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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 2001
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-17111
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PHOENIX TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
Delaware 04-2685985
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Plumeria Drive, San Jose, California 95134
(Address of principal executive offices, including zip code)
(408) 570-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Preferred Stock Purchase Rights
(Title of each Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 30, 2001, was $271,764,134 based upon the last
reported sales price of the Common Stock in the Nasdaq National Market, as
reported by the Nasdaq Stock Market.
The number of shares of the registrant's Common Stock outstanding as of
November 30, 2001 was 25,210,031.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement to be filed pursuant
to Regulation 14A in connection with the 2002 annual meeting of its
stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including without limitation the Business section
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include, but are
not limited to, statements concerning expected price erosion, plans to make
acquisitions, dispositions or strategic investments, expectation of sales
volume to original equipment manufacturers (or "OEM"), and plans to improve and
enhance existing products and develop new products.
The forward-looking statements of the Company are subject to risks and
uncertainties. Some of the factors that could cause future results to
materially differ from the recent results or those projected in the
forward-looking statements include, but are not limited to, significant
increases or decreases in demand for Phoenix's products, increased competition,
lower prices and margins, failure to successfully develop and market new
products and technologies, competitor introductions of superior products,
continued industry consolidation, instability and currency fluctuations in
international markets, product defects, failure to secure intellectual property
rights, results of litigation, failure to retain and recruit key employees,
acts of war or global terrorism, power shortage, and unexpected natural
disasters. For a more detailed discussion of certain risks associated with the
Company's business, see the "Business Risks" section of this Form 10-K. The
Company undertakes no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this Form 10-K.
GENERAL DEVELOPMENT OF THE BUSINESS
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is the global leader
in device-enabling and management software solutions for Personal Computers
(PCs) and connected digital devices. Phoenix provides its products primarily to
platform and peripheral manufacturers (collectively, "OEMs") that range from
large PC and information appliance manufacturers to small system integrators
and value-added resellers. Phoenix also provides training, consulting,
maintenance, and engineering services to its customers. The Company markets and
licenses its products and services through a direct sales force as well as
through regional distributors and sales representatives.
The global computer industry, driven by the expansion of the Internet, has
evolved into a rich "connected device ecosystem" embracing entirely new
categories of functionality and is characterized by rapid technology changes
that include increased processor speeds, hardware miniaturization, portability,
and new and improved ways to connect devices. Traditional PC platforms have
evolved into "endpoints" of the Internet. In addition, a wide array of other
new technological innovations have emerged such as TV-centric "internet
Televisions" (iTVs), "internet Video Players" (iVPs), tablet PCs which
recognize pen-based input in Windows-based applications, wireless handheld
appliances, interactive game stations, home networks, and rack-mounted single
board server systems (known as "server blades") for enterprise applications.
The Company believes that its products and services enable customers who
specify, develop, and manufacture PCs, information appliances, and
semiconductors to bring leading-edge products to market more quickly while
reducing their costs, providing high value-added features to their customers
and, hence, increasing their competitiveness.
The Company was incorporated in the Commonwealth of Massachusetts in
September 1979, and was reincorporated in the State of Delaware in December
1986.
2
In the second quarter of fiscal 2001, the Company acquired assets of
Ravisent Technologies, Inc. and launched the Information Appliance Division
worldwide to extend its global system software to a new generation of
information appliances, mobile devices, and smart peripherals including
internet Television (iTV), and internet Video Player (iVP) applications. As
part of its commitment to deliver compact, high-quality, value-added code to
the information appliance marketplace, the Company enhanced the Ravisent
microbrowser technology and incorporated it into Phoenix's products.
Also, in the second quarter of fiscal 2001, the Company opened a sales
office in Beijing, China as part of its continuing long-term commitment to
service and support its Asian-based customers.
DESCRIPTION OF BUSINESS
The Company's four operating segments were Platform Enabling Division,
inSilicon, Information Appliance Division, and PhoenixNet/TM/ Division.
Information regarding revenues, gross margin and operating profit by segments,
and revenues from unaffiliated customers by geographic regions, can be
referenced under Note 11 "Segment Reporting" in the Company's Consolidated
Financial Statements.
Platform Enabling Division
The Platform Enabling Division of Phoenix has been instrumental in the
advancement of PC architecture. This division's system enabling software,
referred to as Basic Input Output System ("BIOS") products, continues to play
an essential role in the design of PCs and other devices by providing the
critical link between hardware platforms and operating systems. In 2001, the
division introduced a new class of software, FirstWare applications, that is
typically loaded from a protected area of a PC's hard disk. This software can
be used before the operating system is started or in conjunction with an
operating system to provide diagnostic, repair and other services.
PC systems and other electronic devices consist of hardware, BIOS software,
operating system software, and applications software. BIOS is the software that
is initially executed when the system is turned on and is typically stored on a
Read Only Memory ("ROM") chip that resides on the device's motherboard. BIOS
tests and initializes the hardware. It also starts some software components
including FirstWare applications, initiates the operating system, and then
provides certain advanced interface functions.
The Company believes that the introduction of new hardware architectures,
microprocessors, peripheral equipment, and operating systems both within the PC
industry and through other channels, has increased the range of possible
computing options, and has increased the need for system BIOS. In addition, the
Company believes that its customers will require their products to feature
increased reliability, a capability offered by the FirstWare applications.
Products. The Platform Enabling Division is currently offering or developing
the following BIOS products:
Desktop/Server
. PhoenixBIOS(TM) 4.0. The Company provides various versions of PhoenixBIOS
4.0 as its core system firmware for desktop and server systems. The
Company believes that the success of this product is attributable to its
reliability and advanced features, including its fourth generation modular
architecture and advanced development tools and methodology.
. AwardBIOS(TM). The Platform Enabling Division also includes the products
of Award Software, acquired in September 1998. The Company believes that
the Award BIOS products and engineering services enable customers to
rapidly develop new motherboard designs for state-of-the-art computer
systems.
3
Notebook/Portable Computers
. NoteBIOS(TM) 4.0 for Portable Systems. The Company offers its NoteBIOS
system software for use with portable or notebook computers. The product
adds extensive power management capabilities, such as Save-to-Disk and
smart batteries, to the modular architecture of PhoenixBIOS 4.0.
In addition, the Company offers and continues to enhance firstware
applications products, primarily for computer problem analysis and repair, for
use by system owners.
Customers and Sales. The Company generates a significant portion of its
Platform Enabling Division revenues from customers outside of the United
States. See discussion under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations." The
Company has licensed its BIOS technology to over 600 global technology leaders,
including:
PC Systems PC Motherboards Embedded Systems
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Acer Samsung Asustek Force Computers
Dell Compaq Gigabyte Japan Victor Company
Fujitsu Hewlett-Packard GVC Motorola
Sony Toshiba First International Company NCR
Hitachi Fujitsu Siemens NEC
EMC IBM Radisys
The Company licenses its BIOS products and provides professional services to
major OEMs of PCs, motherboards, and other computing devices. In general,
license fees are generated on a per unit basis for each system shipped, and
professional service fees are generated based upon efforts expended. The
Platform Enabling Division utilizes a global direct sales force in North
America, Asia and Europe, and resellers and distributors on a limited basis to
certain regions.
Some product modifications are generally required in order for the customer
to deploy Phoenix's Platform Enabling Division products on specific hardware
platforms. To support its worldwide customer base, the Platform Enabling
Division employed over 125 deployment engineers in Germany, Japan, Korea,
Taiwan, China, California, Oregon, and Massachusetts. The Company also provides
support services by telephone, via the Internet, and on-site.
Two customers accounted for 15% and 11% of revenues generated by Platform
Enabling Division in fiscal 2001. Also, one customer accounted for 19% and 11%,
of revenues generated by Platform Enabling Division in fiscal 2000 and 1999,
respectively. No other customer accounted for more than 10% of revenues of the
Platform Enabling Division in fiscal 2001, 2000, and 1999.
Competition. The Platform Enabling Division competes for BIOS sales
primarily with in-house research and development departments of PC
manufacturers that may have significantly greater financial and technical
resources than those of the Company. These companies include Acer Incorporated,
Compaq Computer Corporation, Dell Computer Corporation, IBM Corporation. The
Company also competes for system software business with other independent
suppliers, ranging from small, privately-held companies to Acer Softech, Inc.,
a division of Acer Laboratories, Inc., a major Taiwan chip and motherboard
supplier. The Company believes that OEM customers often license the Company's
system software products rather than develop these products internally in order
to: (1) enhance compatibility with the latest industry standards, (2) improve
time to market, (3) reduce product development risks, (4) reduce product
development and support costs, and/or (5) to differentiate their system
offerings with advanced features. In the FirstWare software area, the Company
competes with individual component software suppliers such as StorageSoft,
Inc., Symantec Corporation, and other companies that develop diagnostic and
repair software, as well as in-house solutions.
4
inSilicon
inSilicon Corporation ("inSilicon") is a leading provider of communications
technology that is used by semiconductor and systems companies to design
complex semiconductors called systems-on-a-chip. The Systems-on-a-chip are
critical components of wired and wireless products. inSilicon's customers use
its communications technology in hundreds of different digital devices ranging
from network routers to handheld computers and cellular phones. inSilicon's
modular approach emphasizes customer-proven reusable semiconductor intellectual
property that focuses on communications and connectivity, and is compatible
with a wide range of microprocessor designs. Semiconductor and systems
companies integrate inSilicon's communications technology into their overall
semiconductor designs to save time and money, allowing them to focus on their
core competencies that differentiate their products. By integrating inSilicon's
communications technology into their complex designs, inSilicon's customers are
better able to solve the widening "design gap" caused by the difficulty of
designing complex systems-on-a-chip in the time necessary to get to the market
with their products.
inSilicon targets high growth markets requiring high performance, quick time
to market, design flexibility, and compliance with industry standards. The
primary market segments are telecommunications and data communications,
consumer electronics, computers, and office automation.
Products. inSilicon's communications technology includes semiconductor
intellectual property and related software. Its semiconductor intellectual
property includes a wide variety of both standards-based and proprietary
communications technology. inSilicon's semiconductor intellectual property
platforms vertically combine many of these technologies into functional blocks
tailored for ease of use and faster integration by its customers.
inSilicon supplies its technology as Verilog, a source code, and GDS II
database, which are the primary design representations in use today.
Semiconductor and systems companies then integrate inSilicon's communications
technology into their overall semiconductor designs using electronic design
automation tools, such as those provided by Synopsys, Inc., Mentor Graphics
Corporation, and Cadence Design Systems, Inc. It uses a modular approach that
emphasizes silicon-proven reusable, licensable technologies and software that
are compatible with a wide range of processor designs.
inSilicon's technologies are outlined in the following chart. Each family
consists of its technologies that relate to a specific industry standard.
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Communications
Standards Technology Families Technology Applications
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Ethernet 10/100 and 10/100/1000 Ethernet is a widely used local area networking
Ethernet Media Access communications standard, used in devices such as
Controller and Ethernet modems, cable modems, home networking,
Simulation Model routers, and switches.
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IEEE 1394 1394 Device Controller Link, IEEE 1394 is a high-speed digital interface
1394 A/V Link, 1394 Cable Phy standard used in digital cameras, audio-visual disk
and 1394 Simulation Model drives, and scanners.
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IrDA VFIR and VFIR Simulation IrDA is a wireless standard that enables
Model, IrDA and IrDA communication between appliances across short
Simulation Model distances. It is used in mobile phones, handheld
and laptop computers, and electronic games.
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Java(TM) Technology JVX(TM) and JVXtreme(TM) Java JVX is a proprietary hardware and software
Accelerators solution that accelerates applications written in the
Java programming language. JVX is primarily
targeted for wireless Internet applications.
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PCI PCI Suite and PCI Simulation Peripheral Component Interconnect is an internal
Model communications standard that connects various
elements of computer systems to each other. It is
used in many computers as well as in embedded
systems.
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PCI-X PCI-X and PCI-X Simulation PCI-X is the latest revision of the PCI standard. It
Model is used in many high performance computing
applications, including multiprocessor servers,
communications switches and routers, and storage
area networks.
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USB USB 2.0 PHY, USB 1.1 and 2.0 Universal Serial Bus is a standard designed to
OHCI Host Controller, USB 1.1 simplify connections between personal computers
Hub, USB 1.1 and 2.0 Device and peripheral devices, such as printers, digital
Controller cameras, and scanners.
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UTOPIA DMA UTOPIA Controller and UTOPIA is a broadband interface widely used in
Simulation Model Asynchronous Transfer Mode (ATM)
communications, network processors, and DSL
chipsets.
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AMBA ARM Prime Cells, and Micro Advanced ARM Micro Bus Architecture is widely
Pack used in embedded systems. The Arm Prime Cells
and the Micro Pack offer most of the building
blocks needed to build a system around an
ARMAmba processor bus which is supported by
both the ARM and MIPS embedded processor
family. This includes memory controllers, timers,
and peripheral interface
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JPEG JPEG Encoder, Decoder, Codec, JPEG and JPEG2000 are worldwide standards for
and JPEG2000 Encoder still image compression and decompression. They
are widely used in digital camera, security
monitoring, printer, scanner, and medical imaging.
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6
Customers and Sales. inSilicon focuses its sales efforts in the following
areas: direct sales, indirect sales through application specific integrated
circuit (or "ASIC") manufacturers and authorized design centers, and internet
distribution.
Direct Sales. inSilicon maintains a direct worldwide sales network
consisting of its own employees and a limited number of sales representatives
and field applications engineers. The sales force is distributed in key
geographic areas around the world with employees in the following locations:
Texas, Maryland, Massachusetts, California, Switzerland, England, Germany,
Canada, Taiwan, and Japan. In addition, it has a distribution agreement with
Phoenix covering Hong Kong, Japan, Korea, Singapore, and Taiwan.
Indirect Sales. In addition to the direct sales force, inSilicon also uses
indirect sales channels such as ASIC manufacturers and authorized design
centers.
Internet Distribution. inSilicon also allows semiconductor designers to
download and test, via the Internet, encrypted versions of its technology
before committing to any economic arrangement.
inSilicon has developed a strong customer base among semiconductor and
systems companies that use its communications technology to design complex
semiconductors. No customer accounted for more than 10% of revenues
individually in fiscal 2001, 2000, or 1999.
Competition. inSilicon is one of the top five pure merchant IP companies
based on world-wide revenues for fiscal 2000, according to a May 2001 report by
Gartner, Inc. The other top vendors include ARM Holdings plc, MIPS
Technologies, Rambus, Inc., and Mentor Graphics Corporation. The industry is
very competitive and is characterized by constant technological change, rapid
rates of product obsolescence, and frequently emerging new suppliers.
inSilicon's existing competitors include other merchant semiconductor
intellectual property (or "SIP") suppliers, such as the Inventra Division of
Mentor Graphics Corporation, Synopsys Inc., Enthink, Inc., Gain Technology
Corporation, and the VAutomation subsidiary of ARC Cores, Inc.; and suppliers
of ASICs, such as LSI Logic Corporation, the ASIC divisions of IBM Corporation,
Lucent Technologies, Inc., Toshiba Corporation, and NEC Corporation. inSilicon
also competes with the internal development groups of large, vertically
integrated semiconductor and systems companies, such as Intel Corporation,
Motorola Inc., Cisco Systems, Inc., and Hewlett-Packard Company. In these
companies, SIP developed for an individual project sometimes is subject to
efforts by the company to be reused in multiple projects. Companies whose
principal business is providing design services as work-for-hire, such as
Intrinsix Corporation, Sci-worx Corporation, Parthus Technologies plc, and the
Tality subsidiary of Cadence Design Systems, Inc., also provide competition.
