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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period __________ to __________.
Commission file number 0-17111
PHOENIX TECHNOLOGIES LTD.
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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 Identification No.)
incorporation or organization)
411 EAST PLUMERIA DRIVE, SAN JOSE, CALIFORNIA 95134
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(Address of principal executive offices, including zip code)
(408) 570-1000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 30, 1996, was $ 281,433,929 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
November 30, 1996 was 16,554,937.
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.
The Exhibit Index begins on page 17 of this Report.
PART I
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THIS REPORT ON FORM 10-K, INCLUDING WITHOUT LIMITATION THE BUSINESS SECTION
AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF CONTINUING OPERATIONS, CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN PART II, ITEM 7 (MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF CONTINUING OPERATIONS) UNDER THE HEADING "BUSINESS
FACTORS" AND IN OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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, software for implementation as hardware, and
related applications software products for PCs. The Company provides these
products primarily to PC manufacturers, PC peripheral equipment
manufacturers, integrated circuit manufacturers, and system board
manufacturers ("OEMs"). Phoenix's products permit OEMs to introduce new
products 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 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 32%, 25% and 11%
of total revenue in fiscal 1996, 1995, and 1994, respectively. On an actual
dollar basis, these costs grew to $22,764,000 in fiscal 1996, an 84% increase
from fiscal 1995. Fiscal 1995 research and development costs rose 35% from
$9,133,000 in fiscal 1994. With respect to continuing operations, the Company
capitalized approximately $2,136,000, $1,336,000, and $2,246,000 of
internally developed software in fiscal 1996, 1995, and 1994, respectively.
The Company believes continued investment in new and evolving technologies is
essential to meet rapidly changing industry requirements. In addition, the
Company purchased or licensed additional technology related assets for use in
its continuing operations in the amount of $544,000 in fiscal 1996, $338,000
in fiscal 1995, and $405,000 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 1996, one of the Company's customers accounted for
10% of total revenue. No customer accounted for more than 10% of revenue in
fiscal 1995. Two customers did account for more than 10% of the Company's
total revenue during fiscal year 1994. One customer was 19% of revenue for
fiscal year 1994, while the other customer was 14%. In fiscal 1996, 1995,
and 1994, approximately 55%, 52%, and 44%, 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.
2
In December 1995, the Company entered into a seven-year agreement (the
"Technology Agreement") with Intel Corporation. Under the Technology
Agreement, Phoenix licensed certain of its system-level software to Intel for
incorporation into Intel's motherboard products for desktop and server
computers. The Technology Agreement requires Phoenix to provide Intel with a
dedicated engineering team to support Intel under the agreement and develop
agreed-on enhancements to the licensed software. In addition, Phoenix will
assist Intel in its transition to Phoenix's system-level software. In
consideration of the license grants and other commitments made by Phoenix,
the agreement requires Intel to pay Phoenix minimum annual fees and
royalties. These minimum amounts can be exceeded depending on levels of
shipment by Intel of Intel products containing the licensed software. The
maximum license fees payable by Intel to Phoenix under the Technology
Agreement during its seven-year term is $82 million; however, there can be no
assurances that Intel will ship the volume of products required to entitle
Phoenix to such maximum fees.
Concurrently with the signing of the Technology Agreement, Phoenix and
Intel entered into a Common Stock and Warrant Purchase Agreement (the "Equity
Agreement") whereby Intel agreed to purchase 894,971 shares of Phoenix common
stock (or 6% of the outstanding shares), together with a warrant to purchase
an additional 1,073,965 shares. The closing of the sale of the stock and the
warrant occurred on February 15, 1996.
DESCRIPTION OF BUSINESS
The Company is divided into two related product divisions: the PC
Systems Division (PCSD) and the Special Products Division (SPD). PCSD
includes the Company's desktop and server system software, portable system
software, and PC application software product lines, along with the Company's
core system software and strategic development groups. SPD includes the
Company's PhoenixCard software, PhoenixPICO, and Virtual Chips Product Lines.
During fiscal 1996, 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,
Compaq, Dell Computer, and IBM, developing and delivering Plug and Play
firmware, enhancing its PCMCIA software and enhancing the PICO product line
for the major emerging Information Appliance market.
PC SYSTEMS DIVISION: In the PC system-level software product area, the
Company develops and markets software products that enable PC, peripheral,
and motherboard manufacturers to integrate existing and emerging industry
standards and new technologies into PC platforms. The Company offers an
extensive line of system software, including BIOS (Basic Input/Output System)
products, for desktop, portable, and server PC systems based on x86
microprocessors. The system software products include system BIOS products,
system core logic chipsets, system busses, video subsystems, keyboard
controllers, power management chipsets, 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 has
increased the complexity, time, and cost to develop system-level,
firmware-based 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, reduce 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 PC standards 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. The growth rate of sales in the personal computer
industry fluctuates 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.
In fiscal 1996, Phoenix announced Release 6 of PhoenixBIOS 4.0. Release
6 includes over 50 enhancements designed to improve manufacturing customers'
ability to more easily develop their own extensions for products
differentiation or to improve support, and to deploy new products with
reduced costs for customization work.
PHOENIXBIOS 4.0: Phoenix introduced PhoenixBIOS 4.0 as its core desktop
systems firmware product in 1993. Since then, the Company has continuously
released improvements to the core product, including Release 6 discussed
above. 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 modular architecture, Plug
and Play support, and advanced development tools and methodology. 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 1996, Phoenix announced further key extensions to PhoenixBIOS
4.0 to further improve the performance of desktop PCs and makes them easier
to use and support. Key fiscal 1996 advances
3
included support for Microsoft's Simple Interactive PC (SIPC) requirements,
support for APM 1.2 advanced power management, and creation of the ability to
boot PC systems directly from Iomega Zip Drive and LS120 large removable
media.
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 batteries. The Company believes that a majority of
notebook PCs shipped worldwide in fiscal 1996 with commercial BIOS were
delivered with Phoenix's NoteBIOS.
During fiscal 1996, the Company expanded its licensing of NoteBIOS 4.0
and Power Panel products, and introduced the BatteryScope product. In July
1996 Phoenix was the first in the industry to announce power management and
PC Card support for Microsoft's new Windows NT 4.0 operating systems. This
will enable portable systems users to use this major new operating system in
systems with NoteBIOS 4.0 for NT 4.0 and the Company's new Phoenix Card
Executive for NT 4.0 software. 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. BatteryScope is a second generation "Smart
Battery" software utility resulting from development by Phoenix, DuraCell,
Intel and Microsoft to extend battery life in portable PCs.
PC APPLICATION SOFTWARE: The Company develops or acquires and markets
application software to provide new functionality to the consumer and small
office/home office (SOHO) PC environment. These products are marketed through
the OEM channel, and typically the products are modified for each OEM in
order for the OEM to achieve brand identification through product
differentiation. The Company marketed two principal products during fiscal
1995 and 1996, one of which (PhoenixMUSE-TM-) was discontinued in 1996.
In September 1996, the Company announced that it had become the
exclusive distributor to OEMs of the user assistance software developed by
CyberMedia, Inc. This agreement is the first part of Compaq's User Assistance
Initiative (UAI), a development and marketing program from Phoenix designed
to reduce an OEM's support costs by providing new technology to help PCs
resolve many of their own problems automatically. The products are marketed
under CyberMedia's First Aid and Oil Change trademarks. First Aid 97 is
designed to allow PC users to analyze and fix their hardware and software
problems. Oil Change enables users to automatically update the software in
their PCs over the Internet.
SPECIAL PRODUCTS DIVISION
PICO: The PICO product line provides system enabling and system
enhancing software for Industrial, Hand-held, and Consumer Appliances in the
emerging new Information Appliance 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. 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)
provides OEMs with development and educational tools.
PHOENIX PC CARD SOFTWARE: The Phoenix PC Card software family includes
support for identification, configuration, and use of all PC Card types on
the market today. Support is available for all of the major Microsoft Windows
operating system environments. Phoenix PC Card software products are
compliant with the most current version of the PC Card Standard published by
the PCMCIA and thus significantly reduce hardware compatibility problems.
CardBus, the latest 32-bit high bandwidth standard option for PC Cards is
supported by Phoenix as is Zoomed Video, the latest standard for live full
motion video playback and video capture PC Card applications. Phoenix PC Card
software is shipped by major OEMs including: Toshiba, Texas Instruments,
Dell, AST, Fujitsu, Olivetti, and Siemens-Nixdorf, Inc.
