fiscal 1995, 1994 and 1993, respectively.
Included in the above amounts are $232,000 and $1,605,000 of internally
developed software costs and $50,000 and $60,000 of purchased or licensed
software costs related to the discontinued printer software operation for fiscal
1994 and 1993, respectively.
Amortization charged to costs of revenue in fiscal 1995, 1994 and 1993
totaled $1,244,000, $825,000 and $1,225,000, respectively. Amortization charged
to discontinued operations for 1994 and 1993 was $1,604,000 and $1,321,000,
respectively. In addition, the Company wrote off computer software costs of
$6,777,000 in fiscal 1994 and $1,482,000 in fiscal 1993 in connection with a
terminated distribution agreement and reclassified net computer software costs
of $1,584,000 related to the discontinued printer software operation.
Accumulated amortization at September 30, 1995 and 1994 totaled $1,128,000 and
$4,733,000, respectively.
NOTE 6. UNSECURED LINE OF CREDIT
At September 30, 1995, there were no outstanding borrowings on the Company's
$10,000,000 unsecured bank line of credit. Borrowings on the line bear interest
at the bank's prime rate of interest plus 1%. The agreement contains various
covenants which require the Company to operate at a profit and meet certain
financial ratios, and it restricts the payment of cash dividends. A commitment
fee of $25,000 was paid in fiscal 1995 and 1994.
The Company made interest payments of $69,000, $79,000 and $35,000 for
fiscal 1995, 1994 and 1993, respectively.
NOTE 7. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" in fiscal 1994, and there was no cumulative effect
adjustment recorded as a result of the change. The components of the provision
for income taxes from continuing operations are as follows:
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
------------------------------------------------------------------------------------------
Current:
Federal, net of tax benefit on NOL
carryforward of $16,742,000 in 1994 $ 294,000 $ 2,958,000 $ 593,000
State 96,000 1,486,000 304,000
Foreign 2,393,000 2,081,000 1,479,000
Deferred:
Federal -- (87,000) --
State -- (18,000) --
Change in valuation allowance (1,300,000) -- --
----------- ----------- ----------
$ 1,483,000 $ 6,420,000 $ 2,376,000
----------- ----------- ----------
----------- ----------- ----------
The loss from discontinued operations provided a current federal and state
income tax benefit which was utilized against the current tax provision from
continuing operations. The benefit provided in fiscal 1994 and 1993 was
$1,199,000 and $644,000, respectively. The Company made income tax payments of
$1,125,000, $181,000 and $188,000 in fiscal 1995, 1994 and 1993, respectively.
-22-
Reconciliation of the United States federal statutory rate to the Company's
effective tax rate is as follows:
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
-----------------------------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 3,501,000 $ 8,721,000 $ 2,020,000
State taxes, net of federal tax benefit 66,000 969,000 201,000
Foreign withholding taxes 1,959,000 1,411,000 1,000,000
Temporary deductible items recognized currently (2,784,000) -- --
Tax benefit of net operating loss carryforwards -- (3,639,000) (868,000)
R&D tax credit utilized -- (1,116,000) --
Other nondeductible expenses 41,000 74,000 23,000
Change in valuation allowance (1,300,000) -- --
----------- ----------- -----------
Provision for income taxes $ 1,483,000 $ 6,420,000 $ 2,376,000
----------- ----------- -----------
----------- ----------- -----------
The components of net deferred tax assets and liabilities are as follows:
September 30,
1995 1994
-------------------------------------------------------------------------
Deferred tax assets:
Foreign tax credits $ 2,735,000 $ 585,000
R&D tax credits 1,009,000 884,000
Minimum tax carryforward 566,000 566,000
Reserves and accruals 1,617,000 5,243,000
Depreciation 1,223,000 952,000
Net operating loss carryforward 814,000 --
Revenue recognition -- 751,000
Total 7,964,000 8,981,000
Less valuation allowance 3,185,000 7,715,000
Net deferred tax assets 4,779,000 1,266,000
Deferred tax liabilities:
Capitalized software, net 1,479,000 1,266,000
Other -- 104,000
Total deferred tax liability 1,479,000 1,370,000
Net deferred tax assets (liabilities) $3,300,000 $(104,000)
Due to the uncertainty surrounding the timing of the realization of the
benefit of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against otherwise recognizable net deferred tax
assets.
Prior to fiscal 1994, the Company took foreign tax withholding as a
deduction because of limitations on taking them as a credit. In previous years,
the Company has shown a deferred tax asset equal to the potential additional
benefit of amending previous returns to use the withholding amounts as credits,
creating a tax credit carryforward and offsetting it against current taxes. The
potential credits are beginning to expire, and the Company has significant other
unused tax credits, and, therefore, reduced deferred tax assets and the
valuation allowance by the amount thereof.