These companies generally build a portfolio of internally developed SIP over
time and then re-use that SIP as applicable in new service projects in order to
gain productivity leverage. For firmware, its primary competitors are in-house
research and development departments of systems companies and small
privately-held companies. As inSilicon introduces new SIP technologies, it will
face competition from both existing SIP suppliers and new SIP suppliers that it
anticipates will enter the market. inSilicon also may face competition from new
suppliers of technologies based on new or emerging standards.
Information Appliance Division
The Information Appliance Division of Phoenix is a new division launched in
March 2001. It plays a leading role in establishing new information appliance
categories and it also provides solutions for those existing information
appliance categories. As a leader in the development of device enabling and
management software solutions, Phoenix is leveraging more than 20 years of
expertise to develop this new breed of instant-on information appliances.
Unlike PCs, information appliances are designed to offer internet
connectivity to a new class of users. These new users demand devices that are
easy to use, reliable, inexpensive, and that provide appliance-like
capabilities, such as "Instant-on" and "Instant-off". The Company offers and
continues to enhance its information appliance
7
software products to enable device OEMs to deliver this new breed of
information appliances that will bring a new generation of users to the
Internet. The Company believes that with its expertise in the development of
software solutions it is well positioned to take advantage of the anticipated
growth of the information appliance marketplace.
Products. The Information Appliance Division is currently offering the
following BIOS products:
. Industrial BIOS. The Company developed the industrial BIOS for
configuration and control of information appliances, also referred to as
embedded platforms. The industrial BIOS as well as other informational
appliance products are designed using small form factors in order to meet
the requirements of embedded platforms.
. FirstView Connect. The Company offers its FirstView Connect family of
products to device OEMs as its core system to enable solutions to provide
the best possible user experience on non-PC devices. It was designed and
developed to enable a new class of low cost, flexible device that can
bypass the complex and tedious start-up and set-up procedures faced by PC
users who seek internet access. The product adds extensive advanced
interactive web technologies like Java and Macromedia Flash(TM)
capabilities, allowing OEMs to deliver rich, multi-media based internet
content to TV as well as stand-alone network appliances.
Customers and Sales. The Company generates most of its Information Appliance
revenues from North America and Japan. The Company has licensed its FirstView
Connect browser and Industrial BIOS technology to a number of global technology
leaders, including:
PC Motherboards Embedded Systems
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First International Company TeleCruz
VIA eHomeTV
The Company licenses its software products and provides professional
services. In general, license fees are generated on a per unit basis for each
system shipped, and professional service fees are generated based upon efforts
expended. The Information Appliance Division utilizes a global direct sales
force in North America, Asia and Europe, and resellers and distributors on a
limited basis for certain regions.
Some product modifications are generally required in order for the customer
to deploy the Company's Information Appliance Division products on specific
hardware platforms. The Company provides support services by telephone, via the
Internet, and on-site.
One customer accounted for 28% of Information Appliance Division's revenues
in fiscal 2001. There were no other customers accounted for more than 10% of
Information Appliance revenues in fiscal 2001. Fiscal 2001 was the first year
the Information Appliance Division generated revenues.
Competition. The Information Appliance Division competes primarily with
research and development departments of software developers that may have
significantly greater financial and technical resources than those of the
Company. These companies include OpenTV Corporation, Wind River Systems, Inc.,
Liberate Technologies, and Microsoft Corporation. The Company also competes for
software business with other independent suppliers, ranging from small,
privately-held companies to in-house research and development departments of
major OEMs. The Company believes that OEM customers in the information
appliance space often license the Company's software products rather than
develop these products internally in order to: (1) improve time to market, (2)
reduce product development risks, and/or (3) reduce product development support
costs.
8
PhoenixNet(TM) Division
The Company's PhoenixNet(TM) division delivers products and services,
including the introduction of its Internet security infrastructure product in
fiscal 2001, to new and existing users of personal computers, internet
appliances, and mobile devices for leading providers worldwide.
PhoenixNet(TM) provides technology infrastructure that enables security
products and services designed to deliver a higher level of trust to both
devices and device-aware e-business applications through device authentication.
Applications using this infrastructure for virtual private networks (VPNs) and
the Internet are supported by a global network of Regional Device Authorities.
Products. PhoenixNet(TM) is currently offering the following products:
DeviceConnect(TM). Phoenix's DeviceConnect is a software and firmware based
product, currently available for Check Point VPN-1 implementations, that turns
a PC into an authentication token. Users need nothing more than their PCs
running a Phoenix-customized VPN Client to securely access their network.
Technologies. The PhoenixNet(TM) division offers its products using
primarily StrongROM and StrongClient technologies.
StrongROM. StrongROM is a ROM chip that contains an industry-leading
cryptographic engine (RSA algorithms) and three security keys. Every PC,
notebook, internet appliance, and other connected device that includes a
StrongROM chip on the motherboard comes equipped with built-in strong security
features. The device itself can become a tool for instant, and transparent
device authentication.
With Phoenix Security firmware on board, the computer or notebook itself
effectively becomes a "virtual smart card" for network access or internet
transaction authentication, while all existing security steps and
infrastructures (like username/password logons and VPNs) remain in place. By
using two authentication methods--username/password for the individual and
StrongROM for the device--the customer benefits from two-factor or "strong"
authentication.
StrongCLIENT. StrongCLIENT is the software version of the StrongROM security
technology. It is a Windows based implementation of the cryptographic engine
leveraging security keys that are in Phoenix's firmware solution, StrongROM. It
provides the functionalities of the ROM-based version and is easily installed
on new or existing computers.
Customers and Sales. The activities of PhoenixNet(TM) are focused on
delivering internet configuration services to PhoenixNet(TM) enabled
motherboards. When these motherboards are built into a PC that connects to the
Internet, the free configuration services are performed from the PhoenixNet(TM)
data center. The Company has expanded its offerings with an internet security
infrastructure product. This key strategic offering allows a reseller to offer
a trusted platform. The product uses digital signatures and an online
enrollment process to establish device authentication for applications, such as
access control, transaction integrity, and content security.
Two customers accounted for 35% and 34% of revenues generated by
PhoenixNet(TM) in fiscal 2001. In fiscal 2000, four customers each accounted
for more than 10% of revenues in fiscal 2000.
Competition. In the securities business, there are many distribution
vehicles for the Company's customers to reach PC end users, including PC OEM
companies, PC and hardware registration companies, and Internet web sites. Many
have greater resources than the Company.
9
PRODUCT DEVELOPMENT
The company's research and development expenditures in fiscal years 2001,
2000, and 1999 were $45.5, $39.1 million, and $39.9 million, respectively. At
November 30, 2001, its research and development group included 367 full-time
equivalent persons. The Company's research and development expenditures
demonstrate its continuous commitment to maintain and enhance its current
product lines, develop new products, maintain technological competitiveness and
meet continually changing customer and market requirements.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on U.S. and foreign patents, trade secrets,
trademarks, copyrights, and contractual agreements to establish and maintain
proprietary rights in its technology. The Company has an active program to file
applications for and obtain patents in the U.S. and in selected foreign
countries where a potential market for its products exists. As of September 30,
2001, the Company had been issued twenty-nine patents in the U.S. and had
sixty-five patent applications in process in the United States Patent and
Trademark Office. There can be no assurance that any of these patents would be
upheld as valid if challenged.
The Company's general policy has been to seek patent protection for those
inventions and improvements likely to be incorporated in its products or
otherwise expected to be of long-term value. The Company protects the source
code of its products as trade secrets and as unpublished copyrighted works. It
also initiates litigation where appropriate to protect its rights in that
intellectual property. The Company licenses the source code for its products to
its customers for limited uses. Wide dissemination of its software products
makes protection of its proprietary rights difficult, particularly outside the
United States. Although it is possible for competitors or users to make illegal
copies of its products, the Company believes the rate of technology change and
the continual addition of new product features lessen the impact of illegal
copying.
In recent years, there has been a marked increase in the number of patents
applied for and issued with respect to software products. Although the Company
believes that its products do not infringe on any copyright or other
proprietary rights of third parties, the Company has no assurance that third
parties will not obtain, or do not have, intellectual property rights covering
features of its products, in which event the Company or its customers might be
required to obtain licenses to use such features. If an intellectual property
rights holder refuses to grant a license on reasonable terms or at all, the
Company may be required to alter certain products or stop marketing them.
EMPLOYEES
As of November 30, 2001, Phoenix employed 515 full-time equivalent persons
worldwide, of whom 302 were in research and development and customer
engineering, 84 were in sales and marketing, and 129 were in general and
administration. Of the 515 total full-time equivalent persons, 8 were
contractors. Phoenix's employees are not represented by a labor organization,
and the Company has never experienced a work stoppage. The Company considers
its employee relations to be satisfactory.
As of November 30, 2001, inSilicon employed 124 full-time equivalent persons
worldwide, of whom 65 were in research and development and customer
engineering, 42 were in sales and marketing, and 17 were in general and
administration. Of the 124 total full-time equivalent persons, 5 were
contractors. inSilicon's employees are not represented by a labor organization,
and inSilicon has never experienced a work stoppage. inSilicon considers its
employee relations to be satisfactory.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To the Company's present knowledge, compliance with federal, state and local
provisions enacted or adopted for protection of the environment has had no
material effect upon its operations.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a facility in San Jose,
California, which the Company leases pursuant to a lease agreement expiring in
November 2003. This facility also includes its Platform Enabling Division,
inSilicon, Information Appliance Division, and PhoenixNet(TM) Division. In
fiscal 1997, the Company entered into a five-year lease agreement for a
facility in Irvine, California. The Irvine lease was renewed in August 2001 for
an additional seven years effective February 2002. The Company also leases
smaller office facilities in other locations including: Norwood, Massachusetts;
Beaverton, Oregon; Houston and Austin, Texas; Taipei, Taiwan; Hong Kong,
Beijing, and Nanjing, China; Tokyo and Osaka, Japan; Seoul, Korea; Budapest,
Hungary; and Munich, Germany. These offices generally provide engineering,
sales, and technical support to its customers. In November 2000, inSilicon
relocated its sales and marketing function to a small office facility in San
Jose, California under a two-year lease that expires in June 2002.
The Company's facilities are near capacity and are fully utilized. The
Company considers its leased properties to be in good condition, well
maintained, and generally suitable for their present and foreseeable future
needs. The Company believes its facilities are adequate for its current needs
and that suitable additional or substitute space will be available as needed to
accommodate any expansion of its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, becomes involved in litigation claims and
disputes in the ordinary course of business. There are currently no pending
legal proceedings to which either the Company or any of its subsidiaries are a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF PHOENIX TECHNOLOGIES LTD.
The executive officers of the Company serve at the discretion of the Board
of Directors of Phoenix. As of the filing date of this Form 10-K, executive
officers of the Company are as follows:
Name Age Position
- ---- --- --------
Albert E. Sisto.............. 52 Chairman, President, and Chief Executive Officer
David A. Everett............. 58 Senior Vice President
W. Curtis Francis............ 52 Senior Vice President & General Manager, Corporate Engineering and
Planning Division
David L. Gibbs............... 44 Senior Vice President & General Manager, Global Sales and Support
Division
John M. Greeley.............. 54 Senior Vice President, Finance and Chief Financial Officer
Kendall S. Larsen............ 44 Senior Vice President and General Manager, Business Development
Magda M. Madriz.............. 49 Vice President, Human Resources
Alan L. McCann............... 38 Senior Vice President & General Manager, Corporate Marketing and
Products Division
Linda V. Moore............... 55 Vice President, General Counsel and Secretary
11
BIOGRAPHIES
Mr. Sisto joined the Company as President and Chief Executive Officer and
was appointed to the Board in June 1999. He was elected Chairman of the Board
in January 2000. Mr. Sisto was formerly Chief Operating Officer of RSA Data
Security, Inc. from 1997 to 1999. He served as President, Chairman, and CEO of
DocuMagix from 1994 to 1997. From 1989 to 1994, Mr. Sisto served as the
President and CEO of PixelCraft, Inc. Mr. Sisto has also served in executive
management roles at MIPS Technologies, Relational Technologies (INGRES), Intel,
Honeywell, and General Electric. Mr. Sisto serves as a director and Chairman of
the Board of inSilicon, Corp. and is on the Boards of Directors of Hi/fn Inc.,
a semiconductor components company, and Tekgraf, a graphic arts distribution
and service company. Mr. Sisto earned a Bachelor of Science in Engineering from
Stevens Institute of Technology.
Mr. Everett has served as Senior Vice President since October 2001, with
responsibility for special assignments for the CEO. From April 1999 to October
2001, Mr. Everett served as Senior Vice President and General Manager of the
Platform Enabling Division in April 1999. From September 1997 to April 1999, he
was CEO of 3D Labs, Inc. In September 1997, he became President and CEO of
Dynamic Pictures, Inc. In January 1996, he joined the Company as Vice
President, Worldwide Field Operations. Through December 1995, Mr. Everett
worked for SyQuest Technology as Executive Vice President, Sales and Marketing.
He also worked for Wyse Technology as Senior Vice President, Sales and
Corporate Marketing. Mr. Everett earned a B.A. in Business from Michigan State
University.
Mr. Francis joined the Company as Senior Vice President and General Manager
of the Corporate Engineering and Planning Division in October 2001. He joined
Phoenix from Quantum Corporation, where he served as Vice President of
Corporate Development from May 1998 to April 2001. Before joining Quantum, Mr.
Francis was Vice President of Corporate Development and Strategic Planning at
Advanced Micro Devices from April 1995 to May 1998 and also served as Vice
President of Corporate Development at Sun Microsystems from August 1993 to
April 1995. Prior to joining Sun Microsystems, he served in a number of
executive capacities in the areas of corporate strategy, strategic planning,
and finance at Advanced Micro Devices, and previously had worked as a
consultant for the Boston Consulting Group. Mr. Francis holds an MBA Degree
from Harvard Business School, a M.S. degree in Electrical Engineering from
Massachusetts Institute of Technology, and a B.S. degree in Engineering and
Applied Science from Yale University.
Mr. Gibbs became the Senior Vice President and General Manager of the Global
Sales and Support Division in October 2001. He joined the Company as Vice
President of Business Development in March 2001 and was promoted to Senior Vice
President and General Manager of the Information Appliance Division in May
2001. Prior to joining Phoenix, he served in several senior management roles at
FlashPoint Technologies, an embedded appliance OS company, from 1998 to 2001.
Prior to that, Mr. Gibbs was Vice President of Sales at DocuMagix/JetFax from
1997 to 1998, and held a number of executive sales and business development
roles between November 1993 to March 1997 while at Insignia Solutions. Mr.
Gibbs earned a B.A. degree in Economics from UCLA.
Mr. Greeley joined the Company as Senior Vice President of Finance and Chief
Financial Officer in May 2000. From April 1999 to May 2000, he was Chief
Operating and Financial Officer of Leasing Solutions, Inc. Mr. Greeley spent
over sixteen years at GE Capital Corporation in various finance and general
management positions. While at GE Capital, Mr. Greeley served as President of
Telecom Financial Services, a wholly owned subsidiary of GE Capital
specializing in the financing of telecom and data networks, from September 1996
to April 1999. From June 1994 to September 1996, he was President of NTFC
Capital, acquired by GE Capital, which supported Northern Telecom and its
distributors. He started his career in New York City with
PricewaterhouseCoopers LLP, and is a CPA. Mr. Greeley is a graduate of St.
John's University with a B.S. degree in Accounting and an M.B.A. in Finance.