VIRTUAL CHIPS AND INTERCONNECTIVITY SOFTWARE: In August 1996, the
Company completed the acquisition of Virtual Chips, Inc., a leading supplier
of synthesizable cores for the computer industry. Synthesizable cores are
prepackaged circuit descriptions, delivered in a high level language known as
a Hardware Description Language (HDL), and used as building blocks for
system-level application specific integrated circuits (or ASICs). The
resulting ASICs are used in computers and peripheral devices to provide
connectivity using various interconnect standards (e.g., peripheral component
interface (PCI), universal serial bus (USB) and other emerging standards such
as IEEE 1394). Virtual Chips products include a full line of PCI SATELLITE
and PCI HOST BRIDGE SYNTHESIZABLE CORES, plus a PCI TEST ENVIRONMENT to help
customers verify their PCI-based designs. In October of 1996, Virtual Chips
introduced a line of 66 MHZ PCI SATELLITE SYNTHESIZABLE CORES, to handle the
needs for increased bandwidth in the graphics and server markets in
particular. In 1996, Virtual Chips also introduced a USB product line, the
first products of which are the USB FUNCTION SYNTHESIZABLE CORE and USB TEST
ENVIRONMENT. These products complement the USB OHCI HOST CONTROLLER
SYNTHESIZABLE CORE which Compaq Computer Corporation Licensed to Phoenix in
the first half of 1996. Under the license agreement with Compaq, Phoenix has
certain rights to sell, license and make derivatives of the licensed Compaq
design. The Compaq design has already been licensed by twelve of the leading
chipset and PC manufacturers, and, the Company believes, represents a key
standard which compatibility will be measured for USB peripherals.
WORLDWIDE DEPLOYMENT SERVICES AND SUPPORT:
To support its worldwide customer base, Phoenix employs over 300 engineers
and has offices in Japan, Taiwan, England, France, California, Oregon,
Massachusetts and Texas. The Company's support services are provided by means
of telephone and on-site service.
4
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, 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.
COMPETITION:
In marketing its BIOS, NoteBIOS, PICO, and PCMCIA products, Phoenix competes
primarily with three other independent suppliers of BIOS technology: American
Megatrends, Inc., Award Software International Inc. and SystemSoft
Corporation. It also competes for BIOS business with in-house research and
development departments of PC manufacturers that have significantly greater
financial and technical resources than those of Phoenix. These companies
include Compaq Computer Corporation, International Business Machines
Corporation, and Toshiba Corporation. The Company's primary competitors for
user assistance products are Symantec Corporation and SystemSoft. In the
synthesizable core business begun with the acquisition of Virtual Chips,
Phoenix competes with major EDA suppliers such as Mentor Graphics and
Synopsys who are attempting to broaden their design tool business to include
synthesizable cores, and small design houses such as Sand Microelectronics,
Inc. who provide synthesizable cores, often as part of a design consulting
contract. The bases for competition for the PC system-level software 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 Systems Division products accounted
for 78%, 82%, and 89% of the Company's revenue from continuing operations
(other than revenue from the Company's Publishing Division (see below)) in
fiscal 1996, 1995, and 1994, respectively. Revenue attributable to the
Special Products Division products accounted for 22%, 18% and 11% of total
revenue from continuing operations for fiscal 1996, 1995 and 1994,
respectively.
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
5
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% of the Company's total revenue from continuing
operations in fiscal 1994.
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
manufacturers have used PhoenixPage in their printer product lines.
In November 1994, the Company sold all the assets of its Printer
Software Division to Xionics Document Technologies, Inc. The Company received
an 8% 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. The Company also received a minority equity interest in the
purchaser. 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 and later converted an additional
$340,000 into shares of stock. In September and October 1996, the Company
participated in Xionics' initial public offering of shares and sold an
aggregate of 575,000 shares. Following these sales, the Company owns
approximately 1.4 million shares of Xionics common stock. The 8% note was
repaid in full.
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. Revenue from
discontinued operations was $9,439,000 for fiscal 1994. The net liabilities
of discontinued operations of $1,335,000 and $724,000 at September 30, 1996
and 1995, respectively, consist primarily of accrued costs to be incurred in
connection with the sale of the division, offset by accounts receivable.
Payments were $289,000 and $4,479,000 in fiscal 1996 and 1995, respectively.
EMPLOYEES
As of November 30, 1996, the Company employed 490 persons worldwide, of
whom 324 are in research and development, 111 are in sales and marketing, and
55 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 licenses the source code for its
products 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 November 30,
1996, the Company had been issued three patents and had 18 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
6
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 86,602 square foot
building in San Jose, California which the Company leases pursuant to a lease
expiring in November 2003. Minimum annual lease payments for the San Jose
facility are approximately $1,235,000 plus certain additional costs. In
December 1996, the Company completed the move of its principal offices from
Santa Clara, California to this San Jose Facility.
The Company also leases smaller office facilities in other locations
including: Irvine, California; Norwood, Massachusetts; Beaverton, Oregon;
Houston, Texas; Taipei, Taiwan; Tokyo, Japan; Guildford, England; and
Archamps, France.
The Company considers its leased properties to be in good condition,
well maintained, and generally suitable and adequate for its present and
foreseeable future needs.
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 System
under the symbol PTEC. The following table presents the quarterly high and
low bid quotations in the over the counter market, as quoted by NASDAQ.
These quotations reflect the inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW
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Year ended September 30, 1996:
First quarter $ 16.33 $ 9.88
Second quarter 15.75 12.88
Third quarter 20.38 13.00
Fourth quarter 19.50 12.75
Year ended September 30, 1995:
First quarter $ 8.13 $ 5.38
Second quarter 8.50 6.13
Third quarter 11.13 6.75
Fourth quarter 14.38 10.25
The Company has approximately 320 shareholders of record as of September 30,
1996. 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
7
SELECTED UNAUDITED QUARTERLY DATA
FISCAL 1996, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 30
- --------------------------------------------------------------------------------
Revenue $14,807 $17,935 $18,645 $20,749
Gross margin 11,762 13,849 14,933 16,850
Income from operations 2,503 3,329 2,876 1,968
Income from continuing operations 2,092 2,519 2,338 2,098
Net income 2,092 2,519 2,338 5,850
Income per share from continuing
operations 0.13 0.15 0.13 0.11
Net income per share 0.13 0.15 0.13 0.32
FISCAL 1995, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 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 0.10 0.11 0.13 0.22
SELECTED PERCENTAGE DATA FY94
------------------
FY96 FY95 PRO FORMA* ACTUAL
- --------------------------------------------------------------------------------
Revenue:
License fees 86.6 % 87.0 % 86.0 % 93.4 %
Services 13.4 13.0 14.0 6.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees 10.4 7.3 10.0 43.8
Services 10.0 11.9 13.0 6.1
----- ----- ----- -----
Total cost of revenue 20.4 19.2 23.0 49.9
----- ----- ----- -----
Gross margin 79.6 80.8 77.0 50.1
Operating expenses:
Research and development 28.6 22.1 16.6 8.0
Sales and marketing 21.5 28.7 27.0 19.2
General and administrative 13.5 13.4 15.8 9.8
Other operating expenses 1.2 - - 10.6
----- ----- ----- -----
Total operating expenses 64.8 64.2 59.4 47.6
----- ----- ----- -----
Income from operations 14.8 16.6 17.7 2.5
Other income, net 3.1 4.1 3.5 27.3
----- ----- ----- -----
Income before income taxes 17.9 20.7 21.2 29.8
Provision for income taxes 5.4 3.0 7.4 7.5
----- ----- ----- -----
Income from continuing operations 12.5 17.7 13.8 22.3
Gain (Loss) on discontinued operations 5.2 - - (14.4)
----- ----- ----- -----
Net income 17.7 % 17.7 % 13.8 % 7.9 %
----- ----- ----- -----
----- ----- ----- -----
* The Company sold its Publishing and Printer Software Divisions in fiscal
1994. The Publishing Division accounted for 53% of fiscal 1994 revenue.
The Printer Software Division was classified as discontinued operations.
The pro forma results exclude the charge for other operating expenses,
reflect the elimination of Publishing revenue and direct expenses,
treats its sale as if it had occurred at the beginning of fiscal 1994,
and exclude the loss from discontinued operations.