At September 30, 1995, the Company had available for federal income tax
purposes tax credit carryforwards, some of which expire on various dates. The
foreign tax credits expire in 1999 and 2000, the R&D tax credits expire in the
years 2001 through 2010, and the net operating loss carryforward expires in
2010.
NOTE 8. COMMITMENTS
The Company leases office facilities under operating leases. Total rent expense
was $1,673,000, $2,672,000 and $2,149,000 in fiscal 1995, 1994 and 1993,
respectively.
-23-
At September 30, 1995, future minimum operating lease payments are required
as follows:
------------------------------------------------
1996 $ 1,970,000
1997 1,362,000
1998 667,000
1999 238,000
2000 59,000
-----------
Total minimum lease payments $ 4,296,000
-----------
-----------
NOTE 9. STOCKHOLDERS' EQUITY
PREFERRED STOCK. As of September 30, 1995 and 1994, no preferred stock was
issued and outstanding.
SHAREHOLDER RIGHTS PLAN. The Company has a stockholder rights plan which
provides existing stockholders with the right to purchase one one-hundredth
(0.01) preferred share for each share of common stock held in the event of
certain changes in the Company's ownership. These rights may serve as a
deterrent to certain abusive takeover tactics which are not in the best
interests of stockholders.
STOCK OPTION PLANS. Under the 1994 Equity Incentive Plan (the "1994 Plan"), as
amended and approved by stockholders at the February 7, 1995 annual meeting,
1,000,000 shares were reserved for issuance. In September 1995, the Board of
Directors further amended the 1994 Plan to increase the share reserve by an
additional 500,000 shares; shareholder approval of such increase will be sought
at the 1996 annual meeting of shareholders. Except to the extent that options
remain outstanding under prior plans, the 1994 Plan replaced all prior option
plans and all shares which were or become available for grant under any prior
option plan are added to the 1994 Plan. The 1994 Plan provides for the grant of
nonqualified and incentive stock options, as well as restricted stock and stock
bonus awards, to employees, officers, consultants and independent contractors;
nonemployee members of the Board of Directors are eligible for grants of
nonqualified stock options only. 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 market value of the shares on the date of grant. To
date all grants have been made at fair market value or greater. Options vest
over a period determined by the Board of Directors, generally four years, and
have a term not exceeding 10 years.
Activity in the Company's stock option plans was as follows:
PRICE RANGE OF
SHARES STOCK OPTIONS
--------------------------------------------------------------------------
Shares under option, September 30, 1992 3,103,290 $0.450-$ 9.375
Options granted 405,350 $4.000-$ 5.250
Options exercised (463,296) $1.350-$ 4.250
Options canceled (220,560) $1.500-$ 9.375
---------
Shares under option, September 30, 1993 2,824,784 $0.450-$ 9.375
Options granted 1,421,800 $3.875-$ 7.875
Options exercised (282,588) $0.450-$ 4.500
Options canceled (359,680) $2.380-$ 9.375
---------
Shares under option, September 30, 1994 3,604,316 $0.450-$ 9.375
Options granted 477,000 $6.750-$ 12.875
Options exercised (821,721) $0.450-$ 9.375
Options canceled (292,674) $2.380-$ 9.375
---------
Shares under option, September 30, 1995 2,966,921 $0.450-$ 12.875
---------
---------
At September 30, 1995, the number of shares exercisable under stock option
plans was 1,769,985, and 467,025 shares were available for grant.
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock Purchase
Plan (the "ESPP") allows eligible employees to purchase shares at six month
intervals, through payroll deductions, at 85% of the fair market value of the
-24-
Company's common stock at the beginning or end of the six-month period,
whichever is less. The maximum amount each employee may contribute during an
offering period is 10% of gross base pay. As of September 30, 1995, 352,715
shares had been issued under the ESPP and 147,285 shares remained reserved for
future issuance.
NOTE 10. ACQUISITIONS AND INVESTMENTS
On June 30, 1994, the Company purchased certain assets of two related United
Kingdom companies. The acquisition was recorded using the purchase method of
accounting; accordingly, the purchase price, which was insignificant, was
allocated to the assets based on their estimated fair market values at the date
of acquisition.
In fiscal 1993, the Company acquired substantially all of the assets, and
assumed certain liabilities, of its Japanese distributor. Also in fiscal 1993,
the Company acquired substantially all the assets and assumed certain
liabilities of a company that supplied fax/modem software through the retail and
direct channels. Both acquisitions were recorded using the purchase method of
accounting. Goodwill associated with the acquisitions was approximately
$1,558,000 and is being amortized on a straight-line basis over seven years.