Mr. Larsen became Senior Vice President and General Manager, Business
Development in October 2001. He joined the Company as Senior Vice President and
General Manager of the PhoenixNet Division in October
12
2000. Before joining Phoenix, he was with RSA Security, Inc. as the Senior Vice
President of Worldwide Alliances and OEM Sales from May 1998 to October 2000.
Prior to joining RSA, Mr. Larsen was Vice President of International Sales and
Vice President of Worldwide Sales at Ramp Networks from September 1996 to April
1998. From January 1994 to August 1996, he was Managing Director of the
Americas for General Magic. He has also served as Director of National
Accounts, Director of OEM Sales, and Director of the western area for Novell,
Inc., and he held various management sales positions at IBM and Xerox
Corporation. Mr. Larsen holds a B.S. degree in Economics from the University of
Utah.
Ms. Madriz came to Phoenix from Xicor, Inc. in October 2000. She joined
Xicor, Inc. in 1984 as Director of Human Resources, and was promoted to Vice
President in 1990. In addition to her responsibilities as the senior executive
for Human Resources, she also assumed responsibility for Safety and
Environmental Compliance. Prior to Xicor, Ms. Madriz served as Division Senior
HR Manager for Atari, Inc. from 1980 to 1984. She has also worked for Dysan
Corporation, and Federated Department Stores in various HR capacities. She has
served as an appointed Commissioner for The City of San Jose since 1994, and is
on the board of several non-profit organizations. Ms. Madriz earned a B.A.
degree in Business Administration from the University of Pavia, Italy.
Mr. McCann became Senior Vice President and General Manager, Corporate
Marketing and Products Division in October 2001. He joined the Company as Vice
President of Marketing, Platform Enabling Division in May 2001 and was promoted
to Vice President and General Manager, Platform Enabling Division in August
2001. Prior to that, he served as Vice President and General Manager, PC and
Consumer Electronics Divisions, Ravisent Technologies Inc. from November 1999
to April 2001; and from May 1997 to October 1999 as Sr. Director of Product
Marketing, ATI Technologies Inc. Prior to that, Mr. McCann held various
management positions at Xerox, QMS, and IBM. Mr. McCann earned an MBA from York
University, Canada and a B.A.Sc. in Electrical/Computer Engineering from the
University of Waterloo, Canada.
Ms. Moore joined the Company in November 1999. Prior to joining the Company,
she was Vice President and General Counsel of Appiant Technologies, Inc., a
distributor of computer-telephony products based in Fremont, California from
1998 to 1999. From 1989 to 1998, she served as General Counsel and Secretary of
Jabil Circuit, Inc., an electronics contract manufacturer headquartered in St.
Petersburg, Florida. She has also served as a consultant to Internet start-ups,
has 6 years of experience in equipment leasing, and began her career in private
practice. Ms. Moore received a B.A. degree from the University of Michigan, an
M.A. from Eastern Michigan University and a J.D. from Detroit College of Law at
Michigan State University.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol PTEC. The following table presents the quarterly high and low bid
quotations in the over-the-counter market, as quoted by the Nasdaq National
Market. These quotations reflect the inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
High Low
------ ------
Year ended September 30, 2001:
Fourth quarter..................................... $15.14 $ 9.88
Third quarter...................................... 14.60 8.69
Second quarter..................................... 19.25 12.94
First quarter...................................... 18.63 12.19
Year ended September 30, 2000:
Fourth quarter..................................... $20.50 $14.44
Third quarter...................................... 21.50 12.38
Second quarter..................................... 30.25 13.38
First quarter...................................... 18.13 8.63
The Company had 239 shareholders of record as of November 30, 2001. To date,
the Company has paid no cash dividends on its common stock. The Company
currently intends to retain all earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. See Note 13 to the
Consolidated Financial Statements included herein for the terms of exercise of
stock options.
The Company may have issued certain shares of its common stock under its
1999 Stock Plan and 1991 Employee Stock Purchase Plan prior to the filing of
applicable Registration Statements on Form S-8, all of which have now been
filed.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below includes business combinations described
in Note 7 to the Consolidated Financial Statements, included herein. The tables
in Part II include selected unaudited quarterly consolidated data for fiscal
2001 and 2000. 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 annual Consolidated Financial
Statements. The results of operations for any period are not necessarily
indicative of the results to be expected for any future period.
14
Selected Annual Consolidated Data
(In thousands, except per share data)
For the Years ended September 30,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenues:
License fees........................................ $103,324 $125,817 $103,326 $100,344 $ 89,884
Services............................................ 18,113 18,568 22,500 22,541 15,612
-------- -------- -------- -------- --------
Total revenues................................... 121,437 144,385 125,826 122,885 105,496
Gross margin.......................................... 100,372 122,922 90,944 95,785 86,857
Impairment of long-lived assets....................... 9,393 -- -- -- --
Restructuring cost.................................... 1,525 1,270 7,892 11,682 --
Income (loss) from operations......................... (24,768) 26,825 (4,661) (431) 16,407
Net income (loss)..................................... (18,002) 20,902 1,804 722 20,335
Earnings (loss) per share:
Basic............................................... $ (0.72) $ 0.85 $ 0.07 $ 0.03 $ 0.80
Diluted............................................. $ (0.72) $ 0.77 $ 0.07 $ 0.03 $ 0.74
For the Years ended September 30,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Cash, cash equivalents, and short-term investments.... $ 65,034 $107,718 $ 55,592 $ 71,297 $ 72,168
Working capital....................................... 76,606 124,532 52,929 77,143 96,383
Total assets.......................................... 160,611 194,895 141,998 156,484 156,033
Long-term obligations................................. 638 1,449 1,546 1,428 530
Stockholders' equity.................................. 119,696 148,300 98,922 125,336 133,539
Cash dividends declared per common share.............. -- -- -- -- --
Selected Unaudited Quarterly Consolidated Data
(In thousands, except per share data)
Fiscal 2001, Quarters ended
----------------------------------
Dec. 31 Mar. 31 Jun. 30 Sep. 30
------- ------- ------- --------
Revenues.......................................................... $38,775 $25,761 $31,734 $ 25,167
Gross margin...................................................... 34,411 20,966 25,681 19,314
Impairment of long-lived assets................................... -- -- -- 9,393
Restructuring cost................................................ -- -- 1,525 --
Income (loss) from operations..................................... 7,225 (8,183) (4,594) (19,216)
Net income (loss)................................................. 5,511 (4,396) (1,688) (17,429)
Earnings (loss) per share--basic.................................. $ 0.22 $ (0.17) $ (0.07) $ (0.69)
Earnings (loss) per share--diluted................................ $ 0.21 $ (0.17) $ (0.07) $ (0.69)
Fiscal 2000, Quarters ended
----------------------------------
Dec. 31 Mar. 31 Jun. 30 Sep. 30
------- ------- ------- --------
Revenues.......................................................... $32,371 $34,725 $36,503 $ 40,786
Gross margin...................................................... 26,557 29,475 30,308 36,582
Restructuring cost................................................ -- -- -- 1,270
Income from operations............................................ 3,505 6,528 7,226 9,566
Net income........................................................ 2,749 5,007 5,852 7,294
Earnings per share--basic......................................... $ 0.11 $ 0.20 $ 0.23 $ 0.28
Earnings per share--diluted....................................... $ 0.10 $ 0.17 $ 0.21 $ 0.26
15
In the first quarter of fiscal 2001, inSilicon completed the acquisitions of
Xentec, Inc. and HD Lab, K.K. In the third quarter, Phoenix completed the
acquisitions of Integrity Sciences, Inc. and Ravisent Technologies, Inc. All
four acquisitions were accounted for using the purchase method of accounting.
And accordingly, the results of operations for the companies acquired are
included only for the period subsequent to closing of the acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Phoenix is a global leader of device-enabling and management software
solutions for PCs and connected digital devices. We provide our products
primarily to platform and peripheral manufacturers (collectively, "OEMs") that
range from large PC and information appliance manufacturers to small system
integrators and value-added resellers. We also provide training, consulting,
maintenance, and engineering services to our customers. We market and license
our products and services through a direct sales force, as well as through
regional distributors and sales representatives.
The global computer industry, driven by the expansion of the Internet, has
evolved into a rich "connected device ecosystem" embracing entirely new
categories of functionality and is characterized by rapid technology changes
that include increased processor speeds, hardware miniaturization, portability,
and new and improved ways to connect devices. Traditional PC platforms have
evolved into "endpoints" of the Internet. In addition, a wide array of other
new technological innovations have emerged such as TV-centric "Internet
Televisions" (iTVs), "Internet Video Players" (iVPs), tablet PCs, wireless
handheld appliances, interactive game stations, home networks, and rack-mounted
single board server systems (known as "server blades") for enterprise
applications.
We believe that our products and services enable customers who specify,
develop, and manufacture PCs, information appliances, and semiconductors to
bring leading-edge products to market more quickly while reducing their costs,
providing high value-added features to their customers and, hence, increasing
their competitiveness.
Phoenix's operations include the following:
Platform Enabling: Provides system-enabling software that is used in the
design, deployment and ongoing operation of industry standard desktop, notebook
and server PCs. The Platform Enabling's flagship software products provide
support for current technologies and industry standards, allowing systems and
device manufacturers to base new product designs on a range of microprocessors,
chipsets and operating systems combinations.
inSilicon: Provides communications technology that is used by semiconductor
and systems companies to design complex semiconductors called systems-on-a-chip
that are critical components of wired and wireless products. inSilicon provides
cores, related silicon subsystems and firmware to customers that use its
technologies in hundreds of different digital devices ranging from network
routers to handheld computers.
Information Appliance: Provides technology to electronics OEMs to develop
information appliance designs. Information Appliance software delivers an
easy-to-implement, low cost/high value architecture that enables "instant-on"
internet access and browsing capability for devices such as internet TV,
interactive screen phones, and handheld appliances. This division was launched
in March 2001.
PhoenixNet(TM): Provides technology infrastructure that enables security
products and services designed to deliver a higher level of trust to both
devices and device-aware e-business applications through device authentication.
Applications using this infrastructure for virtual private networks (VPNs) and
the Internet are supported by a global network of Regional Device Authorities.
16
During fiscal 2001, we completed four business combinations. In February
2001, Phoenix acquired Integrity Sciences, Inc., a provider of core computer
security products, which developed and marketed strong password technology. In
March 2001, Phoenix acquired certain assets of Ravisent Technologies, Inc., a
provider of digital audio and video software solutions and internet appliance
technology. In December 2000, inSilicon acquired Xentec, Inc., a privately held
IP developer that specialized in the design of high-speed mixed-signal analog
and wireless technologies and HD Lab, K.K., a wireless design services group
specialized in certain Bluetooth baseband technology.
These acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired business
are included in the Consolidated Balance Sheets as of September 30, 2001. The
results of operations from the date of acquisitions through September 30, 2001
were included in the accompanying Consolidated Statement of Operations for the
year ended September 30, 2001. There were no acquisitions or business
combinations during fiscal 2000 or 1999.
The amounts allocated to goodwill and purchased intangible assets are being
amortized on a straight-line basis. The estimated asset lives are determined
based on projected future economic benefits and expected life cycles of the
technologies. The amounts allocated to Purchased Technology are being amortized
over periods of 3 to 6 years, the amounts allocated to Other Intangible Assets
(comprised of customer lists and assembled work force costs) are being
amortized over periods of 2 and 6 years, and the amounts allocated to Goodwill
are being amortized over periods of 5 and 6 years.
The following is a summary of purchased transactions completed in fiscal
2001 (in millions):
- ------------------------------------------------------------------------------------------------
Total Total Other
purchase tangible Purchased intangible Stock-based
Acquired company consideration assets technology assets compensation Goodwill
- ------------------------------------------------------------------------------------------------
By Phoenix:
Integrity Sciences, Inc.... $ 3.9 $ -- $3.4 $ -- $ -- $ 0.5
Ravisent Technologies, Inc. $19.1 $ -- $8.1 $ -- $ -- $11.0
- ------------------------------------------------------------------------------------------------
By inSilicon:
Xentec, Inc................ $11.7 $0.2 $0.2 $0.6 $0.4 $10.3
HD Lab, K.K................ $ 1.6 $ -- $1.3 $0.3 $ -- $ --
- ------------------------------------------------------------------------------------------------
The following are details of the forms of consideration and their fair
values for each acquisition:
- ------------------------------------------------------------------------------------------------
Acquired company Form of consideration Fair value
- ------------------------------------------------------------------------------------------------
Integrity Sciences, Inc. $2.5 million in cash................................ $ 2.5 million
75,000 shares of Phoenix common stock............... 1.3 million
Transaction costs................................... 0.1 million
--------------
Total............................................. $ 3.9 million
- ------------------------------------------------------------------------------------------------
Ravisent Technologies, Inc. $17.8 million in cash............................... $17.8 million
Transaction costs................................... 1.3 million
--------------
Total............................................. $19.1 million
- ------------------------------------------------------------------------------------------------
Xentec, Inc. $3.0 million in cash................................ $ 3.0 million
15,678 and 618,378 shares of inSilicon common and
exchangeable preferred stock, respectively........ 7.2 million
Options to purchase 96,004 shares of inSilicon
common stock...................................... 1.0 million
Transaction costs................................... 0.5 million
--------------
Total............................................. $11.7 million
- ------------------------------------------------------------------------------------------------
HD Lab, K.K. $1.6 million in cash................................ $ 1.6 million
- ------------------------------------------------------------------------------------------------
17
As of September 30, 2001, $1.2 million of the $1.6 million payable specified
in the HD Lab, K.K. acquisition agreement had been paid. The remaining balance
of $0.4 million is scheduled to be paid in fiscal 2002.
The acquisition agreement with Integrity Sciences, Inc. includes an earn-out
agreement over a five year period of up to 100,000 shares of Phoenix's common
stock and cash payments of $1.5 million, if certain revenues and technology
criteria are met. There is no minimum payment requirement in the earn-out
agreement. No payments have been earned through September 30, 2001.
The acquisition agreement with Xentec requires that inSilicon Canada issue
up to an additional 415,000 exchangeable preferred shares to the former Xentec
stockholders over a two-year period, contingent upon the achievement of certain
performance-based milestones. Additional goodwill will be recorded for the fair
value of this consideration as the exchangeable preferred shares, if any, are
issued. There is no minimum payment requirement in this contingent
consideration and no payment was earned or paid for fiscal 2001. Also under the
terms of the acquisition, in January 2002 inSilicon will issue common stock
with a fair value of $0.5 million to former Xentec employees who continue their
employment with inSilicon through December 18, 2001. The $0.5 million is being
recognized as stock-based compensation expense over the one year period
subsequent to the merger, and as of September 30, 2001, $0.4 million of this
amount is included in payroll and related liabilities in the consolidated
balance sheets.
If the performance milestones specified in the earn-out agreements are met,
payments will be accrued and recorded as additional goodwill.
On March 27, 2000, Phoenix's majority-owned subsidiary, inSilicon, closed
its initial public offering of 3.5 million shares. Proceeds, net of issuance
costs, to inSilicon were approximately $37.0 million. The principal purpose of
the offering was to increase inSilicon's equity capital, to create a public
market for its common stock, to facilitate future access to public equity
markets, to improve the effectiveness of its stock option plan in attracting
and retaining key employees, to provide liquidity to Phoenix and to provide
increased visibility of inSilicon in the marketplace. On September 30, 2001,
Phoenix owned approximately 69.2% of inSilicon's common stock.