8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's primary business is to provide system level software and
engineering services to original equipment manufacturers ("OEMs") and
integrators of personal computers ("PCs") and information appliances (special
purpose computers). The Company sold its Publishing and Printer Software
Divisions in fiscal 1994, which marketed technical publishing software and
documentation to OEMs and system software for laser printers, respectively.
The Company discontinued marketing software products through the retail
channel in fiscal 1995.
In August 1996, the Company acquired Virtual Chips, Inc. in
exchange for 1,241,842 shares of newly issued common stock. The transaction
was accounted for as a pooling of interests and financial information for the
quarters in fiscal 1996 has been restated to reflect Virtual Chips' results
of operations. The financial statements for the fiscal 1995 and 1994 have not
been restated as the results of operations of Virtual Chips were not material
in relation to those of the Company. Shares used in the computation of net
income per share have been restated for all periods presented to give effect
to the shares issued and options assumed by the Company in the transaction.
Virtual Chips is a leading supplier of synthesizable cores for the computer
industry. Synthesizable cores are pre-packaged circuit descriptions used as
building blocks for system level application specific integrated circuits
(ASICs). ASICs are used in computers and peripheral devices to connect them
using PCI, USB and other emerging industry standard protocols.
REVENUE. Revenue increased $22.2 million (44%) to $72.1 million in fiscal
1996 from $49.9 million in fiscal 1995. The increase resulted primarily from
an increase in royalty revenue from the Company's expanding customer base as
well as additional revenue from existing customers. Revenue increased in all
geographic areas. Revenue decreased $36.2 million (42%) to $49.9 million in
fiscal 1995 from $86.2 million in fiscal 1994. This decrease in revenue is
primarily due to the sale of the Company's Publishing Division in fiscal
1994. In fiscal 1996, one customer accounted for 10% of revenues. No
customers accounted for 10% or more of revenue in fiscal 1995. In fiscal
1994, one customer accounted for 19% of revenue and another customer
accounted for 14%. Software revenue increased 44% from fiscal 1995 to fiscal
1996 and 24% from fiscal 1995 to fiscal 1994.
GROSS MARGIN. Gross margin as a percent of revenue was 80%, 81% and 50% for
fiscal 1996, 1995 and 1994, respectively. The gross margin for fiscal 1994,
excluding the Publishing Division sold during the year, was 77%. License fee
gross margin was 88%, 92% and 88% for fiscal 1996, 1995 and 1994,
respectively. The decrease from fiscal 1995 to fiscal 1996 is primarily due
to increases in royalty expense and amortization of capitalized computer
software costs. Service gross margin was 25%, 8% and 7% in fiscal 1996, 1995
and 1994, respectively. The increase in service gross margin is attributable
to productivity improvements in service engineering.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$20.6 million, $11 million and $6.9 million in fiscal 1996, 1995 and 1994,
respectively. The increases in research and development expenses are
primarily due to the hiring of additional engineers devoted to the
development of system level software. The increase as a percent of revenue in
fiscal 1996 is primarily due to the creation of a new product line to develop
and market software to connect computers and peripheral devices and the
acquisition of Virtual Chips, Inc.
The Company capitalized approximately $2.1 million, $1.3
million and $2.5 million of internally developed software costs in fiscal
1996, 1995 and 1994, respectively. These amounts were offset by
9
amortization of capitalized software costs of $3.2 million, $1.2 million and
$0.8 million in fiscal 1996, 1995 and 1994, respectively. The Company
believes that continued investment in new and evolving technologies is
essential to meet rapidly changing industry requirements.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $15.5
million, $14.4 million, and $16.6 million in fiscal 1996, 1995 and 1994,
respectively. The increase in fiscal 1996 was primarily due to an increase in
headcount in sales and marketing as well as an increase in commission expense
associated with an increase in revenues. The decrease in fiscal 1995 and the
decrease as a percent of revenue in fiscal 1996 resulted primarily from the
discontinuance of advertising expenses related to products marketed through
the retail channel. The Company discontinued retail distribution in the
second half of fiscal 1995. As a percent of revenue, sales and marketing
expenses were 22%, 29% and 19% in fiscal 1996, 1995 and 1994, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9.7 million, $6.7 million and $8.5 million in fiscal 1996, 1995 and
1994, respectively. The increase in fiscal 1996 resulted primarily from
increased salaries and related benefits associated with headcount growth and
increased recruiting and relocation costs. The decrease in fiscal 1995 from
1994 was due to the employment of fewer people and the use of less outside
consulting or professional services as a result of imporved internal
operating efficiency over the previous year. As a percent of revenue,
general and administrative expenses were 13%, 13% and 10% in fiscal 1996,
1995 and 1994, respectively.
OTHER OPERATING EXPENSES. Other operating expenses were $0.9 million and
$9.1 million in fiscal 1996 and 1994. Other operating expenses in fiscal
1996 include the costs associated with the acquisition of Virtual Chips, Inc.
in August 1996.
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 1996
and 1995, $525,000 and $876,000 of the accrual was paid, respectively.
INTEREST INCOME. Net interest income was $2.2 million, $1.7 million and $0.2
million in fiscal 1996, 1995 and 1994, respectively. The increase in
interest income over the years is primarily due to the increase in cash
available for investment in the respective periods.
DISCONTINUED OPERATIONS. In September 1996, the Company sold 500,000 shares
of common stock of Xionics Document Technologies, Inc.'s ("Xionics") in its
initial public offering. In addition, the Company received payment on a
promissory note. The gain on the repayment of the note and sale of the stock
in the amount of $6.5 million was recorded as a gain from discontinued
operations, net of income taxes, to the extent such amounts were previously
written off in fiscal 1994 by a charge to discontinued operations. The
remaining amount of $294,000, which represents investment gains, was
recorded in continuing operations as other income on the Company's income
statement. At September 30, 1996, the Company held 1,455,381 shares of
Xionics stock at a market value of $15 per share. In October 1996, the
underwriters of the offering exercised their option to purchase additional
shares, which included 75,000 shares from Phoenix. Following these sales,
Phoenix owned 1,380,381 shares, or approximately 13% of the outstanding
Xionics common stock.
PROVISION FOR INCOME TAXES. The Company recorded income tax provisions of
$3.9 million, $1.5 million and $6.4 million in fiscal 1996, 1995 and 1994,
respectively. The Company's effective tax rate was 30%, 14% and 25% in
fiscal 1996, 1995 and 1994, respectively. The higher tax rate in fiscal 1996
is due to the increase in nondeductible expenses and a decrease in the tax
benefit from losses in the prior years. The Company's effective tax rate has
been lower than the statutory rate primarily due to available net operating
losses carried forward and various tax credits. The provision for fiscal
1995 includes an income tax benefit in the fourth quarter of $1.3 million
resulting from a decision to reduce the Company's valuation allowance related
to its deferred tax assets
10
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.
QUARTERLY RESULTS OF OPERATIONS
The tables in Part II, Item 6 of this Form 10-K include selected unaudited
quarterly consolidated results of operations for fiscal 1996 and 1995. This
information was derived from the Company's unaudited consolidated financial
statements that, in the opinion of management, reflect all recurring
adjustments necessary to fairly present this information, when read in
conjunction with the Company's Consolidated Financial Statements. The
results of operations for any quarter are not necessarily indicative of the
results to be expected for any future quarter.
Phoenix's future operating results may vary substantially from
period to period. The timing and amount of its license fees are subject to a
number of factors that make estimating revenues and operating results prior
to the end of a quarter uncertain. While Phoenix receives recurring revenue
on royalty-based license agreements and some agreements contain minimum
quarterly royalty commitments, a significant amount of license fees in any
quarter is dependent on signing agreements and delivering the licensed
software in that quarter. Generally, Phoenix has experienced a pattern of
recording 50% of its quarterly revenues in the third month of the quarter.
Phoenix has historically monitored its revenue bookings through regular,
periodic worldwide forecast reviews during the quarter. However, while these
reviews keep management informed of areas where additional selling effort may
be needed in order to meet the internal plans and market expectations, there
can be no assurances that this process will result in revenue expectations
being met. Operating expenses for any year are normally based on the
attainment of planned revenue levels for that year and are incurred ratably
throughout the period. As a result, if revenues are less than planned in any
quarter while expense levels remain relatively fixed, Phoenix's operating
results would be adversely affected for that quarter. In addition, the
incurring of unplanned expenses could adversely affect operating results for
the period in which such expenses were incurred.