Amortization expense was $236,000, $226,000 and $56,000 in fiscal 1995, 1994 and
1993, respectively. In fiscal 1993, $1,482,000 of capitalized software costs
made redundant by these acquisitions was written off.
The operating results of these acquisitions have been included in the
consolidated financial statements from the date of acquisition and are not
material in relation to the Company's consolidated financial statements. Pro
forma statements of operations prior to the acquisition dates would not differ
significantly from reported results.
NOTE 11. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In November 1994, the Company sold all the assets of
its Printer Software Division. The Company received a promissory note in the
principal amount of $4,849,000, collateralized by the assets sold and payable in
twenty quarterly installments commencing January 15, 1997. Interest at 8% per
year is payable quarterly. The Company also received a minority equity interest
in the purchaser and the right to a future contingent payment based on operating
performance. In fiscal 1995, the Company provided an additional loan of
$350,000 to the purchaser. Subsequently, the Company participated in a stock
offering to new and existing investors by exchanging $1,900,000 of principal
under these two notes for additional shares. The Company has the right to
convert up to $340,000 of additional principal into shares of stock on or before
June 30, 1998. Because of the risk of collection, the Company will recognize
proceeds from the note and contingent payment as cash payments are received.
The current estimated fair market value of the shares, which has a book value of
zero, is not significant.
The consolidated financial statements were restated to reflect the Printer
Software Division as a discontinued operation. Revenues from discontinued
operations were $9,439,000 and $9,947,000 for fiscal 1994 and 1993,
respectively. The net liabilities of discontinued operations of $724,000 and
$5,203,000 at September 30, 1995 and 1994, respectively, consist primarily of
accrued costs to be incurred in connection with the sale of the division, offset
by accounts receivable. Payments were $4,479,000 and $223,000 in fiscal 1995
and 1994, respectively.
PUBLISHING DIVISION. In fiscal 1994, the Company also sold 80% of its
Publishing Division for cash payments of $30,000,000 to Softbank Corporation of
Japan ("Softbank"). The Company recognized a pre-tax gain of $23,538,000 on the
transaction. Softbank and the Company each contributed their respective
interests in the net assets of the Publishing Division to Phoenix Publishing
Systems, Inc. ("PPSI"); and the Company received 20% of the capital stock of
PPSI. There is a put and call on the 20% interest, exercisable from September
30, 1997 to September 30, 1999, for the greater of $7,500,000 or an amount based
on PPSI's operating performance. The Company accounts for its interest in PPSI
under the equity method of accounting. The resulting related party receivable
of $3,768,000 at September 30, 1994 was collected from PPSI in fiscal 1995.
The following unaudited pro forma information for fiscal 1994 reflects how
the disposition might have affected the statement of operations if the
divestiture had taken place as of the beginning of the fiscal year.
AS REPORTED PRO FORMA
--------------------------------------------------------------------------
Revenue $86,173,000 $40,589,000
Gross margin 43,152,000 31,266,000
Operating income 2,125,000 7,176,000
Income from continuing operations 19,230,000 5,595,000
Income from continuing operations per share $ 1.37 $ 0.40
-25-
The pro forma results exclude the gain on the sale of the Publishing
Division and the non-recurring other operating expenses of $9,095,000 described
in Note 12 and include interest income on the proceeds of the sale and income
from the Company's equity interest in PPSI. Revenue attributable to the
Publishing Division for fiscal years 1994 and 1993 was $45,584,000 and
$36,662,000, respectively.
OTHER INVESTMENTS. Included in other assets at September 30, 1995 and 1994 is
$2,388,000 of equity and other investments in Softbank, Inc., a joint venture
company formed to distribute software products on compact disks. In fiscal
1995, the Company exchanged its investment in Softbank, Inc. for the right to
put the investment to its joint venture partner for $2,310,000, plus 7% annual
interest, or for an amount based upon the valuation of a subsidiary of another
jointly owned company in an initial public stock offering should that offering
occur. The investment is recorded at cost, and any gain will be recorded upon
realization.
NOTE 12. OTHER OPERATING EXPENSES
Other operating expenses in fiscal 1994 include the write-off of $6,777,000 of
non-refundable advance royalties in connection with its termination of an
agreement to distribute a BIOS and other software for IBM. Also included in
other operating expenses in fiscal 1994 is a provision of $2,318,000 related to
the relocation of the Company's headquarters from Massachusetts to California
which occurred in fiscal 1995. In fiscal 1995, $876,000 of the accrual was
paid. The remaining liability at September 30, 1995 relates primarily to
termination benefits and lease payments. Other operating expenses in fiscal
1993 consist of acquisition related charges.