In September 1998, we acquired Sand in a purchase acquisition. The purchase
price consisted of approximately $18.6 million in cash, 464,000 shares of our
common stock, approximately 264,000 stock options issued in exchange for Sand
stock options, and up to $3.7 million in performance incentives to be paid
through fiscal 2002. Of the $3.7 million, approximately $1.6 million represents
minimum anticipated payments. Performance incentives totaling of $2.6 million
were earned per the agreement. Of the $2.6 million, $0.8 million was earned in
fiscal 2000 and paid in fiscal 2001; $0.9 million was earned in fiscal 1999 and
paid in fiscal 2000. The final payment of $0.9 million was earned in fiscal
2001 and is scheduled to be paid in fiscal 2002. The earn-out agreement ended
in fiscal 2001.
18
Results of Operations
The following table includes Consolidated Statement of Operations data for
the years ended September 30, 2001, 2000, and 1999, as a percentage of total
revenues:
2001 2000 1999
---- ---- ----
Revenues:
License fees....................................................... 85 % 87% 82%
Services........................................................... 15 13 18
--- --- ---
Total revenues.................................................... 100 100 100
Cost of revenues:
License fees....................................................... 3 2 6
Services........................................................... 12 12 15
Amortization of purchased technology............................... 2 1 2
Write-off of capitalized software.................................. -- -- 5
--- --- ---
Total cost of revenues............................................ 17 15 28
--- --- ---
Gross margin......................................................... 83 85 72
Operating expenses:
Research and development........................................... 37 27 32
Sales and marketing................................................ 31 23 23
General and administrative......................................... 20 14 13
Amortization of goodwill and acquired intangible assets............ 4 2 2
Stock-based compensation........................................... 1 -- --
Impairment of long-lived assets.................................... 8 -- --
Restructuring cost................................................. 2 1 6
--- --- ---
Total operating expenses.......................................... 103 67 76
--- --- ---
Income (loss) from operations........................................ (20) 18 (4)
Interest and other income, net....................................... 2 3 3
Gain (loss) on investment............................................ (2) -- 3
Minority interest.................................................... 4 -- --
--- --- ---
Income (loss) before income taxes.................................... (16) 21 2
Income tax expense (benefit)......................................... (1) 7 1
--- --- ---
Net income (loss).................................................... (15)% 14% 1%
=== === ===
Revenues
Our products are generally designed into personal computer systems,
information appliances, and semiconductors. License fee and service revenues by
segment for fiscal 2001, 2000, and 1999 were as follows (dollars in thousands):
Amount of Revenues % Change % of Revenues
-------------------------- ----------- -------------------
2001 2000 1999 2001 2000 2001 2000 1999
-------- -------- -------- ----- ---- ----- ----- -----
Platform Enabling........ $ 96,668 $118,604 $106,872 -18.5% 11.0% 79.6% 82.1% 84.9%
inSilicon................ 19,079 24,676 18,954 -22.7% 30.2% 15.7% 17.1% 15.1%
Information Appliance.... 3,531 -- -- n/a n/a 2.9% -- --
PhoenixNet(TM)........... 2,159 1,105 -- 95.4% n/a 1.8% 0.8% --
-------- -------- -------- ----- ---- ----- ----- -----
Total revenues........... $121,437 $144,385 $125,826 -15.9% 14.7% 100.0% 100.0% 100.0%
======== ======== ======== ===== ==== ===== ===== =====
Total revenues in fiscal 2001 decreased by $22.9 million (or 15.9%) from
fiscal 2000. The decrease is primarily a result of the global economic slowdown
and softness in the PC market.
19
Platform Enabling revenues in fiscal 2001 decreased by $21.9 million (or
18.5%) from fiscal 2000 due to softness in the PC market which had a
significant impact on our core business in the North America and Taiwan
regions. Platform Enabling revenues increased by $11.7 million (or 11.0%) in
fiscal 2000, mainly due to higher volume royalty license fees from two OEM
customers.
inSilicon revenues in fiscal 2001 decreased by $5.6 million (or 22.7%) from
fiscal 2000 due primarily to the challenging economic environment, particularly
in North America. Revenues in fiscal 2000 increased by $5.7 million (or 30.2%)
from fiscal 1999 due to greater market acceptance of semiconductor intellectual
property, increased acceptance of re-use licenses of semiconductor intellectual
property to existing customers, and increased maintenance revenues from
inSilicon's growing installed base of customers.
Information Appliance first generated revenues in the third quarter of
fiscal 2001. North America and Japan were the two main regions contributing to
these revenues.
PhoenixNet(TM) revenues in fiscal 2001 increased by $1.1 million (or 95.4%)
from fiscal 2000, primarily due to its shift in business focus from homepage
and search settings solutions to device authentication security products and
services during fiscal 2001. PhoenixNet(TM) first generated revenues in the
second quarter of fiscal 2000.
Revenues by geographic region based on country of sale for fiscal 2001,
2000, and 1999 were as follows (dollars in thousands):
Amount of Revenues % Change % of Revenues
-------------------------- ------------ -------------------
2001 2000 1999 2001 2000 2001 2000 1999
-------- -------- -------- ----- ----- ----- ----- -----
North America........ $ 34,613 $ 41,121 $ 40,907 -15.8% 1.0% 28.5% 28.5% 32.5%
Japan................ 46,878 48,994 36,596 -4.3% 33.9% 38.6% 33.9% 29.1%
Taiwan............... 21,705 41,409 33,828 -47.6% 22.4% 17.9% 28.7% 26.9%
Other Asian Countries 9,870 3,405 2,999 189.9% 13.5% 8.1% 2.4% 2.4%
Europe............... 8,371 9,456 11,496 -11.5% -17.7% 6.9% 6.5% 9.1%
-------- -------- -------- ----- ----- ----- ----- -----
Total Revenues....... $121,437 $144,385 $125,826 -15.9% 14.7% 100.0% 100.0% 100.0%
======== ======== ======== ===== ===== ===== ===== =====
In fiscal 2001, North America, Japan, Taiwan, and Europe revenues decreased
while Other Asian Countries revenues increased. The decrease in North America,
Japan, Taiwan, and Europe was due primarily to the economic slowdown in the
global economy which had a significant impact on the PC market. The increase in
Other Asian Countries was attributed to improved sales development efforts in
Korea and China. In fiscal 2000, revenues from Japan, Taiwan, and Other Asian
Countries increased while North American revenues remained relatively flat and
European revenues decreased. This fluctuation of revenues was due primarily to
the outsourcing of system design and manufacturing to Asian PC and motherboard
manufacturers, inSilicon's release of their USB 2.0 Controller, growth in Japan
PC shipments in the Platform Enabling segment, and a shift in revenues from the
European market to the Asian market. Taiwan, Japan, and Other Asian Countries
revenues in fiscal 2000 increased despite lower average selling prices of our
BIOS products than in fiscal 1999, partly due to a shift in demand for personal
computers from desktop to notebook computers.
One customer accounted for 12% of total revenues in fiscal 2001. Another
customer accounted for 19% and 11% of revenues in fiscal 2000 and 1999,
respectively. No other customer accounted for more than 10% of revenues in
fiscal 2001, 2000, or 1999.
Gross Margin
Gross margin as a percentage of revenues was 83%, 85%, and 72% for fiscal
2001, 2000, and 1999, respectively. Included in the cost of revenues was $2.2
million, $1.3 million, and $2.1 million of amortization of
20
purchased technologies from business combinations for fiscal 2001, 2000, and
1999, respectively. Also included in the costs of revenues in fiscal 2000 and
1999 was a reversal of $1.9 million of previous year's Year 2000 ("Y2K")
support cost and $3.2 million of Y2K support cost. In addition, a $6.6 million
write-off of capitalized software in fiscal 1999 was reclassified from
restructuring cost to cost of revenues for presentation purposes.
For fiscal 2001, 2000, and 1999, gross margin as a percentage of revenues
before the amortization of purchased technology and software development costs,
Y2K support costs (reversal of Y2K support costs), and write-off of capitalized
software was 84%, 85%, and 82%, respectively. The decrease in gross margin in
fiscal 2001 from fiscal 2000 was due to lower margins on Information Appliance
and inSilicon product sales. The increase in gross margin in fiscal 2000 from
fiscal 1999 was due to an increase in license revenues from the Platform
Enabling division and inSilicon, especially in Asia. License fee gross margin
as a percentage of license fee revenues was 96%, 98% and 92% in fiscal 2001,
2000 and 1999, respectively. Service gross margin as a percentage of revenues
was 16%, 8% and 19% in fiscal 2001, 2000 and 1999, respectively. Total
amortization of capitalized purchased technologies and software development
costs charged to costs of revenues in fiscal 2001, 2000 and 1999, was $2.2
million, $2.5 million and $4.8 million, respectively.
Research and Development Expenses
Research and development expenses were $45.5 million, $39.1 million, and
$39.9 million in fiscal 2001, 2000, and 1999, respectively. As a percentage of
revenues, these expenses represented 37%, 27%, and 32%, respectively. In fiscal
2001, research and development expenses increased by $6.4 million (or 16%) due
to increased expenses relating to recent acquisitions, the launch of a new
division, and establishment of a new development center in Asia. In fiscal
2000, research and development expenses decreased by $0.8 million (or 2%) due
to the improvement of product and resource management resulting in lower
headcount and the movement of research and development centers to Asia and
Japan where costs were lower partially offset by an increase in variable
compensation due to the attainment of increased revenues.
Approximately $1.4 million, $0.4 million, and $2.4 million of internal
software development costs were capitalized in fiscal 2001, 2000, and 1999,
respectively.
Sales and Marketing Expenses
Sales and marketing expenses were $37.2 million, $33.1 million, and $29.0
million in fiscal 2001, 2000, and 1999, respectively. As a percentage of
revenues, these expenses represented 31%, 23% and 23% in fiscal 2001, 2000, and
1999, respectively. In fiscal 2001, sales and marketing expenses increased by
$4.1 million (or 12%) due primarily to the increase in the size of our direct
sales force and the expansion of our distribution channels to position
ourselves for growth in the security and Information Appliance markets. In
fiscal 2000, sales and marketing expenses increased by $4.1 million (or 14%)
due primarily to an increase in variable compensation due to the attainment of
increased revenues, and costs related to sales meetings.
General and Administrative Expenses
General and administrative expenses were $24.7 million, $19.7 million, and
$16.3 million in fiscal 2001, 2000, and 1999, respectively. As a percentage of
revenues, these expenses represented 20%, 14%, and 13% in fiscal 2001, 2000,
and 1999, respectively. In fiscal 2001, the general and administrative expenses
increased by $5.0 million (or 25%) due to investment in infrastructure,
including launching the new Information Appliance Division and setting up new
foreign offices. Also included in the fiscal 2001 general and administrative
expenses was an increase in bad debt provision of $1.2 million from fiscal 2000
to reflect current market slowdown. The increase in fiscal 2000 was primarily
due to increases in personnel, especially in the PhoenixNet(TM) segment and
inSilicon, and variable compensation due to higher profitability.
21
Amortization of goodwill and acquired intangibles
Amortization expenses were $5.0 million, $2.2 million, and $2.5 million in
fiscal 2001, 2000, and 1999, respectively. In fiscal 2001, amortization expense
increased by $2.8 million from fiscal 2000, primarily due to various purchase
acquisitions completed in fiscal 2001 (see Note 7 to the Consolidated Financial
Statements). The amortization expenses in fiscal 2000 and 1999 were related to
the Sand acquisition, which was completed in fiscal 1998.
Stock-Based Compensation
The stock-based compensation expenses were $1.7 million, $0.8 million, and
$nil in fiscal 2001, 2000, and 1999, respectively. Charges in fiscal 2001 were
mostly due to the granting of options to purchase Phoenix and inSilicon stock
at exercise prices less than the fair market value of the stock on the grant
date.
Impairment of long-lived assets
Impairment of long-lived assets were $9.4 million in fiscal 2001 and $nil in
fiscal 2000 and 1999. During the fourth quarter of fiscal 2001, pursuant to
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), inSilicon performed an assessment of the carrying value of its
long-lived assets to be held and used, including goodwill and other intangible
assets recorded in connection with its various acquisitions. The assessment was
necessitated by various factors that indicated these assets may be impaired,
including recent operating results that did not meet management's expectations,
the global downturn in technology spending, and sustained decline in
inSilicon's market capitalization.
The conclusion of inSilicon's assessment was that indicators of impairment
were present and therefore a test was required. inSilicon performed an asset
impairment test with the assistance of independent valuation experts. The test
was performed by comparing the undiscounted expected cash flows for a five-year
period (the estimated life of the assets), to the carrying amount of the
goodwill and other intangible assets resulting from purchase business
combinations. The assumptions supporting the estimated cash flows reflect
management's best estimates.
Also with the assistance of independent valuation experts, inSilicon
determined the fair value of the impaired long-lived assets. Fair value was
determined using the cash flow method and the income approach using the same
assumptions as those used in the initial test of impairment. Based on the
results of the test, inSilicon determined that the goodwill associated with
Xentec was impaired and a write-down of goodwill and intangible assets totaling
$9.4 million was recorded during the fourth quarter of fiscal 2001, reflecting
the amount by which the carrying amount of the assets exceed their respective
fair values. The write-down was included in "Impairment of long-lived assets"
in the Consolidated Statements of Operations. There were no impairment charges
of long-lived assets in fiscal 2000 or 1999 for inSilicon.
Phoenix also conducted an assessment of the carrying value of its long-lived
assets due to similar impairment indicators and determined that no impairment
charges were required in fiscal 2001, 2000, or 1999.
Restructuring Costs
Restructuring charges for fiscal 2001, 2000, and 1999, were as follows:
Years ended September 30,
-------------------------
2001 2000 1999
------ ------ ------
(in thousands)
Severance and other exit costs................... $1,525 $1,270 $7,108
Asset write-offs................................. -- -- 784
------ ------ ------
$1,525 $1,270 $7,892
====== ====== ======
22
Write-off of capitalized software of $6.6 million that was previously
categorized as restructuring charges in fiscal 1999 was reclassified to costs
of revenues for presentation purposes.
2001 Charges
In April 2001, in efforts to optimize operational efficiency and change its
business strategy to address changes in customer demands, we reduced our global
workforce by approximately 70 employees across all business functions. The
restructuring included refocusing research and development efforts,
re-evaluating sales and marketing and general and administration resource
requirement, and aligning overall cost structure with current revenue levels.
All terminations were completed as of September 30, 2001.
The restructuring program resulted in a charge of approximately $1.5 million
for severance and related cost in the third quarter of fiscal 2001. As of
September 30, 2001, approximately $1.3 million was paid and an additional $0.2
million was accrued and expected to be paid through the first quarter of fiscal
2002. As a result of the restructuring program, we expect pretax savings in
operating expenses to be approximately $9.0 million on an annualized basis.
2000 Charges
In the fourth quarter of fiscal 2000, Phoenix recorded a restructuring
charge of approximately $1.3 million for severance benefits associated with the
elimination of three management positions. The charges were related to the
streamlining of certain management functions in Taiwan and North America. All
terminations were completed as of September 30, 2000.
1999 Charges
In fiscal 1999, we incurred $7.9 million of restructuring charges relating
to the realignment of its business into three operating divisions,
consolidation of certain facilities and operations, integration of Award and
Sand, and discontinuation of the PICO and PC Enhancing Division. These charges
included $5.5 million in severance costs associated with the elimination of 92
positions across all business functions from various product divisions and
management, $0.8 million of fixed assets write-down for the Company's United
Kingdom branch, $0.7 million in facilities abandonment, and $0.9 million of
other business exit costs pursuant to the re-organization plan. All
terminations were completed as of September 30, 2000.