BUSINESS RISKS
The additional following factors should be considered carefully when
evaluating Phoenix and its business.
UNCERTAINTIES RELATING TO THE INTEGRATION OF VIRTUAL CHIPS. Phoenix and
Virtual Chips entered into the acquisition agreement with the expectation
that the merger will result in beneficial synergies for the combined
companies. Achieving the anticipated benefits of the merger will depend in
part upon whether the integration of the two companies' businesses is
achieved in an efficient and effective manner and there can be no assurance
that this will occur. Virtual Chips' products address new and emerging
technologies and its customer base includes peripheral device manufacturers
which have not been among Phoenix's traditional customers. The combination
of the two companies will require, among other things, the integration of the
two companies' sales forces. There can be no assurance that such integration
will be accomplished smoothly, on time, or successfully. Phoenix's operating
results could be adversely affected if Phoenix does not adequately train its
sales force to sell the products based on these new technologies into this
new market.
PRODUCT DEVELOPMENT. Phoenix's long-term success will depend on its ability
to enhance its existing products and to introduce new products on a timely
and cost-effective basis that meet the needs of its current customers in
their present markets and of current and future customers in new and emerging
markets. There can be no assurance that Phoenix will be successful in
developing new products or in enhancing existing products or that new or
enhanced products will meet market requirements. Phoenix has from time to
time experienced delays in introducing new products which could adversely
impact acceptance and revenue generated from the sale of such products.
Finally, Phoenix's software products and their enhancements contain complex
code which may contain undetected errors or bugs when first introduced,
despite testing. There can be no assurance that new products or enhancements
will not contain errors or bugs that will adversely affect commercial
acceptance of such products or enhancements.
11
PROTECTION OF INTELLECTUAL PROPERTY. Phoenix relies on a combination of
trade secret, copyright, trademark laws and contractual provisions to protect
its proprietary rights in its software products. There can be no assurance
that these protections will be adequate or that competitors will not
independently develop technologies that are substantially equivalent or
superior to Phoenix's technology. In addition, copyright and trade secret
protection for Phoenix's products may be unavailable or unreliable in certain
foreign countries. The Company has been issued one patent with respect to
its current product offerings and has a number of patent applications pending
with respect to certain of the products it markets. Phoenix maintains an
active internal program designed to identify internally developed inventions
worthy of being patented. There can be no assurance that any of the
applications pending will be approved and patents issued or that Phoenix's
engineers will be able to develop technologies capable of being patented. As
the number of software patents increases, Phoenix believes that software
developers may become increasingly subject to infringement claims. There can
be no assurance that a third party will not assert that its patents or other
proprietary rights are violated by products offered by Phoenix. Any such
claims, whether or not meritorious, can be time consuming and expensive to
defend, and could have an adverse effect on Phoenix's business, results of
operations and financial condition. Infringement of valid patents or
copyrights or misappropriation of valid trade secrets could also have an
adverse effect on Phoenix's business, results of operations and financial
condition.
DEPENDENCE ON THIRD-PARTY PROVIDERS OF TECHNOLOGY. Phoenix's products use
certain products and technologies of various third party software developers,
including both complete products offered as extensions of Phoenix's product
lines and technology used in the enhancement of internally developed
products. In addition, Phoenix recently announced that it had become the
exclusive distributor to OEMs of First Aid, a diagnostic and repair utility
from CyberMedia, Inc. for PCs and PC software. These products are licensed
under contractual agreements, which in some cases are for limited time
periods and in some cases provide for termination under certain
circumstances. There can be no assurance that the technology plans and
directions for the third party products will remain compatible with Phoenix's
needs, that these third-party providers will commit adequate development
resources to maintain or enhance these products and technologies, or that the
license agreements with limited duration will be renewed upon expiration. In
such circumstances, Phoenix may not be able to obtain or develop substitute
products or technology, which could adversely affect Phoenix's business,
results of operation and financial condition.
IMPORTANCE OF MICROSOFT AND INTEL. For a number of years, Phoenix has worked
closely with Microsoft Corporation and Intel Corporation in developing
standards for the PC Industry. In addition, Phoenix has been a supplier of
its system-level software technology to Intel and in December 1995 the two
companies entered into a significant, long-term technology agreement pursuant
to which Phoenix licensed its desktop and server BIOS products for Intel to
include with its motherboard products. Phoenix presently expects its ongoing
relationships with these two industry leaders to remain good. There can,
however, be no assurance that either Microsoft or Intel will not develop
alternative product strategies which could conflict with Phoenix's product
plans and marketing strategies and, accordingly, adversely impact Phoenix's
business and results of operations. Presently, there is little overlap or
conflict in Phoenix's product offerings and strategies and those of Intel.
Windows NT and Windows CE, Microsoft's newer operating systems, incorporate
some functionality that has traditionally resided in the BIOS. However, PCs
which support multiple operating systems still require this support in the
BIOS. To provide products to OEMs which are manufacturing systems using only
these newer Microsoft operating systems, Phoenix must migrate its
intellectual property from the BIOS to the lower levels of these operating
systems. There can be no assurances that Phoenix will be successful in these
efforts.
RETENTION OF KEY PERSONNEL. Phoenix believes it employs more BIOS engineers
than any other company in the PC industry. Virtual Chips' products are based
on new and emerging technologies which are different than BIOS technologies.
Phoenix's ability to achieve its revenue and operating performance objectives
will depend in large part on its ability to attract and retain technically
qualified engineers. The available pool of engineering talent is
12
limited for both operations. Accordingly, failure to retain and grow its
research and development teams could adversely affect Phoenix's business and
operating results.
COMPETITION. The market for Phoenix's products is extremely competitive.
Phoenix competes primarily with three other independent suppliers with
respect to its system-level software products: American Megatrends, Inc.,
Award Software International Inc. and SystemSoft Corporation. It also
competes for BIOS business with in-house research and development departments
of PC manufacturers that have significantly greater financial and technical
resources than those of Phoenix. These companies include Compaq Computer
Corporation, International Business Machines Corporation, Dell Computer
Corporation and Toshiba Corporation. In the synthesizable core business
begun with the acquisition of Virtual Chips, Phoenix competes with businesses
such as Mentor Graphics Corporation, Synposys Corporation and Cadence Systems
who have resources far greater than those of Phoenix and with other companies
such as Sand Microsystems and CAE Technology. There can be no assurance that
Phoenix will continue to compete successfully with its current competitors or
that it will be able to compete successfully with new competitors.
INTERNATIONAL SALES AND ACTIVITIES. Revenue derived from Phoenix's
international operations comprises a majority of total revenues. There can
be no assurances that Phoenix will not experience significant fluctuations in
international revenues. While virtually all of Phoenix's license fee or
royalty contracts are U.S dollar denominated, Phoenix is considering
permitting its overseas offices to invoice in local currencies. Phoenix has
sales and engineering offices in England, France, Japan and Taiwan and uses a
Madras, India software engineering firm for assistance in the synthesizable
core business. Phoenix's operations and financial results could be adversely
affected by factors associated with international operations such as changes
in foreign currency exchange rates, uncertainties relative to regional
economic circumstances, political instability in emerging markets, and
difficulties in staffing and managing foreign operations, as well as by other
risks associated with international activities.
VOLATILE MARKET FOR PHOENIX STOCK. The market for Phoenix's stock is highly
volatile. The trading price of Phoenix common stock has been and will
continue to be subject to fluctuations in response to operating and financial
results, announcements of technological innovations, new products of customer
contracts by Phoenix and its competitors, changes in Phoenix's or its
competitors' product mix or product direction, changes in Phoenix's revenue
mix and revenue growth rates, changes in expectations of growth for the PC
industry, as well as other events or factors which Phoenix may not be able to
influence or control. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms and industry analysts relating to the
market in which Phoenix does business, companies with which Phoenix competes
or relating to Phoenix specifically could have an immediate and adverse
effect on the market price of Phoenix's stock. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations that
have particularly affected the market price for many high-technology
companies and that often have been unrelated to the operating performance of
these companies.