NOTE 13. INTERNATIONAL INFORMATION
The Company licenses its products worldwide. Export revenues were made
principally to the following geographic areas:
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
--------------------------------------------------------
Asia/Pacific $16,246,000 $12,884,000 $10,042,000
Europe 3,258,000 9,962,000 12,695,000
----------- ----------- -----------
$19,504,000 $22,846,000 $22,737,000
----------- ----------- -----------
----------- ----------- -----------
A summary of foreign operations, principally represented by locations in the
Asia/Pacific region, is presented below.
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
--------------------------------------------------------
Revenue $4,108,000 $16,366,000 $8,143,000
Operating income 1,136,000 2,751,000 768,000
Income before taxes 1,304,000 2,754,000 778,000
Identifiable assets 6,777,000 3,430,000 5,334,000
In fiscal 1995, no customer accounted for 10% or more of revenue. In
fiscal 1994, revenue from Packard Bell and its subsidiaries was $16,211,000 or
19% of revenue, and revenue from Compaq Computer Corporation and its
subsidiaries was $11,630,000 or 14% of revenue. In fiscal 1993, revenue from
Compaq Computer and its subsidiaries was $15,455,000 or 23% of revenue, and
revenue from Packard Bell and its subsidiaries was $9,474,000 or 14% of revenue.
NOTE 14. RETIREMENT PLAN
The Company has a retirement plan which is qualified under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all U.S. employees who
meet minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. In addition, Company
contributions to the plan may be made at the discretion of the Board of
Directors. Company contributions to date have not been material. The Company
does not offer post-retirement benefits.
-26-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Phoenix Technologies Ltd.:
We have audited the accompanying consolidated balance sheets of Phoenix
Technologies Ltd. as of September 30, 1995 and 1994, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the three fiscal years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Phoenix
Technologies Ltd. as of September 30, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ending September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
October 27, 1995
-27-
PHOENIX TECHNOLOGIES LTD.
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA) YEAR ENDED SEPTEMBER 30, 1995
QUARTER ENDED DEC. 31 MAR. 31 JUNE 30 SEPT. 30
-------------------------------------------------------------------------
Revenue $11,119 $12,204 $13,320 $13,297
Gross margin 9,040 9,844 10,879 10,596
Income from operations 1,730 1,992 2,390 2,154
Net income 1,569 1,738 2,030 3,474
Net income per share 0.11 0.12 0.13 0.22
YEAR ENDED SEPTEMBER 30, 1994
QUARTER ENDED DEC. 31 MAR. 31 JUNE 30 SEPT. 30
-------------------------------------------------------------------------
Revenue $20,115 $22,855 $20,872 $22,331
Gross margin 9,120 9,806 9,803 10,370
Income (loss) from continuing
operations 1,548 (398) 2,199 15,881
Net income (loss) 1,220 (1,046) 1,383 5,237
Income (loss) per share from
continuing operations 0.11 (0.03) 0.16 1.11
Net income (loss) per share 0.09 (0.08) 0.10 0.37
Quarterly information related to the Company's statements of operations prior to
the fourth quarter of fiscal 1994 has been reclassified for discontinued
operations.
-28-
PHOENIX TECHNOLOGIES LTD.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 30, 1995
Balance at Charged to Charged Balance
Allowance for Beginning Costs and to other at end of
Doubtful Accounts of Year Expenses Accounts Deductions(1) Recoveries Year
- ----------------- ---------- ---------- -------- ------------- ---------- ---------
Year Ended $ 657,000 $ 60,000 $329,000 $ 785,000 $169,000 $430,000
September 30, 1995
Year Ended 1,548,000 351,000 320,000 1,623,000 61,000 657,000
September 30, 1994
Year Ended 1,858,000 -- 71,000 391,000 10,000 1,548,000
September 30, 1993
- ------------------------
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
-29-
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Phoenix
Technologies Ltd. is included in this Form 10-K. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule listed in the index of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
October 27, 1995
-30-
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/ Jack Kay
--------------------------------------
Jack Kay
President and Chief Executive Officer
Date: December 28, 1995
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/ Jack Kay /s/ Robert J. Riopel
- ---------------------------------------- ------------------------------
Jack Kay Robert J. Riopel
Director and Principal Executive Officer Principal Finance and
Accounting Officer
Date: December 28, 1995 Date: December 28, 1995
/s/ Lawrence G. Finch
- ---------------------------------------- ------------------------------
Charles Federman Lawrence G. Finch
Director Director
Date: December __, 1995 Date: December 28, 1995
/s/ Ronald D. Fisher /s/ Lance E. Hansche
- ---------------------------------------- ------------------------------
Ronald D. Fisher Lance E. Hansche
Director Director
Date: December 28, 1995 Date: December 28, 1995
/s/ Anthony P. Morris
- ----------------------------------------
Anthony P. Morris
Director
Date: December 28, 1995
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