Charges Subsequent to Fiscal 2001 Year End
In October 2001, due to continuing global economic downturn and industry
trends, we announced a restructuring program that would reduce its global
workforce by approximately 15%. This restructuring program will align our
expense structure with current market conditions to return to profitability.
This reduction will result in a one-time charge of approximately $4.0 million
in the first quarter of fiscal 2002.
As part of the restructuring program, we also announced a reorganization
plan that would align its corporate actions with corporate strategy to improve
customer focus, unify product marketing, streamline engineering, and create a
market driven development process. The Corporate Marketing and Products
Division (or CMPD), will be customer-focused and responsible for product
marketing functions and applications development activities. The Corporate
Engineering and Planning Division (or CEPD), will be technology-focused and
includes the core development resources and deployment-engineering group. The
Global Sales and Support Division (or GSSD), will focus on growing customer
base and revenues.
As a result of the restructuring program announced in October 2001, we
expect a pre-tax saving of $10.0 million on an annualized basis starting from
the second quarter of fiscal 2002.
23
In December 2001, inSilicon announced a restructuring program to realign
ongoing expense structure. This restructuring program will result in a one-time
charge of $3.5 million which includes a global workforce reduction by
approximately 20% and a substantial non-cash write-down of previously
capitalized software. The restructuring is expected to be completed by the
first quarter of fiscal 2002. inSilicon anticipated an annualized cost saving
of approximately $2.8 million from this restructuring program.
Interest and Other Income, Net
Net interest and other income was $2.9 million, $4.0 million, and $3.3
million in fiscal 2001, 2000, 1999, respectively. Net interest and other income
consists mostly of interest income. Interest income is primarily derived from
cash and short-term investments. The income generated each period is highly
dependent on available cash and fluctuations in government interest rates. The
average interest rate earned in fiscal 2001 was approximately 4.3%. All of the
cash equivalents and short-term investments are in USD and are not subject to
fluctuations in foreign currency exchange rates. Interest income was $3.5
million, $4.4 million, and $3.4 million in fiscal 2001, 2000, 1999,
respectively, of which $1.6 million in fiscal 2001 was inSilicon's. Interest
income decreased by $0.9 million and increased by $1.0 million in fiscal year
2001 and 2000, respectively. The decrease in interest income in fiscal 2001 was
primarily due to the decrease in the average cash balance available for
investment as a result of funding various acquisitions and stock repurchase
programs during the year. The increase of $1.0 million interest income in
fiscal 2000 was primarily due to higher cash balances as a result of proceeds
inSilicon received from the initial public offering of inSilicon stock.
Gain/Loss on Investment
Gain (loss) on investment was ($2.8 million), $nil, and $4.0 million in
fiscal 2001, 2000, and 1999, respectively. Equity investments in companies in
which Phoenix does not have significant influence, which is usual when
ownership is less than 20%, are included in other assets. These investments are
accounted for using the cost method. These investments are assessed for
impairment periodically through review of operations and indications of
continued viability, such as subsequent rounds of financing. In the fourth
quarter of fiscal 2001, as a result of the deterioration of financial markets
and the corresponding effect on company valuations and financing prospects,
Phoenix recorded $3.5 million in losses as a result of other than temporary
declines in the value of investments in these companies. We do not participate
in subsequent financings for any of the companies we invested in, and we are
not obligated or committed in any way to participate in any future financings
of these companies. Net loss on investment in fiscal 2001 was $2.8 million
resulting from $3.5 million of write-down netted against $0.7 million of gain
on sale of investments. The net gain on investment in fiscal 1999 was mainly
related to a sale of Xionics common stock, which resulted in a $4.0 million
gain.
Provision for Income Taxes
Phoenix recorded income tax benefit of $0.8 million and income tax
provisions of $9.8 million and $0.9 million, reflecting effective tax rates of
4%, 32%, and 32% in fiscal 2001, 2000, and 1999, respectively. The effective
tax rate in 2001 was lower than the statutory rate due to change of valuation
allowance related to inSilicon's deferred tax assets and foreign withholding
taxes. Phoenix's effective tax rate in fiscal 2000 and 1999 had been lower than
the statutory rate due to various federal and state tax credits and lower tax
rates imposed on foreign earnings in certain jurisdictions. inSilicon is not
consolidated for federal income tax purposes in fiscal 2001, as Phoenix owns
less than 80% of inSilicon's issued outstanding voting stock.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations to be accounted for using the purchase method of accounting and is
effective for all business combinations
24
completed after June 30, 2001. The adoption did not have a material effect on
the Company's operating results or financial condition. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and
written-off when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 required purchased intangible assets to be
amortized over their estimated useful lives unless these lives are determined
to be indefinite. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. Early application is permitted for entities with fiscal
years beginning after March 15, 2001 provided that the first interim period
financial statements have not been previously issued. The Company is currently
assessing the impact of SFAS 142 on its operating results and financial
condition. The unamortized goodwill was $15.9 million as of September 30, 2001
and the amortization of goodwill was $4.1 million for fiscal 2001.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), that is applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting
Principles Board Opinion 30, "Reporting the Results of Operations." This
Standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. This Standard also requires
expected future operating losses from discontinued operations to be displayed
in the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company is currently assessing the
potential impact of SFAS 144 on its operating results and financial position.
Fluctuations in Operating Results
The tables in Part II, Item 6 of this Form 10-K include selected unaudited
quarterly consolidated data for fiscal 2001 and 2000. This information was
derived from our 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 our annual Consolidated
Financial Statements. The results of operations for any period are not
necessarily indicative of the results to be expected for any future period.
Our future operating results may vary substantially from period to period.
The timing and amount of our 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 we receive recurring revenues 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, we
experience a pattern of recording 50% or more of our quarterly revenues in the
third month of the quarter. We have historically monitored our revenue bookings
through regular, periodic worldwide forecast reviews within the quarter. These
reviews keep management informed of areas where additional selling efforts may
be needed in order to meet the internal plans and market expectations. There
can be no assurances that this process will result in our meeting revenue
expectations. Operating expenses for any year are normally based on the
attainment of planned revenue levels for that year and are incurred ratably
throughout the year. As a result, if revenues were less than planned in any
period while expense levels remain relatively fixed, our operating results
would be adversely affected for that period. In addition, unplanned expenses
could adversely affect operating results for the period in which such expenses
were incurred.
Business Risks
The additional following factors should be considered carefully when
evaluating our business.
Product Development
Our long-term success will depend on our ability to enhance existing
products and to introduce new products timely and cost-effectively that meet
the needs of customers in present and emerging markets. There
25
can be no assurance that we will be successful in developing new products or in
enhancing existing products or that new or enhanced products will meet market
requirements. Delays in introducing new products can adversely impact
acceptance and revenues generated from the sale of such products. We have, from
time to time, experienced such delays. Our software products and their
enhancements contain complex code that may contain undetected errors and/or
bugs when first introduced. There can be no assurance that new products or
enhancements will not contain errors or bugs that will adversely affect
commercial acceptance of such new products or enhancements. The introduction of
new products depends on acceptance of e-commerce and adoption of digital
devices.
Protection of Intellectual Property
We rely on a combination of patent, trade secret, copyright, trademark, and
contractual provisions to protect our proprietary rights in our 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 our technology. In addition, copyright
and trade secret protection for our products may be unavailable or unreliable
in certain foreign countries. We have been issued twenty-nine patents with
respect to our current product offerings and have sixty-five patent
applications pending with respect to certain of the products we market. 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 our engineers
will be able to develop technologies capable of being patented. Also, as the
number of software patents increases, we believe that companies that develop
software products may become increasingly subject to infringement claims.
There can be no assurance that a third party will not assert that our
patents or other proprietary rights are violated by products offered by
Phoenix. Any such claims, whether or not meritorious, may be time consuming and
expensive to defend, can trigger indemnity obligations owed by us to third
parties, and may have an adverse effect on our business, results of operations
and financial condition. Infringement of valid patents or copyrights or
misappropriation of valid trade secrets, whether alleged against us, or our
customers, and regardless of whether such claims have merit, could also have an
adverse effect on our business, results of operations and financial condition.
Importance of Microsoft and Intel
For a number of years, Phoenix has worked closely with leading software and
semiconductor companies in developing standards for the PC industry. We remain
optimistic regarding relationships with these industry leaders. However, there
can be no assurance that leading software and semiconductor companies will not
develop alternative product strategies that could conflict with our product
plans and marketing strategies. Action by such companies may adversely impact
our business and results of operations. Presently, there is little overlap or
conflict in our product offerings, although these companies now incorporate
some functionality that has traditionally resided in the BIOS. These leading
software and semiconductor companies, in their endeavors to add value,
incorporate features or functions provided by Phoenix either in the silicon or
in the operating system. Therefore, we must continuously create new features
and functions to sustain, as well as increase, our software's added value to
OEMs. There can be no assurances that we will be successful in these efforts.
Attraction and Retention of Key Personnel
Our ability to achieve our revenue and operating performance objectives will
depend in large part on our ability to attract and retain technically qualified
engineering, sales, marketing, and finance personnel. In particular,
approximately 50% to 60% of our employees are involved in engineering efforts.
Semiconductors IP and Internet products are based on new and emerging
technologies that are different from BIOS technologies. The available pool of
engineering talent is limited for all four operating segments. Accordingly,
failure to attract, retain and grow our research and development teams could
adversely affect our business and operating results.
26
All of our executive officers and key personnel are employees at-will. Phoenix
might not be able to execute its business plan if we were to lose the services
of any of our key personnel. Several of our executives and key employees joined
Phoenix only recently and have had only a limited time to work together. Our
management team might not be able to work effectively together or with the rest
of our employees to develop our technology and manage our continuing operations.
Dependence on Key Customers; Concentration of Credit Risk
The loss of any key customer and our inability to replace revenues provided
by a key customer may have a material adverse effect on our business and
financial condition. Phoenix's customer base includes large OEMs in the PC,
semiconductor and Internet markets, system integrator value-added reseller, and
motherboard manufacturers. As a result, we maintain individually significant
receivable balances due from some of them. If these customers fail to meet
guaranteed minimum royalty payments and other payment obligations, our
operating results could be adversely affected. As of September 30, 2001, our
largest receivable balance from any one customer represented approximately 20%
of total accounts receivable. As of the filing date, this receivable had been
collected.
Competition
The market for our BIOS products is very competitive, resulting in downward
pricing pressure. In marketing our BIOS products, we compete primarily with
in-house research and development departments of PC manufacturers that may have
significantly greater financial and technical resources than ours. These
companies include Acer Incorporated, Compaq Computer Corporation, Dell Computer
Corporation, IBM Corporation, and Toshiba Corporation. We also compete for
system software business with other independent suppliers, ranging from small,
privately held companies to Acer Softech, a division of Acer Laboratories,
Inc., a major Taiwan chip and motherboard supplier. There can be no assurance
that we will continue to compete successfully with our current competitors or
potential new competitors. There can be no assurance that intense competition
in the industry and particular actions of our competitors will not have an
adverse effect on our business, operating results and financial condition. Due
to the competitive nature of the business and the overall price pressures
within the PC market, we expect that prices on many of our products may
decrease in the future and that such price decreases could have an adverse
impact on our results of operations or financial condition.
The SIP industry is very competitive and is characterized by constant
technological change, rapid rates of product obsolescence, and frequently
emerging new suppliers. Our existing competitors include other merchant
semiconductor intellectual property (or "SIP") suppliers, such as the Inventra
Division of Mentor Graphics Corporation, Synopsys Inc., Enthink, Inc., Gain
Technology Corporation, and the VAutomation subsidiary of ARC Cores, Inc.; and
suppliers of ASICs, such as LSI Logic Corporation, the ASIC divisions of IBM
Corporation, Lucent Technologies, Inc., Toshiba Corporation, and NEC
Corporation. We also compete with the internal development groups of large,
vertically integrated semiconductor and systems companies, such as Intel
Corporation, Motorola Inc., Cisco Systems, Inc., and Hewlett-Packard Company.
In these companies, SIP developed for an individual project sometimes is
subject to efforts by the company to be reused in multiple projects. Companies
whose principal business is providing design services as work-for-hire, such as
Intrinsix Corporation, Sci-worx Corporation, Parthus Technologies plc, and the
Tality subsidiary of Cadence Design Systems, Inc., also provide competition.
In the FirstWare software area, we compete with individual component
software suppliers such as StorageSoft, Inc., Symantec Corporation, and other
companies that develop diagnostic and repair software, as well as in-house
solutions.
In the Internet and securities business, there are many distribution
vehicles for our partners to reach PC end users, including PC OEM companies, PC
and hardware registration companies and Internet web sites. Many have greater
resources than Phoenix.
27
The Information Appliance Division competes primarily with research and
development departments of software developers that may have significantly
greater financial and technical resources than Phoenix. These companies include
OpenTV Corporation, Wind River Systems, Inc., Liberate Technologies, and
Microsoft Corporation. We also compete for software business with other
independent suppliers, ranging from small, privately-held companies to in-house
research and development departments of major OEMs.
International Sales and Activities
Revenues derived from the international operations of our Platform Enabling
Division comprises a majority of total revenues. There can be no assurances
that we will not experience significant fluctuations in international revenues.
While the major portion of our license fee or royalty contracts are U.S. dollar
denominated, we are entering into a number of contracts denominated in local
currencies. Phoenix has sales and engineering offices in Germany, Japan, Korea,
Taiwan, and China. Our operations and financial results may be adversely
affected by factors associated with international operations, such as changes
in foreign currency exchange rates, uncertainties relative to regional economic
circumstances, political instability in emerging markets, difficulties in
attracting qualified employees, and language, cultural and other difficulties
managing foreign operations.
Recent Terrorist Attacks
On September 11, 2001, the United States was a target of terrorist attacks
of unprecedented scope. These attacks have caused instability in the global
financial markets, and have contributed to downward pressure on stock prices of
United States publicly traded companies. This instability has resulted in a
slowdown in the economy. These attacks may lead to armed hostilities or to
further acts of terrorism and civil disturbances in the United States, or
elsewhere, which may further contribute to economic instability in the United
States and could have a material adverse effect on our business, financial
condition and operating results.
Volatile Market for Phoenix Stock
The market for our stock is highly volatile. The trading price of our common
stock has been, and will continue to be, subject to fluctuations in response to
operating and financial results, announcements of technological innovations,
new products or customer contracts by us or our competitors, changes in our or
our competitors' product mix or product direction, changes in our revenue mix
and revenue growth rates, changes in expectations of growth for the PC
industry, as well as other events or factors which we 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 it specifically could have an immediate and adverse effect on the
market price of our 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 small capitalization, high-technology
companies and have often included factors other than the operating performance
of these companies.
Certain Anti-Takeover Effects
Our 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.
Rapid Change with the Internet
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility, quality of service,
potential tax or other government regulation, may affect the use of the
28
Internet as a medium to distribute or support our software products and the
functionality of some of our products. If we are unsuccessful in timely
assimilating changes in the Internet environment in our business operations and
product development efforts, our future net revenues and operating results
could be adversely affected.
Business Disruptions
While Phoenix has not been the target of software viruses specifically
designed to impede the performance of its products, such viruses could be
created and deployed against its products in the future. Similarly, experienced
computer programmers or hackers may attempt to penetrate our network security
or the security of our web sites from time to time. A hacker who penetrates our
network or web sites could misappropriate proprietary information or cause
interruptions of our services. We might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
virus creators and/or hackers.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity include cash, cash equivalents, and
short-term investments, totaling $65.0 million and $107.7 million at September
30, 2001 and 2000, respectively. Consolidated cash and cash equivalents were of
$62.1 million at September 30, 2001, of which $32.0 million was owned directly
by inSilicon. Consolidated short-term investment totaled $2.9 million at
September 30, 2001, and none was restricted. We believe that current cash and
cash flow from operations will be sufficient to meet our operating and capital
requirements on a short-term and long-term basis.