CERTAIN ANTI-TAKEOVER EFFECTS. Phoenix's Certificate of Incorporation,
Bylaws and Stockholder Rights Plan and the Delaware General Corporation Law
include provisions that may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that stockholders might consider
in their best interests. These include provisions under which members of the
Board of Directors are divided into three classes and are elected to serve
staggered three year terms. The Stockholder Rights Plan permits holders of
Phoenix common stock to purchase shares of Series A Junior participating
preferred stock in the event of the acquisition by a third party of 20% or
more of Phoenix's outstanding common stock or if a third party announces its
tender offer for at least 30% of Phoenix's outstanding common stock. If
Phoenix is acquired in a merger or other business combination, each right
will entitle its holder to purchase a number of shares of Phoenix common
stock which equals the exercise price of the right divided by one-half of the
then current market price of Phoenix common stock. In addition, in
connection with the February 1996 sale of shares representing 6% of the
outstanding Phoenix common stock and of a warrant to purchase an additional
7%, Phoenix granted Intel Corporation certain rights in the event of
solicited or unsolicited offers to acquire Phoenix.
13
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1996, the Company's
primary sources of liquidity included cash, cash equivalents and short-term
investments of $57 million and available borrowings under a bank credit
facility of $10 million. There were no borrowings outstanding under the bank
credit facility at September 30, 1996. The Company believes that its
existing sources of liquidity will be sufficient to satisfy the Company's
cash requirements for at least the next twelve months.
CHANGES IN FINANCIAL CONDITION. Net cash generated from operating activities
during fiscal 1996 was $11 million, resulting primarily from cash provided by
net income, adjusted for non-cash items. Net cash used in investing
activities was $24.4 million which consisted primarily of purchases of
short-term investments of $45.4 million, purchases of property and equipment
of $4.3 million, and additions to computer software costs of $2.7 million for
use in the Company's operations and was partially offset by maturities of
short-term investments of $21.3 million and proceeds from sale of marketable
securities of $6.8 million. Cash generated from financing activities during
fiscal 1996 was $13.3 million resulting from the issuance of common stock and
a warrant to Intel Corporation for $10.4 million, issuance of convertible
debt securities of $0.7 million and the exercise of common stock options and
issuance of stock under the Company's employee stock purchase plan of $4.2
million, partially offset by $2 million of purchases of treasury stock.
14
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, 1996 and 1995.
Consolidated Statements of Income for the years ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Independent Auditor's Report.
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 1997
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 50 President and Chief Executive Officer
Robert J. Riopel 55 Vice President, Finance,
Chief Financial Officer and Treasurer
Gayn B. Winters 54 Vice President, Engineering and
Chief Technology Officer
David A. Everett 54 Vice President, Worldwide Field Operations
Craig Slayter Vice President and General Manager, Special
Products Division
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, he 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.
15
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.
Mr. Slayter has been employed in various management positions
since he joined the Company in July 1987. Mr. Slayter served as General
Manager, Asia-Pacific Division, from April 1988 through September 1994. He
was promoted to Vice President, Asia Pacific Operations in October 1994.
Since April 1996, Mr. Slayter has been employed as the Vice President and
General Manager of the Special Products Division.
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
Forms 5 for fiscal 1996 for directors Charles Federman, Lawrence G. Finch and
Anthony P. Morris were filed 36 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,
1996 and 1995.
Consolidated Statements of Income for the years
ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the
years ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
Selected Quarterly Financial Data.
Report of Independent Accountants.
16
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
are not applicable or the information is included in the financial statements
or notes thereto. The financial statements and financial statement schedules
follow the signature page hereto.
3. EXHIBITS
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-21793 (the "Form S-1"))
3.2 By-laws of the Registrant as amended through February 6,
1995 (incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8,
Registration No. 333-03065 (the "1996 ESPP S-8"))
3.3 Certificate of Correction to the Registrant's Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.3 to Amendment No. 2 to the Form
S-1 ("Amendment No. 2"))
3.4 Certificate of Amendment to the Registrant's Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.4 to Amendment No. 2)
3.5 Certificate of Correction to the Registrant's Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 1988 (the "1988 Form 10-K"))
3.6 Certificate of Ownership (incorporated herein by
reference to Exhibit 3.6 to the 1988 Form 10-K)
3.7 Certificate of Correction to the Registrant's Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.7 to the 1988 Form 10-K)
3.8 Rights Agreement dated as of October 31, 1989 between the
Registrant and The First National Bank of Boston
(incorporated herein by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated October 31,
1989 (the "1989 8-K"))
3.9 Certificate of Designations of the Registrant's Series A
Junior Participating Preferred Stock (incorporated herein
by reference to Exhibit 4.1 to the 1989 8-K)
3.10 Certificate of Amendment of Restated Certificate of
Incorporation filed with the Delaware Secretary of State
on April 18, 1996 (incorporated by reference to Exhibit
4.11 to the 1996 ESPP S-8).
3.11 Certificate of Increase of Shares Designated as Series A
Junior Participating Preferred Stock filed with the
Delaware Secretary of State on April 18, 1996
(incoporated by reference to Exhibit 4.12 to the 1996
ESPP S-8).
4.1 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.
17
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.
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 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 1994 Equity Incentive Plan, as amended through February
28, 1996 -filed as Exhibit 10.17 to the Company's Report
on Form 10-K for the fiscal year ended September 30, 1995
(the "1995 10-K") and incorporated herein by this
reference.
10.16 Amended and Restated Employee Stock Purchase Plan, as
amended by through February 28, 1996 - filed as Exhibit
4.10 to the 1996 ESPP S-8 and incorporated herein by this
reference.
10.17 Employment offer letter between the Company and Gayn B.
Winters -filed as Exhibit 10.19 to the 1995 10-K and
incorporated herein by this reference.
10.18 Loan Modification Agreement dated January 25, 1995 to the
Line of Credit Agreement dated November 25, 1991 between
Silicon Valley Bank and the Company - filed as Exhibit
10.20 to the 1995 10-K and incorporated herein by this
reference.
10.19 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 - filed as Exhibit 10.21 to
the 1995 10-K and incorporated herein by this reference.
10.20 Amendment dated as of June 30, 1995 to the Line of Credit
Agreement dated November 25, 1991 between Silicon Valley
Bank and the Company - filed as Exhibit 10.22 to the 1995
10-K and incorporated herein by this reference.
18
10.21 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 - filed as Exhibit
10.23 to the 1995 10-K and incorporated herein by this
reference.
10.22 Agreement dated December 18, 1995 between Intel
Corporation and the Company filed as Exhibit 10.24 to the
Company's Report on Form 10-Q for the quarter ended
December 31, 1995 as amended by a Form 10-Q/A-1 (the
"December 1995 10-Q") and incorporated herein by this
reference. Portions have been omitted and filed
separately with the Commission pursuant to a request for
confidential treatment.
10.23 Common Stock and Warrant Purchase Agreement dated as of
December 18, 1995 by and between the Company and Intel
Corporation - filed as Exhibit 10.25 to the December 1995
10-Q and incorporated herein by this reference.
10.24 Warrant to Purchase Shares of Common Stock of the Company
dated February 15, 1996 - filed as Exhibit 2 to the
Schedule 13D of Intel Corporation dated February 23, 1996
with respect to the purchase by Intel of shares of the
Company's common stock and of a warrant to purchase
shares of the Company's common stock (the "Intel Schedule
13D") and incorporated herein by this reference
10.25 Investor Rights Agreement, dated December 18, 1995,
between the Company and Intel Corporation - filed as
Exhibit 3.2 to the Intel Schedule 13D and incorporated
herein by this reference.
10.26 Standard Industrial Lease - Full Net between The
Equitable Life Assurance Society of the United States as
Landlord and Phoenix Technologies Ltd. as Tenant dated as
of May 15, 1996 for that certain property located at 411
E. Plumeria Drive, San Jose, California - filed as Exhibit
10.20 to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by
this reference.
10.27 Loan Agreement dated as of February 29, 1996 by and
between Silicon Valley Bank and Phoenix Technologies Ltd.
10.28 Industrial Lease (Single Tenant; Net) dated as of October
1, 1996 by and between The Irvine Company and Phoenix
Technologies Ltd. For that certain property located at
135 Technology Drive, Irvine, California.
11.1 Statement re computation of earnings per share (primary
earnings per share).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors (Ernst & Young LLP).
23.2 Consent of Independent Accountants (Coopers & Lybrand
LLP).
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 1996.
(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, 1996
19
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 30, 1996
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 Principal Finance and Accounting
Officer Officer
Date: December 30, 1996 Date: December 30, 1996
/s/ Lawrence G. Finch
- ---------------------------------- -------------------------------------
Charles Federman Lawrence G. Finch
Director Director
Date: December , 1996 Date: December 30, 1996
/s/ Ronald D. Fisher /s/ Lance E. Hansche
- ---------------------------------- -------------------------------------
Ronald D. Fisher Lance E. Hansche
Director Director
Date: December 30, 1996 Date: December 30, 1996
/s/ Anthony P. Morris
- ----------------------------------
Anthony P. Morris
Director
Date: December 30, 1996
20
PHOENIX TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
----------------------------------
Revenue:
License fees $ 62,497 $ 43,448 $ 34,913
Services 9,639 6,493 5,676
Publishing - - 45,584
--------- --------- ---------
Total revenue 72,136 49,941 86,173
Cost of revenue:
License fees 7,482 3,633 4,053
Services 7,260 5,949 5,270
Publishing - - 33,698
--------- --------- ---------
Total cost of revenue 14,742 9,582 43,021
--------- --------- ---------
Gross margin 57,394 40,359 43,152
Operating expenses:
Research and development 20,628 11,038 6,887
Sales and marketing 15,522 14,355 16,585
General and administrative 9,679 6,696 8,460
Other operating expenses 889 - 9,095
--------- --------- ---------
Total operating expenses 46,718 32,089 41,027
--------- --------- ---------
Income from operations 10,676 8,270 2,125
Gain on sale of Publishing Division - - 23,538
Interest income, net 2,177 1,725 213
Other income (expense), net 73 303 (226)
--------- --------- ---------
Income before income taxes 12,926 10,298 25,650
Provision for income taxes 3,879 1,483 6,420
--------- --------- ---------
Income from continuing operations 9,047 8,815 19,230
Discontinued operations:
Loss from discontinued operations
(after income tax benefit of $1,199) - - (1,792)
Gain (loss) from disposal
(after income taxes of $2,300 in 1996
and benefit of $425 in 1994) 3,752 - (10,644)
--------- --------- ---------
Net Income $ 12,799 $ 8,815 $ 6,794
--------- --------- ---------
--------- --------- ---------
Income (loss) per share:
Income from continuing operations $ 0.52 $ 0.56 $ 1.32
Income (loss) from discontinued operations 0.21 - (0.85)
--------- --------- ---------
Net income per share $ 0.73 $ 0.56 $ 0.47
--------- --------- ---------
--------- --------- ---------
Shares used in per share computations 17,456 15,763 14,567
--------- --------- ---------
--------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
PHOENIX TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,752 $ 25,797
Short-term investments 31,287 7,147
Accounts receivable, net of allowances of
$467 in 1996 and $430 in 1995 16,225 12,064
Deferred income taxes 2,719 1,105
Other current assets 2,809 2,585
--------- ---------
Total current assets 78,792 48,698
Other marketable securities 21,831 -
Property and equipment, net 5,099 2,625
Computer software costs, net 3,694 3,823
Deferred income taxes - 2,195
Other assets 4,133 5,049
--------- ---------
Total assets $ 113,549 $ 62,390
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,589 $ 1,645
Payroll and related liabilities 3,279 2,536
Accrued license fees and royalties 1,299 889
Other accrued liabilities 2,702 2,721
Income taxes payable 3,955 2,765
Relocation accrual 97 622
Discontinued operations 1,335 724
--------- ---------
Total current liabilities 15,256 11,902
Deferred income taxes 8,561 -
Other liabilities 155 70
Commitments - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 40,000 shares
authorized, 16,636 and 13,928 shares issued
and outstanding at September 30, 1996 and
1995 17 14
Additional paid-in capital 68,509 53,710
Retained earnings (accumulated deficit) 8,113 (3,232)
Unrealized gain on available-for-sale
securities 13,098 -
Accumulated translation adjustment (160) (74)
--------- ---------
Total stockholders' equity 89,577 50,418
--------- ---------
Total liabilities and stockholders'
equity $ 113,549 $ 62,390
--------- ---------
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
PHOENIX TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------ ----------------------------------
Cash flow from operating activities:
Net income $ 12,799 $ 8,815 $ 6,794
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation and amortization 5,051 3,050 5,401
Provision for relocation (525) (876) 2,318
Gain on recovery of assets previously
written off (6,051) - -
Realized gain on sale of marketable securities (294) - -
Compensation costs related to stock issuance 49 - -
Gain on sale of Publishing Division - - (23,538)
Equity investment 170 (170) -
Provision for loss on discontinued operations - - 10,006
Write-off of prepaid royalties and
capitalized software - - 6,777
Deferred income taxes 410 (1,300) -
Change in operating assets and liabilities,
net of effects of acquisitions and divestures:
Accounts receivable (4,305) 4,020 (6,024)
Other current assets and other assets (53) (351) (2,310)
Accounts payable 955 (1,798) -
Payroll and related liabilities 788 74 2,142
Other accrued liabilities 147 (2,494) (152)
Income taxes payable 1,234 (1,335) 2,991
Discontinued operations 611 (4,479) (223)
--------- -------- --------
Total adjustments (1,813) (5,659) (2,612)
--------- -------- --------
Net cash provided by operations 10,986 3,156 4,182
Cash flows from investing activities:
Proceeds from sale of Publishing Division - - 30,000
Maturity of short-term investments 21,261 23,086 1,000
Purchases of short-term investments (45,401) (25,863) (4,370)
Proceeds from recovery on assets previously
written off 6,774 - -
Purchases of property and equipment (4,328) (1,596) (1,787)
Investments and acquisitions, net of cash acquired - - (1,467)
Additions to computer software costs (2,680) (1,674) (5,306)
Other investing activities (32) - (838)
--------- -------- --------
Net cash provided by (used in) investing activities (24,406) (6,047) 17,232
Cash flows from financing activities:
Proceeds from issuance of common stock and
warrant 10,442 - -
Proceeds from issuance of convertible debt
securities 706 - -
Proceeds from stock purchases under stock option
and stock purchase plans, net 4,188 3,317 1,171
Purchase of treasury stock (2,005) (2,980) -
Repayment of short-term borrowings - (1,241) (188)
--------- -------- --------
Net cash provided by (used in) financing activities 13,331 (904) 983
--------- -------- --------
Esffect of exchange rate changes on cash and cash
equivalents 44 73 -
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (45) (3,722) 22,397
Cash and cash equivalents at beginning of fiscal year 25,797 29,519 7,122
--------- -------- --------
Cash and cash equivalents at end of fiscal year $ 25,752 $ 25,797 $ 29,519
--------- -------- --------
--------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
PHOENIX TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1996
UNREALIZED
RETAINED GAIN ON
ADDITIONAL EARNINGS AVAILABLE- ACCUMULATED TOTAL
COMMON STOCK PAID-IN (ACCUMULATED FOR-SALE TRANSLATION STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT CAPTIAL DEFICIT) SECURITIES ADJUSTMENT EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993 12,273 $ 13 $ 48,105 $ (16,637) $ - $ - $ 31,481
Stock purchases under stock
option and stock purchase plans 424 - 1,171 - - - 1,171
Net income - - - 6,794 - - 6,794
-------- ------ --------- --------- ------ -------- ----------
Balance, September 30, 1994 12,697 13 49,276 (9,843) - - 39,446
Stock purchases under stock
option and stock purchase plans 892 1 3,317 - - - 3,318
Tax benefit on exercise of stock
options - - 1,893 - - - 1,893
Cancellation of treasury shares (30) - 350 (350) - - -
Repurchases of common stock 369 - (1,126) (1,854) - - (2,980)
Net income - - - 8,815 - - 8,815
Accumulated translation adjustment - - - - - (74) (74)
-------- ------ --------- --------- ------ -------- ----------
Balance, September 30, 1995 13,928 14 53,710 (3,232) - (74) 50,418
Effect of pooling of interests 658 1 6 (39) - - (32)
Conversion of notes receivable 206 - 706 - - - 706
Deferred compensation, net - - 49 - - - 49
Sale of common stock and warrant,
net of costs 961 1 10,441 - - - 10,442
Stock purchases under stock
option and stock purchase plans 1,035 1 3,651 - - - 3,652
Tax benefit on exercise of stock
options - - 536 - - - 536
Repurchases of common stock (152) - (590) (1,415) - - (2,005)
Unrealized gain on available for
sale securities - - - - 13,098 - 13,098
Net income - - - 12,799 - - 12,799
Accumulated translation adjustment - - - - - (86) (86)
-------- ------ --------- --------- ------ -------- ----------
Balance, September 30, 1996 16,636 $ 17 $ 68,509 $ 8,113 $13,098 $ (160) $ 89,577
-------- ------ --------- --------- ------ -------- ----------
-------- ------ --------- --------- ------ -------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
PHOENIX TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
1. DESCRIPTION OF OPERATIONS
Phoenix designs, develops, markets and supports standards-based system
software and application software for personal computers and other
microprocessor-based products. The Company sells to original equipment
manufacturers ("OEMs") and integrators of personal computers ("PCs"),
information appliances and peripheral devices. Phoenix provides training,
consulting, maintenance and engineering services to its customers. The
Company operates seven development and support centers in four countries.