In February 2001, the Board of Directors authorized a program to repurchase
up to $30 million of outstanding shares of common stock over a 12-month period.
In fiscal 2001, we repurchased approximately 469,000 shares at a cost of
approximately $5.1 million under the 2001 repurchase program.
In fiscal 2000, the Board of Directors authorized a program to repurchase
outstanding shares of common stock over a 24-month period. Under this program,
we repurchased approximately 836,000 shares during fiscal 2000 at a cost of
$14.5 million. Also, in first quarter of fiscal 2001, we repurchased
approximately 1,028,000 shares at a cost of approximately $15.9 million under
the 2000 repurchase program and completed the program.
Changes in Financial Condition
We reported $62.1 million consolidated cash in fiscal 2001, of which $32.0
million was owned directly by inSilicon. Net cash generated from operating
activities during fiscal 2001 was $5.1 million, consisting primarily of a
decrease of $18.3 million in accounts receivable and a $1.7 million increase in
income tax payable, partially offset by an outflow of $3.3 million of net loss
adjusted for non-cash items, a $4.8 million increase in prepaid royalties, and
other fluctuations in working capital. Net cash provided by investing
activities in fiscal 2001 was $18.6 million, consisting primarily of $51.0
million in net proceeds in disposal from short-term investments, offset by $3.8
million in purchases of property and equipment, $1.4 million in additions to
computer software costs, and $27.2 million in business acquisitions. Net cash
used in financing activities during fiscal 2001 was $15.1 million, consisting
primarily of repurchase of the our common stock of $21.0 million, repurchase of
the Intel warrant for $2.9 million, and net payment of borrowings of $0.8
million, partially offset by exercise of common stock options and issuance of
stock under Phoenix and inSilicon's employee purchase plan of $9.6 million.
Net cash generated from operating activities during fiscal 2000 was $11.0
million, consisting primarily of $20.9 million of net income, adjusted for
non-cash items, partially offset by increases in accounts receivable, other
current assets and other assets and decreases in payroll, other accrued
liabilities and income taxes payable.
29
Net cash used in investing activities in fiscal 2000 was $18.5 million,
consisting primarily of $13.3 million of net purchases of short-term and
long-term investments, $4.8 million in purchases of property and equipment and
$0.4 million in additions to computer software costs. Net cash provided by
financing activities during fiscal 2000 was $36.6 million, consisting of
approximately $37.0 million generated from the initial public offering of
inSilicon common stock, $19.9 million generated from the exercise of common
stock options and the issuance of stock under the Phoenix and inSilicon's
employee stock purchase plans, partially offset by $20.3 million of cash used
to repurchase Phoenix's common stock.
Net cash generated from operating activities during fiscal 1999 was $21.6
million, resulting primarily from cash provided by net income, adjusted for
non-cash items. Net cash used in investing activities was $13.7 million, which
consisted primarily of $6.2 million of net purchases of short-term and
long-term investments and marketable securities, $5.0 million in purchases of
property and equipment, and $2.4 million in addition to computer software
costs. Cash used in financing activities during fiscal 1999 was $28.3 million,
consisting primarily of $34.1 million to repurchase our common stock, partially
offset by $5.8 million generated from the exercise of common stock options and
the issuance of stock under our employee stock purchase plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. Our investments are in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limit the amount of credit exposure to any
one issuer. We protect and preserve our invested funds by limiting default,
market and reinvestment risk. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if there is a decline in interest rates. Due in part to these factors,
our future investment income may fall short of expectations, or we may suffer a
loss in principal if it is forced to sell securities, which have declined in
market value due to changes in interest rates.
Foreign Currency Risk
International revenues from our foreign subsidiaries were 71%, 71%, and 67%
of total revenues in fiscal 2001, 2000, and 1999, respectively. International
sales are primarily from our foreign sales subsidiaries in their respective
countries and are often denominated in the local currency of each country.
These subsidiaries incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their
functional currency. Our international business is subject to risks typical of
an international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors. Our exposure to foreign exchange rate
fluctuations arises in part from intercompany accounts in which costs incurred
in the United States are charged to our foreign sales subsidiaries. These
intercompany accounts are typically denominated in the functional currency of
the foreign subsidiary in order to centralize foreign exchange risk with the
parent company in the United States. We are also exposed to foreign exchange
rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The impact from a hypothetical 10 percent
appreciation/depreciation of the U.S. Dollar from September 30, 2001 market
rates would be immaterial on our net income.
30
Investment Risk
We invest in equity instruments of information technology companies for
business and strategic purposes. These investments are included in other
long-term assets and are accounted for under the cost method when ownership is
less than 20%. For these non-quoted investments, our policy is to regularly
review the assumptions underlying the operating performance and cash flow
forecasts in assessing the carrying values. We identify and record impairment
losses on these assets when events and circumstances indicate that such assets
might be impaired. In fiscal 2001, after re-valuating our investments, we
recorded impairment charges of $3.5 million on these investments. Equity
security price fluctuations would have an immaterial negative impact on the
value of our securities in fiscal 2001 due to our low net equity investment
balance at September 30, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to its Company's
directors will be contained in its definitive proxy statement to be filed
pursuant to Regulation 14A in connection with the 2001 annual meeting of its
stockholders (the "Proxy Statement") and is incorporated herein by this
reference. The information required by this item with respect to its executive
officers is contained in Part I in the section captioned, "Election of
Directors" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Executive Compensation" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Certain Transactions" in
the Proxy Statement.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of the Company and its
subsidiaries are filed as part of this report on Form 10-K:
Page
----
Report of Ernst & Young LLP, Independent Auditors.................................. 36
Consolidated Balance Sheets as of September 30, 2001 and 2000...................... 37
Consolidated Statements of Operations for the years ended September 30, 2001, 2000,
and 1999......................................................................... 38
Consolidated Statements of Stockholders' Equity for the years ended September 30,
2001, 2000, and 1999 39
Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000,
and 1999......................................................................... 40
Notes to Consolidated Financial Statements......................................... 41
2. Consolidated Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto. The consolidated financial statements and
financial statement schedules follow the signature page hereto.
3. See Item 14(c)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 2001.
(c) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Reorganization dated April 15, 1998, among Phoenix, Portland Acquisition
Corporation and Award (incorporated herein by this reference to Exhibit 2.1 to the Registration
Statement on Form S-4 filed with the SEC on May 26, 1998).
2.2 Agreement of Merger between Award and Portland Acquisition Corporation (incorporated herein by
this reference to Exhibit 2.2 to the Registration Statement on Form S-4 filed with the SEC on
May 26, 1998).
2.3 Asset Acquisition Agreement among Phoenix, Ravisent I.P., Inc., Ravisent Operating Company, Inc.,
Ravisent Technologies Internet Appliance Group, Inc., and Ravisent Technologies, Inc., dated
March 21, 2001.
3.1 Amended and Restated Certificate of Incorporation of Phoenix dated June 29, 1998 (incorporated
herein by this reference to Exhibit 3.1 to the Registration Statement on Form S-4 filed with the SEC
on May 26, 1998).
3.2 By-laws of Phoenix as amended through February 6, 1995 (incorporated herein by reference to
Exhibit 4.2 to Phoenix's Registration Statement on Form S-8, Registration No. 333-03065).
4.2 Phoenix Preferred Share Purchase Rights Plan dated October 28, 1999 (incorporated herein by
reference to Exhibit 1 of Form 8-A as filed on October 28, 1999).
32
Exhibit
Number Description
- ------ -----------
10.15 1994 Equity Incentive Plan, as amended through February 28, 1996 (incorporated herein by reference
to Exhibit 10.17 to Phoenix's Report on Form 10-K for the fiscal year ended September 30, 1995 (the
"1995 10-K")).
10.21 Amended and Restated Lease Agreement dated March 15, 1995 between The Prudential Insurance
Company of America and Phoenix with respect to certain facilities located at 846 University Avenue,
Norwood, MA (incorporated herein by reference to Exhibit 10.23 to the 1995 10-K).
10.22+ Agreement dated December 18, 1995 between Intel Corporation and Phoenix (incorporated herein by
reference to Exhibit 10.24 to Phoenix's Report on Form 10-Q for the quarter ended December 31,
1995, as amended by a Form 10-Q/A-1 (the "December 1995 10-Q")).
10.26 Standard Industrial Lease--Full Net between The Equitable Life Assurance Society of the United
States as Landlord and Phoenix as Tenant dated as of May 15, 1996 for that certain property located
at 411 E. Plumeria Drive, San Jose, California (incorporated herein by reference to Exhibit 10.20 to
Phoenix's Report on Form 10-Q for the quarter ended June 30, 1996).
10.28 Industrial Lease (Single Tenant; Net) dated October 1, 1996 by and between The Irvine Company
and Phoenix for that certain property located at 135 Technology Drive, Irvine, California
(incorporated herein by reference to Exhibit 10.28 to Phoenix's Report on Form 10-K for the fiscal
year ended September 30, 1996).
10.29 1996 Equity Incentive Plan, as amended through December 12, 1996 (incorporated herein by
reference to Exhibit 4.2 to Phoenix's Registration Statement on Form S-8 filed on January 27, 1997
(Registration No. 333-20447)).
10.30 1997 Non-statutory Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to Phoenix's
Registration Statement on Form S-8, filed on October 2, 1997, Registration No. 333-37063).
10.32 1998 Stock Plan (incorporated herein by reference to Exhibit 99.1 to Phoenix's Registration
Statement on Form S-8, filed on June 5, 1998, Registration No. 333-56103).
10.33 Amended and Restated 1991 Employee Stock Purchase Plan, as amended June 4, 1998 (incorporated
herein by reference to Exhibit 99.2 to Phoenix's Registration statement on Form S-8, filed on June 5,
1998, Registration No. 333-56103) .
10.53 Letter Agreement dated March 1, 1998 between Pierre A. Narath and Phoenix (incorporated herein
by reference to Exhibit 10.36 of the 10-K of Award for the year ended December 31, 1997).
10.54+ Master Original Equipment Manufacturer (OEM) Software License Agreement, dated September 10,
1997, between Phoenix and Intel Corporation (incorporated herein by reference to Exhibit 10.37 of
the 10-K of Award for the year ended December 31, 1997).
10.59 Employment Agreement dated June 8, 1999 between Phoenix and Albert E. Sisto (incorporated
herein by reference to Exhibit 10.59 to the 1999 Form 10-K).
10.61 Amended and Restated Initial Public Offering Agreement, dated March 15, 2000, between Phoenix
and inSilicon (incorporated herein by reference to Exhibit 10.61 to the Form 10-Q for the quarter
ended March 31, 2000).
10.62 Contribution Agreement, dated November 30, 1999, between Phoenix and inSilicon (incorporated
herein by reference to Exhibit 10.62 to the Form 10-Q for the quarter ended March 31, 2000).
10.63 Employee Matters Agreement, dated November 30,1999, between Phoenix and inSilicon
(incorporated herein by reference to Exhibit 10.63 to the Form 10-Q for the quarter ended March 31,
2000).
33
Exhibit
Number Description
- ------ -----------
10.64 Registration Rights Agreement dated as of November 30, 1999 by and between Phoenix and
inSilicon Corporation (incorporated herein by reference to Exhibit 10.8 to inSilicon Corporation's
Registration Statement on Form S-1, Registration No. 333-94573).
10.65 1999 Stock Plan (incorporated herein by reference to Exhibit 4.1 to Phoenix's Registration Statement
on Form S-8 filed on December 5, 2001, Registration No. 333-74532).
10.66 1999 Director Option Plan (incorporated herein by reference to Exhibit 4.2 to Phoenix's Registration
Statement on Form S-8 filed on December 5, 2001, Registration No. 333-74532).
10.67 Employment Agreement, dated February 19, 1999, between Phoenix and David A. Everett.
10.68 Employment Agreement, dated January 4, 2001, between Phoenix and John M. Greeley.
10.69 Employment Agreement, dated January 4, 2001, between Phoenix and Linda V. Moore.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney. See signature page.
- ---------------------
+ The Securities and Exchange Commission has granted confidential treatment
for portions of this document.
(d) See Item 14(a)2
34
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.
/s/ ALBERT E. SISTO
By: _________________________________
Albert E. Sisto
Chairman, President and Chief
Executive Officer
Date: December 5, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Linda V. Moore, Albert E. Sisto and John M.