Most sales are made through the Company's direct sales force, but sales
through technically certified distributors is increasing as a percent of
revenue. The Company's Publishing Division sold technical publishing
software and documentation and its Printer Software Division sold system
software for laser printers until the sales of those divisions in fiscal
1994. The Company also marketed software through a retail channel until
fiscal 1995.
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 1996 presentation.
USE OF ESTIMATES. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Such estimates include the allowance for doubtful accounts,
sales returns and customer credits, net realizable value of capitalized
computer software costs, and the valuation allowance on deferred tax assets.
REVENUE RECOGNITION. The Company's revenue is derived from license fees and
engineering services sold primarily to OEMs. License fees for system
software are recorded as revenue when the products have been delivered to the
OEMs and no significant vendor obligations remain. The costs of
insignificant support obligations are accrued. 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 or minimum 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 on a time and
materials basis or when contractual milestones are met. Maintenance revenues
are recognizable ratably over the contract period.
Allowances for estimated returns and customer credits are recorded in
the same period as the related revenues.
In fiscal 1996, one customer accounted for 10% of revenues. No
customers accounted for 10% or more of revenues in fiscal 1995. In fiscal
1994, one customer accounted for 19% of revenues and another customer
accounted for 14%.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity of
less than three months are considered cash equivalents.
SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES. The Company adopted
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," in
fiscal 1995. SFAS 115 requires investment securities to be classified as
trading, available for sale or held to maturity. Management determines the
appropriate classification of each security at the purchase date.
Short-term investment securities consist of U.S. government and agency
obligations, bankers' acceptances and commercial paper with original
maturities generally ranging from three months to one year. Short-term
investments are classified as held-to-maturity as the Company has the intent
and the ability to hold them until maturity. Such investments are recorded
at amortized cost under SFAS 115. At September 30, 1996
26
and 1995, the fair value of such short-term investments approximated
amortized cost and gross unrealized holding gains and losses were not
material.
Other marketable securities consist of the shares of Xionics Document
Technologies, Inc. ("Xionics") (NASDAQ:XION) owned by the Company and
classified as available-for-sale. In accordance with SFAS 115, the shares
of Xionics common stock are recorded at fair value based on quoted market
prices. The unrealized gain on this investment, less deferred income taxes
has been recorded as a separate component of stockholders' equity. The
market value, deferred taxes and unrealized gain will be adjusted to the
current market value each period.
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 the related credit
risk is limited due to the Company's large number of customers and their
geographic dispersion. One customer accounted for 12% and another customer
accounted for 11% of accounts receivable at September 30, 1996 and one other
customer accounted for 11% of accounts receivable at September 30, 1995.
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 recorded at cost
and amortized over the lesser of their useful lives or the remaining term of
the related lease.
COMPUTER SOFTWARE COSTS. Computer software costs consist of internally developed
and purchased software. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed as incurred until technological feasibility has been established, at
which time, such costs are capitalized. Capitalized computer software costs are
amortized over the economic life of the product, generally three years, using
the straight-line method or a ratio of current revenues to total anticipated
revenues.
The Company evaluates the net realizable value and amortization periods
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 SFAS 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of enactment.
NET INCOME PER SHARE. Net income per share is computed using the weighted
average number of common and dilutive common stock equivalents outstanding.
Dilutive common equivalent shares consist of stock options and warrants and
are calculated using the treasury stock method. Fully diluted earnings per
share are not materially different from reported primary earnings per share.
STOCK BASED COMPENSATION. The Company intends to continue to account for its
stock option and employee stock purchase plans in accordance with the
provisions of APB Opinion Number 25, "Accounting for Stock Issued to
Employees" and will adopt the "disclosure only" alternative described in
SFAS 123, "Accounting for Stock-Based Compensation" in fiscal 1997.
CASH FLOW INFORMATION. Supplemental cash flow information is as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------
Supplemental disclosure of
cash flow information:
Interest paid during the year $ 39 $ 69 $ 79
27
Income taxes paid during
the year, net of refunds $2,905 $1,125 $ 181
Supplemental schedule of non-
cash activities
Conversion of debt securities
to common stock $ 706 $ - $ -
Tax benefit on stock options $ 536 $1,893 $ -
3. CASH AND INVESTMENTS
The short-term investments were as follows:
SEPTEMBER 30,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------
U.S. government and
agency obligations $ 30,290 $ 5,156
Bankers' acceptances 997 998
Commercial paper - 993
-------- --------
$ 31,287 $ 7,147
-------- --------
-------- --------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------
Equipment $ 10,618 $ 7,833
Furniture and fixtures 2,496 2,808
Leasehold improvements 1,365 1,258
-------- --------
14,479 11,899
Less accumulated depreciation
and amortization 9,380 9,274
-------- --------
$ 5,099 $ 2,625
-------- --------
-------- --------
Depreciation and amortization expense related to property and equipment
totaled $1,825,000, $1,278,000, and $1,860,000 for fiscal 1996, 1995 and
1994, respectively.
5. COMPUTER SOFTWARE COSTS
Computer software costs in the amounts of $2,680,000, $1,674,000 and
$2,933,000 were purchased or capitalized during fiscal 1996, 1995 and 1994,
respectively.
Amortization charged to cost of revenue in fiscal 1996, 1995 and 1994 was
$3,224,000, $1,244,000 and $825,000, respectively. Amortization charged to
discontinued operations for fiscal 1994 was $1,604,000. In addition, the
Company wrote off computer software costs of $6,777,000 in fiscal 1994 in
connection with a
28
terminated distribution agreement and charged net computer software costs of
$1,584,000 to the discontinued printer software operation. Accumulated
amortization of capitalized computer software costs at September 30, 1996 and
1995 totaled $2,356,000 and $1,128,000, respectively.
6. UNSECURED LINE OF CREDIT
At September 30, 1996, 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 line of credit
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. The line of credit expires in February 1997.
7. INCOME TAXES
The components of the provision for income taxes from continuing operations are
as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------
Current:
Federal $ 829 $ 294 $ 2,958
State 707 96 1,486
Foreign 4,213 1,093 2,081
Deferred:
Federal (1,462) - (87)
State (408) - (18)
------- ------- --------
Provision for income taxes $ 3,879 $ 1,483 $ 6,420
------- ------- --------
------- ------- --------
Reconciliation of the United States federal statutory rate to the Company's
effective tax rate is as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 4,524 $ 3,501 $ 8,721
State taxes, net of federal tax
tax benefit 195 66 969
Foreign taxes not previously
benefited - 659 1,411
Tax benefit of prior year losses (1,328) (2,784) (3,639)
Research and development
tax credits (269) - (1,116)
Nondeductible merger costs 311 - -
Other nondeductible expenses 446 41 74
-----------------------------------
Provision for income taxes $ 3,879 $ 1,483 $ 6,420
-----------------------------------
-----------------------------------
The components of net deferred tax assets and liabilities are as follows:
SEPTEMBER 30,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------
Deferred tax assets:
Foreign tax credits $ 1,308 $ 2,735
Research and development
tax credits 1,325 1,009
Minimum tax carryforward 864 566
Reserves and accruals 795 1,617
Depreciation 1,516 1,223
29
Net operating loss carryforward - 814
Other 1,611 -
-------- -------
Total 7,419 7,964
Less valuation allowance 3,185 3,185
-------- -------
Net deferred tax assets 4,234 4,779
Deferred tax liabilities:
Capitalized software, net 1,343 1,479
Unrealized gain on available-
for-sale securities 8,733 -
-------- -------
Total deferred tax liabilities 10,076 1,479
-------- -------
Net deferred tax assets
(liabilities) $ (5,842) $ 3,300
-------- -------
-------- -------
Due to the uncertainty surrounding the timing of the realization of the
benefit of its tax attributes in future tax returns, the Company has recorded
a valuation allowance against otherwise recognizable net deferred tax assets.