Greeley jointly and severally, his attorneys-in-fact and agents, each with the
power of substitution and resubstitution, for him and in his name, place or
stead, in any and all capacities, to sign any amendments to this Registration
Statement on Form 10-K, and to file such amendments, together with exhibits and
other documents in connection therewith, with the Securities and Exchange
Commission, granting to each attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as he might or could
do in person, and ratifying and confirming all that the attorney-in-facts and
agents, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ ALBERT E. SISTO /s/ JOHN M. GREELEY
_______________________________________ _______________________________________
Albert E. Sisto John M. Greeley
Chairman, President and Chief Executive Principal Financial and Accounting
Officer Officer
Date: December 5, 2001 Date: December 5, 2001
/s/ TAHER ELGAMAL /s/ GEORGE C. HUANG
_______________________________________ _______________________________________
Taher Elgamal George C. Huang
Director Director
Date: December 5, 2001 Date: December 5, 2001
_______________________________________ /s/ ANTHONY SUN
Edmund P. Jensen _______________________________________
Director Anthony Sun
Director
Date: December , 2001
Date: December 5, 2001
/s/ ANTHONY P. MORRIS
_______________________________________
Anthony P. Morris
Director
Date: December 5, 2001
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the accompanying consolidated balance sheets of Phoenix
Technologies Ltd. as of September 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2001. Our audits also
included the financial statement schedule listed in Part IV, Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
management of Phoenix Technologies Ltd. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Phoenix Technologies Ltd. at September 30, 2001 and 2000,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
October 17, 2001
36
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
September 30,
------------------
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents........................................................ $ 62,084 $ 55,017
Short-term investments........................................................... 2,950 52,701
Accounts receivable, net of allowances of $2,374 and $2,283 at September 30, 2001
and 2000....................................................................... 21,527 39,868
Prepaid royalties and maintenance................................................ 5,623 791
Deferred income taxes............................................................ 5,186 3,926
Other current assets............................................................. 6,572 3,703
-------- --------
Total current assets......................................................... 103,942 156,006
Property and equipment, net....................................................... 10,793 13,272
Computer software costs, net...................................................... 17,602 5,385
Goodwill and intangible assets, net............................................... 17,104 7,937
Deferred income taxes............................................................. 8,743 6,422
Other assets...................................................................... 2,427 5,873
-------- --------
Total assets................................................................. $160,611 $194,895
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................. $ 2,949 $ 3,945
Accrued compensation and related liabilities..................................... 9,918 10,554
Deferred revenue................................................................. 5,088 4,733
Treasury stock payable........................................................... 108 2,212
Accrued acquisition costs........................................................ 1,802 1,000
Income taxes payable............................................................. 3,201 5,254
Other accrued liabilities........................................................ 4,270 3,776
-------- --------
Total current liabilities.................................................... 27,336 31,474
Long-term obligations............................................................. 638 1,449
-------- --------
Total liabilities............................................................ 27,974 32,923
-------- --------
Minority interest................................................................. 12,941 13,672
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares authorized,none issued............... -- --
Common stock, $.001 par value, 60,000 shares authorized, 30,114 and 28,985 shares
issued, 25,239 and 25,608 shares outstanding at September 30, 2001 and 2000.... 30 30
Additional paid-in capital....................................................... 165,396 153,530
Retained earnings................................................................ 35,888 53,890
Accumulated other comprehensive income (loss).................................... (1,878) (380)
Less: Cost of treasury stock (4,875 and 3,377 shares at September 30, 2001
and 2000)...................................................................... (79,740) (58,770)
-------- --------
Total stockholders' equity................................................... 119,696 148,300
-------- --------
Total liabilities and stockholders' equity................................... $160,611 $194,895
======== ========
See notes to consolidated financial statements
37
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended September 30,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues:
License fees.............................................. $103,324 $125,817 $103,326
Services.................................................. 18,113 18,568 22,500
-------- -------- --------
Total revenues........................................ 121,437 144,385 125,826
-------- -------- --------
Cost of revenues:
License fees.............................................. 3,712 3,133 7,844
Services.................................................. 15,138 17,074 18,344
Amortization of purchased technology...................... 2,215 1,256 2,132
Write-off of capitalized software......................... -- -- 6,562
-------- -------- --------
Total cost of revenues................................ 21,065 21,463 34,882
-------- -------- --------
Gross Margin............................................... 100,372 122,922 90,944
Operating expenses:
Research and development.................................. 45,526 39,055 39,910
Sales and marketing....................................... 37,213 33,050 29,020
General and administrative................................ 24,743 19,713 16,287
Amortization of goodwill and acquired intangible assets... 5,027 2,220 2,496
Stock-based compensation.................................. 1,713 789 --
Impairment of long-lived assets........................... 9,393 -- --
Restructuring cost........................................ 1,525 1,270 7,892
-------- -------- --------
Total operating expenses.............................. 125,140 96,097 95,605
-------- -------- --------
Income (loss) from operations.............................. (24,768) 26,825 (4,661)
Interest and other income, net............................. 2,866 3,997 3,346
Gain (loss) on investments................................. (2,824) -- 3,969
Minority interest.......................................... 5,891 (81) --
-------- -------- --------
Income (loss) before income taxes.......................... (18,835) 30,741 2,654
Income tax expense (credit)................................ (833) 9,839 850
-------- -------- --------
Net income (loss).......................................... $(18,002) $ 20,902 $ 1,804
======== ======== ========
Earnings (loss) per share:
Basic..................................................... $ (0.72) $ 0.85 $ 0.07
======== ======== ========
Diluted................................................... $ (0.72) $ 0.77 $ 0.07
======== ======== ========
Shares used in earnings (loss) per share calculation:
Basic..................................................... 25,141 24,720 25,966
======== ======== ========
Diluted................................................... 25,141 27,120 27,250
======== ======== ========
See notes to consolidated financial statements
38
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Common Stock Additional Other Total
------------- Paid-In Retained Comprehensive Treasury Stockholders' Comprehensive
Shares Amount Capital Earnings Income (Loss) Stock Equity Income (Loss)
------ ------ ---------- -------- ------------- -------- ------------- -------------
BALANCE, SEPTEMBER 30, 1998.......... 26,286 $26 $102,629 $ 31,150 $ 101 $ (8,568) $125,336
Stock purchases under option and
purchase plans...................... 1,028 1 5,335 -- -- -- 5,336
Stock warrants exercised............. 49 -- 40 -- -- -- 40
Repurchase of common stock........... (3,327) -- -- -- -- (34,106) (34,106)
Stock-based compensation............. -- -- 1,101 -- -- -- 1,101
Tax benefit on exercise of stock
options............................. -- -- 186 -- -- -- 186
Purchase of minority interest in
Award Japan......................... -- -- 158 37 -- -- 195
Comprehensive income:
Net income......................... -- -- -- 1,804 -- -- 1,804 $ 1,804
Change in unrealized gain on
investments, net of a tax benefit
of $963........................... -- -- -- -- (2,046) -- (2,046) (2,046)
Translation adjustment, net of tax
of $506........................... -- -- -- -- 1,076 -- 1,076 1,076
--------
Comprehensive income.............. $ 834
------ --- -------- -------- ------- -------- -------- ========
BALANCE, SEPTEMBER 30, 1999.......... 24,036 27 109,449 32,988 (869) (42,674) 98,922
Stock purchases under option and
purchase plans...................... 2,481 2 19,473 -- -- -- 19,475
Stock warrants exercised............. 102 -- -- -- -- -- --
Net proceeds under inSilicon IPO..... -- 4 36,972 -- -- -- 36,976
Changes in APIC resulting from
issuances of inSilicon stock........ -- (4) (13,588) -- -- -- (13,592)
Repurchase of common stock........... (1,011) -- -- -- -- (16,096) (16,096)
Tax benefit on exercise of
stock options....................... 455 -- -- -- 455
Stock-based compensation............. -- -- 770 -- -- -- 770
Comprehensive income:
Net income......................... -- -- -- 20,902 -- -- 20,902 $ 20,902
Translation adjustment, net of tax
of $230........................... -- -- -- -- 489 -- 489 489
--------
Comprehensive income.............. $ 21,391
------ --- -------- -------- ------- -------- -------- ========
BALANCE, SEPTEMBER 30, 2000.......... 25,608 29 153,531 53,890 (380) (58,770) 148,300
Purchases under stock option and
purchase plans...................... 1,052 1 8,677 -- -- -- 8,678
Changes in APIC resulting from
issuances of inSilicon stock........ -- -- 4,051 -- -- -- 4,051
Issuance of stock and options for
ISI acquisition..................... 75 -- 1,303 -- -- -- 1,303
Repurchase of common stock........... (1,497) -- -- -- -- (20,970) (20,970)
Repurchase of Intel Warrant.......... -- -- (2,900) -- -- -- (2,900)
Stock-based compensation............. 1 -- 697 -- -- -- 697
Amortization of deferred stock-based
compensation........................ -- -- 37 -- -- -- 37
Comprehensive income: --
Net income (loss).................. -- -- -- (18,002) -- -- (18,002) $(18,002)
Translation adjustment, net of tax
of $705........................... -- -- -- -- (1,498) -- (1,498) (1,498)
--------
Comprehensive loss................ $(19,500)
------ --- -------- -------- ------- -------- -------- ========
BALANCE, SEPTEMBER 30, 2001.......... 25,239 $30 $165,396 $ 35,888 $(1,878) $(79,740) $119,696
====== === ======== ======== ======= ======== ========
See notes to consolidated financial statements
39
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended September 30,
-----------------------------
2001 2000 1999
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................. $(18,002) $ 20,902 $ 1,804
Reconciliation to net cash provided by operating activities:
Depreciation and amortization.................................................... 13,341 8,811 12,558
Write-offs related to merger and restructuring activities........................ -- -- 784
Write-off of capitalized software................................................ -- -- 6,562
Impairment of long-lived assets.................................................. 9,393 -- --
Stock-based compensation......................................................... 1,713 770 1,101
Minority interest................................................................ (5,891) 81 --
Gain (loss) on investment........................................................ 2,824 -- (4,034)
Deferred income tax.............................................................. (6,704) 232 (8,570)
Change in operating assets and liabilities:
Accounts receivable............................................................. 18,341 (9,678) (1,193)
Other assets.................................................................... (384) (2,296) 1,480
Prepaid royalties and maintenance............................................... (4,821) (599) 150
Accounts payable................................................................ (996) 149 (3,167)
Accrued compensation and related liabilities.................................... (636) (1,322) 3,130
Other accrued liabilities....................................................... (1,731) (3,659) 8,037
Deferred Revenue................................................................ 355 622 1,790
Income taxes.................................................................... (1,725) (2,995) 1,190
-------- --------- --------
Net cash provided by operating activities..................................... 5,077 11,018 21,622
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments.................................................. 61,420 505,251 54,300
Purchases of investments........................................................... (10,381) (518,550) (60,533)
Purchases of property and equipment................................................ (3,763) (4,829) (5,003)
Additions to computer software..................................................... (1,406) (411) (2,423)
Acquisition of businesses, net of cash acquired.................................... (27,249) -- --
-------- --------- --------
Net cash provided by (used in) investing activities........................... 18,621 (18,539) (13,659)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock purchases under stock option and stock purchase plans.......... 9,551 19,930 5,376
Proceeds from initial public offering of inSilicon common stock.................... -- 36,976 --
Repurchase of common stock......................................................... (20,970) (20,322) (34,106)
Repurchase of warrant.............................................................. (2,900) -- --
Repayment of long term-obligations................................................. (1,139) -- --
Proceeds from borrowings........................................................... 325 -- --
Other financing activities......................................................... -- -- 383
-------- --------- --------
Net cash provided by (used in) financing activities........................... (15,133) 36,584 (28,347)
-------- --------- --------
Effect of exchange rate changes on cash and cash equivalents......................... (1,498) 1,081 1,023
-------- --------- --------
Net increase in cash and cash equivalents............................................ 7,067 30,144 (19,361)
Cash and cash equivalents at beginning of period..................................... 55,017 24,873 44,234
-------- --------- --------
Cash and cash equivalents at end of period........................................... $ 62,084 $ 55,017 $ 24,873
======== ========= ========
Supplemental disclosure of cash flow information:
Income taxes paid during the year, net of refunds.................................. $ 7,208 $ 12,413 $ 6,115
Supplemental schedule of non-cash investing and financing activities:
Issuance of Phoenix common shares and stock options related to the ISI acquisition. $ 1,303 $ -- $ --
See notes to consolidated financial statements
40
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is the global leader
in device-enabling and management software solutions for PCs and other
user-driven connected digital devices. Phoenix provides these products
primarily to platform and peripheral manufacturers (collectively, "OEMs") which
range from large PC and Information Appliance manufacturers to small system
integrators and value-added resellers. Phoenix also provides training,
consulting, maintenance and engineering services to its customers. The Company
markets and licenses its products and services through a direct sales force as
well as through regional distributors and sales representatives. The Company
had four business units (one of which, inSilicon Corporation ("inSilicon"), is
a majority-owned subsidiary), each of which delivers leading products and
professional services that enable connected computing. See Note 11 - "Segment
Reporting".
Note 2. Summary of Significant Accounting Policies
Financial Statement Presentation. The consolidated financial statements of
the Company include the financial statements of the Company and subsidiaries,
including inSilicon. All significant intercompany accounts and transactions
have been eliminated.
Reclassification. Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year presentation.
Foreign Currency Translation. The Company has determined that the functional
currency of its foreign operations is the local currency. Therefore, assets and
liabilities are translated at year-end exchange rates and income statement
transactions are translated at average exchange rates prevailing during each
period.
Use of Estimates. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition. The Company licenses software under non-cancelable
license agreements and provides services including non-recurring engineering
efforts, maintenance consisting of product support services and rights to
upgrades on a when-and-if available basis, and training.
Revenues from software license agreements is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. The Company uses the residual
method to recognize revenue when an agreement includes one or more elements to
be delivered at a future date and vendor specific objective evidence of the
fair value of all the undelivered elements exists. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenues. If evidence of fair
value of one or more undelivered elements does not exist, revenues are deferred
and recognized when delivery of those elements occurs or when fair value can be
established. When the Company provides the customer with significant
customization of the software products, revenues are recognized in accordance
with AICPA Statement of Position 81-1 ("Accounting for Performance of
Construction-Type and Certain Production-Type Contracts") which requires
revenues to be recognized using the percentage-of-completion method based on
time and materials or when services are complete. Revenues from arrangements
with distributors or resellers are recognized on a sell-through basis.
Royalty revenues from OEMs are generally recorded in each period based on
estimates of shipments by the OEMs of products containing the Company's
software during the period. Revenues from OEMs for fully paid up,
non-refundable royalties is recorded when the revenue recognition criteria has
been met.
41
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-recurring engineering service revenues are recognized on a time and
materials basis or when contractual milestones are met. Contractual milestones
involve the use of estimates and approximate the percentage-of-completion
method. Software maintenance revenues are recognized ratably over the
maintenance period which is typically one year. Training and other service
revenues are recognized as the services are performed. Amounts paid in advance
for licenses and services that are in excess of revenues recognized are
recorded as deferred revenues.
Provisions are made for doubtful accounts, estimated returns, and customer
credits.
Cash Equivalents. The Company considers all highly liquid securities
purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents.
Investments. Short-term investments represent marketable securities acquired
with original maturities ranging from three months to one year. As of September
30, 2001, the Company had short-term investments of $2.9 million, which
consisted only of auction instruments. All marketable securities acquired with
excess cash were classified as cash equivalents as they mature within three
months. At September 30, 2000, the short-term investments were classified as
held-to-maturity and consisted of U.S. government agency obligations,
commercial paper, and corporate debt securities. The fair value of such
short-term investments approximated amortized cost and gross unrealized holding
gains and losses were not material. The cost of securities sold and the fair
value of securities are based on the specific identification method. Realized
gains or losses and declines in value deemed to be other than temporary, if
any, are reported in gain (loss) on investments in the consolidated statements
of operations.
Other investments primarily consist of equity investments of less than 20%
equity interest in publicly held and private companies. The Company does not
have the ability to exercise significant influence over any of these companies
and therefore account for the investments as available-for-sale securities
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). Investments in
publicly held companies are recorded at fair value as measured by quoted market
prices and investments in privately held companies, which are recorded at cost,
are accounted for under the cost method of accounting. Realized gains and
losses are recorded in gain (loss) on investment when the related investments
are sold and temporary fluctuations in values are recorded in other
comprehensive income. In fiscal 2001, the Company sold its investment in
certain marketable securities and recorded a realized gain of $0.7 million.
The Company performs periodic reviews of its investments for impairment. The
Company's investments in publicly held companies are generally considered
impaired when a decline in the fair value of an investment as measured by
quoted market prices is less than its carrying value and such decline is other
than temporary. The impairment charge is included in the gain (loss) on
investment in the consolidated statements of operations. The Company's
investments in privately held companies are considered impaired when a review
of operations and other indicators of impairment show that the carrying value
of the investment is not likely to be recoverable. Such indicators include
operating losses, significant cash outflows, prices of subsequent issuances of
equity securities, and limited liquidity. Impaired investments in privately
held companies are written down to estimated fair value, which is the amount
the Company believes is recoverable from its investments. Impairment
write-downs when deemed other than temporary create a new carrying value for
both publicly and privately held investments and the Company does not realize
gains from subsequent increases in fair value in excess of the new carrying
value until disposition. In fiscal 2001, the Company recorded a write-down of
$3.5 million for impairments of its equity investments.
42
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments. The carrying values of the Company's
financial instruments, including accounts receivable, accounts payable, and
accrued liabilities, approximate their fair values due to their short
maturities. The estimated fair values may not be representative of actual
values of the financial instruments that could be realized as of the period end
or that will be realized in the future.
Credit Risk. Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company places its cash investments with high credit qualified
financial institutions. The Company extends credit on open accounts to its
customers and does not require collateral. The Company performs ongoing credit
evaluations of all customers and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends, and other information. One customer accounted for 20% and
18% of accounts receivable as of September 30, 2001 and 2000, respectively.
Property and Equipment. Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of
the assets, which are typically three to five years. Leasehold improvements are
recorded at cost and amortized over the lesser of the useful life of the assets
or the remaining term of the related lease.
Computer Software Costs. Computer software costs consist of internally
developed and purchased software capitalized under the provisions of Statement
of Financial Accounting Standards No. 86, "Computer Software to be Sold, Leased
or Otherwise Marketed" ("SFAS 86"). Costs incurred in the research and
development of new software products and enhancements to existing products are
expensed as incurred until technological feasibility (beta test version) has
been established, at which time, such costs are capitalized. Capitalized
computer software costs are amortized over the economic life of the product,
generally three to six years, using the straight-line method.