At September 30, 1996, the Company had available for federal income tax
purposes foreign tax credits of $801,000, which expire in 2000 and 2001 and
research and development tax credits of $1,325,000, which expire in the years
2001 through 2011.
8. COMMITMENTS
The Company leases office facilities under operating leases. Total rent
expense was $2,410,000, $1,673,000 and $2,672,000 in fiscal 1996, 1995 and
1994, respectively.
At September 30, 1996, future minimum operating lease payments are
required as follows:
(IN THOUSANDS) YEAR ENDING SEPTEMBER 30,
1997 $ 3,330
1998 2,500
1999 1,696
2000 1,497
2001 1,466
2002 and thereafter 2,654
---------
Total minimum lease payments $ 13,143
---------
---------
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK. As of September 30, 1996 and 1995, no preferred stock was
issued or outstanding.
STOCKHOLDER RIGHTS PLAN. The Company has a stockholder rights plan which
provides existing stockholders with the right to purchase one one-hundredth
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. This plan expires in fiscal 1999.
STOCK OPTION PLANS. During 1994, the Company established the 1994 Equity
Incentive Plan (the "1994 Plan"). At September 30, 1996, the Company
currently has 1,500,000 authorized shares under the plan. 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. In August
1996, the Company established the 1996 Equity Incentive Plan under which a
total of 900,000 shares have been authorized for issuance. Both the 1994 and
the 1996 Plans provide 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; however, no officers or
directors are eligible to receive any awards under the 1996
30
plan until it is approved by the stockholders. 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.
Option activity under the plans, including the options assumed in the
Virtual Chips acquisition, was as follows:
PRICE RANGE OF
SHARES STOCK OPTIONS
- -----------------------------------------------------------------------
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
Options granted 1,334,377 $ 0.310 - $19.875
Options exercised (812,049) $ 0.310 - $13.375
Options canceled (161,207) $ 4.125 - $19.875
---------
Shares under option,
September 30, 1996 3,328,042 $ 0.310 - $19.875
At September 30, 1996, the number of shares exercisable under stock
option plans was 1,640,470 and 996,747 shares were available for future
grant.
SALE OF COMMON STOCK AND WARRANT. In February 1996, the Company sold 894,971
newly issued, unregistered shares of its common stock and a warrant to
purchase 1,073,965 additional shares of the Company's common stock to Intel
Corporation for $10.4 million. The purchase rights under the warrant vest in
annual increments of 214,793, 429,586, 644,379 and 1,073,965 shares beginning
in December 1996. The warrant becomes fully exercisable in the event of an
acquisition of the Company or termination of a technology agreement between
the two parties. The per share purchase price at which the warrant may be
exercised increases in annual increments from $12.88 in 1997 to $15.22 in
2001. The warrant expires in April 2001.
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock
Purchase Plan ("ESPP") allows eligible employees to purchase shares at six
month intervals, through payroll deductions, at 85% of the fair market value
of the Company's common stock at the beginning or end of the six-month
period, whichever is less. The maximum amount each employee may contribute
during an offering period is 10% of gross base pay. As of September 30,
1996, 419,133 shares had been issued under the ESPP and 230,867 shares
remained reserved for future issuance.
10. ACQUISITIONS AND INVESTMENTS
In August 1996, the Company acquired all of the outstanding capital of
Virtual Chips, Inc. ("Virtual Chips") in exchange for 1,241,842 shares of the
Company's common stock. Virtual Chips is a leading supplier of synthesizable
cores for the computer industry. The Company also assumed Virtual Chip's
outstanding stock options, which were converted to options to purchase
approximately 147,959 shares of the Company's common stock. The merger was
accounted for as a pooling of interests and, accordingly the consolidated
financial
31
statements of the Company for fiscal 1996 have been restated to include the
operations of Virtual Chips. The financial statements for the fiscal 1995
and 1994 have not been restated as the results of operations of Virtual Chips
were not material in relation to those of the Company. However, shares used
to compute net income per share have been restated for all periods presented
to give effect to the shares issued and options assumed by the Company in the
transaction.
In 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. 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.
11. OTHER OPERATING EXPENSES
Other operating expenses in fiscal 1996 of $889,000 are the costs associated
with the acquisition of Virtual Chips, Inc. in August 1996. 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 1996 and 1995, $525,000 and
$876,000 of the accrual was paid, respectively.
12. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In November 1994, the Company sold all the
assets of its Printer Software Division to Xionics Document Technologies,
Inc. ("Xionics") in return for a promissory note and shares of Xionics stock.
Interest at 8% per annum was received quarterly; no payments of principal
were due before January 1997. During fiscal 1995 and fiscal 1996, the
Company made an additional loan to Xionics, exchanged a portion of the note
for additional shares and reflected certain adjustments to the purchase price
in the note balance.
In September 1996, Xionics (NASDAQ: XION) completed an initial public
offering of its common stock and repaid the net amount due to the Company.
The Company sold 500,000 of its Xionics' shares in the offering. The amounts
received were recorded as a gain on disposal of discontinued operations, net
of income taxes, to the extent such amounts were previously written off by a
charge to discontinued operations. The balance of the amount received of
$294,000 represents investment income and was recorded as other income. At
September 30, 1996, the Company held 1,455,381 shares of Xionics stock with a
market value of $15 per share. In October 1996, the underwriters for the
offering exercised their option to purchase additional shares, including
75,000 shares from the Company. Following these sales, the Company owned
approximately 13% of the outstanding Xionics common stock.
The results of the Printer Software Division are reflected in
discontinued operations. Revenue for fiscal 1994 was $9,439,000. The net
liabilities were $1,335,000 and $724,000 at September 30, 1996 and 1995,
respectively, and consist primarily of accrued costs to be incurred in
connection with the sale of the Division, offset by accounts receivable.
Payments were $289,000 and $4,479,000 in fiscal 1996 and 1995, 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 a call on the Company's 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.
OTHER INVESTMENTS. Included in other assets at September 30, 1996 and 1995 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
32
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.
13. INTERNATIONAL INFORMATION
The Company licenses its products worldwide. Export revenues were made
principally to the following geographic areas:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------
Asia/Pacific $ 27,716 $ 16,246 $ 12,884
Europe 7,328 3,258 9,962
--------- --------- ---------
$ 35,044 $ 19,504 $ 22,846
--------- --------- ---------
--------- --------- ---------
A summary of foreign operations, principally represented by locations in
the Asia/Pacific region, is presented below.
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------
Revenues $ 4,248 $ 4,108 $ 16,366
Operating income 2,120 1,136 2,751
Income before income taxes 2,107 1,304 2,754
Identifiable assets 4,849 6,777 3,430
14. RETIREMENT PLANS
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. In January 1996, the Company began making a matching
contribution of 25% of each participant's contribution, up to a match of
$1,000 per year per participant. The matching contributions vest over a four
year period which starts with the participant's employment start date with
the Company. The Company's contributions for fiscal 1996 were $158,000.
33
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
Phoenix Technologies Ltd.
We have audited the consolidated balance sheet of Phoenix Technologies Ltd.
as of September 30, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in Part IV, Item 14(a) to
the Company's Report on Form 10-K for the year ended September 30, 1996.
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. The consolidated
financial statements and schedules of Phoenix Technologies Ltd. for the years
ended September 30, 1995 and 1994 were audited by other auditors whose report
dated October 27, 1995 expressed an unqualified opinion on those statements
and schedules.
We conducted our audit 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 our audit provides a reasonable
basis for our opinion.
In our opinion the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Phoenix Technologies Ltd. as of September 30, 1996, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Palo Alto, California
October 29, 1996
34
PHOENIX TECHNOLOGIES LTD.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 30, 1996
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 $ 430,000 $ 94,000 $ - $ 88,000 $ 31,000 $ 467,000
September 30, 1996
Year Ended 657,000 60,000 329,000 785,000 169,000 430,000
September 30, 1995
Year Ended 1,558,000 351,000 320,000 1,623,000 61,000 657,000
September 30, 1994
- ------------------------
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
35
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements and the financial
statement schedule of Phoenix Technologies Ltd. as of September 30, 1995 and
for the years ended September 30, 1995 and 1994 listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule 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 the consolidated results of
their operations and their cash flows for the years ended September 30, 1995
and 1994 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule for the years
ended September 30, 1995 and 1994 referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand, L.L.P.
San Jose, California
October 27, 1996
36