Goodwill and other intangible assets. Goodwill is amortized using the
straight-line method over the estimated life of the assets, which is typically
from five to six years. Goodwill was $15.9 million and $6.3 million, net, as of
September 30, 2001 and 2000, respectively. Accumulated amortization amounted to
$7.9 million and $5.2 million on September 30, 2001 and 2000, respectively.
Other intangible assets were amortized using the straight-line method over
the estimated life of the assets, which is typically from two to six years.
Other intangible assets were $1.2 million and $1.6 million, net, as of
September 30, 2001 and 2000, respectively. Accumulated amortization amounted to
$1.8 million and $1.2 million on September 30, 2001 and 2000, respectively.
The Company evaluates the net realizable value and amortization periods of
computer software costs, goodwill, and other intangible assets on an ongoing
basis and records charges to reduce carrying value to net realizable value, as
necessary. In assessing net realizable value, the Company relies on a number of
factors including operating results, business plans, budgets and economic
projections. In addition, the Company's evaluation considers non-financial data
such as market trends, customer relationships, buying patterns, and product
development cycles.
Impairment of goodwill and other long-lived assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. These
indicators may be a significant industry downturn, a significant decline in the
market value of the Company, or significant reductions in projected future cash
flows of operating segments. Pursuant to Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
43
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for Long-Lived Assets to be Disposed of" ("SFAS 121"), recoverability of
long-lived assets is based on an estimate of future undiscounted cash flows to
initially determine whether impairment should be measured. Measurement of
impairment charges for long-lived assets is based on the fair value of the
assets. If quoted market prices for the assets are not available, the fair
value is calculated using the present value of estimated expected future cash
flows. The cash flow calculations are based on management's best estimates,
using appropriate assumptions and projections. When impairments are assessed,
the Company records charges to reduce goodwill or other long-lived assets based
on the amount by which the carrying amounts of these assets exceed their fair
values.
Income Taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of enactment.
Stock-Based Compensation. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the
Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has adopted the disclosure only criteria,
described in Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). See Note 13 for more details.
Computation of Earnings (loss) per Share. Basic earnings (loss) per share is
computed using the weighted-average number of common shares outstanding during
the period. Diluted net income per share is computed using the weighted-average
number of common and dilutive potential common shares outstanding during the
period. Diluted net loss per share is computed using the weighted-average
number of common shares and excludes dilutive potential common shares
outstanding, as their effect is anti-dilutive. Dilutive potential common shares
primarily consist of employee stock options and warrants.
New Accounting Pronouncements. In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
141 requires all business combinations to be accounted for using the purchase
method of accounting and is effective for all business combinations completed
after June 30, 2001. The adoption did not have a material effect on the
Company's operating results or financial condition. SFAS 142 requires goodwill
to be tested for impairment under certain circumstances, and written-off when
impaired, rather than being amortized as previous standards required.
Furthermore, SFAS 142 required purchased intangible assets to be amortized over
their estimated useful lives unless these lives are determined to be
indefinite. SFAS 142 is effective for fiscal years beginning after December 15,
2001. Early application is permitted for entities with fiscal years beginning
after March 15, 2001 provided that the first interim period financial
statements have not been previously issued. The Company is currently assessing
the impact of SFAS 142 on its operating results and financial condition. The
unamortized goodwill was $15.9 million as of September 30, 2001 and the
amortization of goodwill was $4.1 million for fiscal 2001.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), that is applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede
44
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations." This Standard provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower
of fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company is currently assessing the potential impact of
SFAS 144 on its operating results and financial position.
Note 3. Sale of Interest in inSilicon Corporation
The initial public offering of 3.5 million shares of common stock of the
Company's subsidiary, inSilicon, closed on March 27, 2000. Proceeds, net of
issuance costs, to inSilicon were approximately $37.0 million. The Company
owned 69.2% of inSilicon's outstanding common stock as of September 30, 2001.
The accompanying consolidated financial statements include the financial
position and results of operations of inSilicon on a fully consolidated basis.
During fiscal 2000, as part of the separation of the inSilicon business to a
separate subsidiary, the Company contributed certain assets to inSilicon
including technology, licenses, personal property and other assets with
inSilicon assuming the related liabilities. The Company entered into certain
agreements with inSilicon, including a service and cost sharing agreement,
employee matters agreement, and a tax sharing agreement that govern the ongoing
relationship of the parties
Note 4. Property and Equipment
Property and equipment consist of the following:
September 30,
------------------
2001 2000
-------- --------
(in thousands)
Equipment..................................... $ 25,464 $ 19,486
Leasehold improvements........................ 4,690 7,843
Furniture and fixtures........................ 3,283 3,003
-------- --------
33,437 30,332
Less accumulated depreciation and amortization (22,644) (17,060)
-------- --------
Property and equipment, net................ $ 10,793 $ 13,272
======== ========
Depreciation expense related to property and equipment totaled $6.0 million,
$5.1 million, and $5.1 million for fiscal 2001, 2000, and 1999, respectively.
Note 5. Computer Software Costs
Additional costs associated with purchased and internally developed computer
software of $1.4 million, $0.4 million, and $2.4 million were capitalized in
fiscal 2001, 2000, and 1999, respectively. During fiscal 2001, Phoenix
capitalized $3.4 million and $8.1 million of software costs in conjunction with
its acquisitions of Integrity Sciences, Inc. and Ravisent Technologies, Inc.,
respectively. inSilicon also capitalized $1.3 million and $0.2 million of
software costs in conjunction with its acquisition of HD Lab, K.K. and Xentec,
Inc., respectively. Amortization charged to costs of revenues was $2.2 million,
$2.5 million and $4.8 million, during fiscal 2001, 2000, and 1999,
respectively. Accumulated amortization of capitalized computer software costs
was $5.7 million and $3.5 million at September 30, 2001 and 2000, respectively.
45
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Earnings Per Share
The following table presents the calculation of basic and diluted earnings
per share required under Statement of Financial Accounting Standards No. 128
("SFAS 128"):
Years ended September 30,
-------------------------------
2001 2000 1999
-------- ------- -------
(in thousands, except per share
amounts)
Net income (loss)............................................... $(18,002) $20,902 $ 1,804
======== ======= =======
Weighted average common shares outstanding...................... 25,141 24,720 25,966
Effect of dilutive securities (using the treasury stock method):
Stock options.................................................. -- 2,125 1,160
Warrants....................................................... -- 275 124
Total dilutive securities.................................... -- 2,400 1,284
-------- ------- -------
Weighted average diluted common and equivalent shares
outstanding................................................... 25,141 27,120 27,250
======== ======= =======
Earnings (loss) per share:
Basic.......................................................... $ (0.72) $ 0.85 $ 0.07
======== ======= =======
Diluted........................................................ $ (0.72) $ 0.77 $ 0.07
======== ======= =======
The dilutive potential common shares that were anti-dilutive for fiscal 2001
amounted to 1,114,000 shares.
Note 7. Business Combinations
During fiscal 2001, the Company completed four business combinations. In
February 2001, Phoenix acquired Integrity Sciences, Inc., a provider of core
computer security products, which developed and marketed strong password
technology. In March 2001, Phoenix acquired certain assets of Ravisent
Technologies, Inc., a provider of digital audio and video software solutions
and internet appliance technology. In December 2000, inSilicon acquired Xentec,
Inc., a privately held IP developer that specialized in the design of
high-speed mixed-signal analog and wireless technologies and HD Lab, K.K., a
wireless design services group specialized in certain Bluetooth baseband
technology.
These acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired business
are included in the Consolidated Balance Sheets as of September 30, 2001. The
results of operations from the date of acquisition through September 30, 2001
were included in the accompanying Consolidated Statement of Operations for the
year ended September 30, 2001. There were no acquisitions or business
combinations during fiscal 2000 or 1999.
The amounts allocated to goodwill and purchased intangible assets are being
amortized on a straight-line basis. The estimated asset lives are determined
based on projected future economic benefits and expected life cycles of the
technologies. The amounts allocated to Purchased Technology are being amortized
over periods of 3 to 6 years, the amounts allocated to Other Intangible Assets
(comprised of customer lists and assembled work force costs) are being
amortized over periods of 2 and 6 years, and the amounts allocated to Goodwill
are being amortized over periods of 5 and 6 years.
46
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of purchased transactions completed in fiscal
2001 (in millions):
- ------------------------------------------------------------------------------------------------
Total Total Other
purchase tangible Purchased intangible Stock-based
Acquired company consideration assets technology assets Compensation Goodwill
- ------------------------------------------------------------------------------------------------
By Phoenix:
Integrity Sciences, Inc.... $ 3.9 $ -- $3.4 $ -- $ -- $ 0.5
Ravisent Technologies, Inc. $19.1 $ -- $8.1 $ -- $ -- $11.0
- ------------------------------------------------------------------------------------------------
By inSilicon:
Xentec, Inc................ $11.7 $0.2 $0.2 $0.6 $0.4 $10.3
HD Lab, K.K................ $ 1.6 $ -- $1.3 $0.3 $ -- $ --
- ------------------------------------------------------------------------------------------------
The following are details of the forms of consideration and their fair
values for each acquisition:
- --------------------------------------------------------------------------------------------------
Acquired company Form of consideration Fair value
- --------------------------------------------------------------------------------------------------
Integrity Sciences, Inc. $2.5 million in cash................................... $ 2.5 million
75,000 shares of Phoenix common stock.................. 1.3 million
Transaction costs...................................... 0.1 million
-------------
Total................................................ $ 3.9 million
- --------------------------------------------------------------------------------------------------
Ravisent Technologies, Inc. $17.8 million in cash.................................. $17.8 million
Transaction costs...................................... 1.3 million
-------------
Total................................................ $19.1 million
- --------------------------------------------------------------------------------------------------
Xentec, Inc. $3.0 million in cash................................... $ 3.0 million
15,678 and 618,378 shares of inSilicon common and
exchangeable preferred stock, respectively........... 7.2 million
Options to purchase 96,004 shares of inSilicon common
stock................................................ 1.0 million
Transaction costs...................................... 0.5 million
-------------
Total................................................ $11.7 million
- --------------------------------------------------------------------------------------------------
HD Lab, K.K. $1.6 million in cash................................... $ 1.6 million
- --------------------------------------------------------------------------------------------------
As of September 30, 2001, $1.2 million of the $1.6 million specified in the
HD Lab, K.K. acquisition agreement had been paid. The remaining balance of $0.4
million will be paid in fiscal 2002.
The acquisition of Integrity Sciences, Inc. includes an earn-out agreement
over a five year period of up to 100,000 shares of Phoenix's common stock and
cash payments of $1.5 million, if certain revenues and technology criteria are
met. There is no minimum payment requirement in the earn-out agreement. No
payments have been earned through September 30, 2001.
The acquisition agreement with Xentec requires that inSilicon Canada issue
up to an additional 415,000 exchangeable preferred shares to the former Xentec
stockholders over a two-year period, contingent upon the achievement of certain
performance-based milestones. Additional goodwill will be recorded for the fair
value of this consideration as the exchangeable preferred shares, if any, are
issued. There is no minimum payment requirement in this contingent
consideration and no payment was earned or paid for fiscal 2001. Also under the
terms of the acquisition, in January 2002 inSilicon will issue common stock
with a fair value of $0.5 million to former Xentec employees who continue their
employment with inSilicon through December 18,
47
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2001. The $0.5 million is being recognized as stock-based compensation expense
over the one year period subsequent to the merger, and as of September 30,
2001, $0.4 million of this amount is included in payroll and related
liabilities in the consolidated balance sheets.
If the performance milestones specified in the earn-out agreements are met,
payments will be accrued and recorded as additional goodwill.
The following unaudited, pro forma information shows the results of
operations of the Company for the years ended September 30, 2001 and 2000, as
if the business combinations had occurred at the beginning of each period. This
data is not indicative of the results of operations that would have arisen if
the business combinations had occurred at the beginning of the respective
periods. Moreover, this data is not intended to be indicative of future results
of operations.
Pro Forma Years ended
September 30,
---------------------
2001 2000
-------- --------
(unaudited)
Revenues................................... $121,553 $145,571
Net income (loss).......................... $(21,074) $ 14,813
Earnings (loss) per share:
Basic................................... $ (0.84) $ 0.60
Diluted................................. $ (0.84) $ 0.55
In September 1998, the Company acquired Sand in a purchase acquisition. The
purchase price consisted of approximately $18.6 million in cash, 464,000 shares
of the Company's common stock, approximately 264,000 stock options issued in
exchange for Sand stock options, and up to $3.7 million in performance
incentives to be paid through fiscal 2002. Of the $3.7 million, approximately
$1.6 million represents minimum anticipated payments. Performance incentives
totaling $2.6 million were earned per the agreement. Of the $2.6 million, $0.8
million was earned in fiscal 2000 and paid in fiscal 2001, $0.9 million was
earned in fiscal 1999 and paid in fiscal 2000. The final payment of $0.9
million was earned in fiscal 2001 and is scheduled to be paid in fiscal 2002.
The earn-out agreement ended in fiscal 2001.
Note 8. Restructuring Charges
Restructuring charges during fiscal 2001, 2000, and 1999, were as follow:
Years ended September 30,
-------------------------
2001 2000 1999
-------- ------- -------
(in thousands)
Severance and other exit costs......... $1,525 $1,270 $7,108
Asset write-offs....................... -- -- 784
-------- ------- -------
$1,525 $1,270 $7,892
======== ======= =======
Write-off of capitalized software of $6.6 million that was previously
categorized as restructuring charges in fiscal 1999 was reclassified to costs
of revenues for presentation purposes.
48
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2001 Charges
In April 2001, in efforts to optimize operational efficiency and change its
business strategy to address changes in customer demands, the Company reduced
its global workforce by approximately 70 employees across all business
functions. The restructuring included refocusing research and development
efforts, re-evaluating sales and marketing and general and administration
resource requirement, and aligning overall cost structure with current revenue
levels. All terminations were completed as of September 30, 2001.
The restructuring program resulted in a charge of approximately $1.5 million
for severance and related cost in the third quarter of fiscal 2001. As of
September 30, 2001, approximately $1.3 million was paid and an additional $0.2
million was accrued and expected to be paid through the first quarter of fiscal
2002.
2000 Charges
In the fourth quarter of fiscal 2000, the Company recorded a restructuring
charge of approximately $1.3 million for severance benefits associated with the
elimination of three management positions. The charges were related to the
streamlining of certain management functions in Taiwan and North America. All
terminations were completed as of September 30, 2000.
1999 Charges
In fiscal 1999, the Company recorded $7.9 million restructuring charges
relating to the realignment of its business into three operating divisions,
consolidation of certain facilities and operations, integration of Award and
Sand, and discontinuation of the PICO and PC Enhancing Division. These charges
included $5.5 million in severance costs associated with the elimination of 92
positions across all business functions from various product divisions and
management, $0.8 million of fixed assets write-down for the Company's United
Kingdom branch, $0.7 million in facilities abandonment, and $0.9 million of
other business exit costs pursuant to the re-organization plan. All
terminations were completed as of September 30, 2000.
Note 9. Impairment of Goodwill and Other Long-lived Assets
During the fourth quarter of fiscal 2001, pursuant to SFAS 121, inSilicon
performed an assessment of the carrying value of its long-lived assets to be
held and used, including goodwill and other intangible assets recorded in
connection with its various acquisitions. The assessment was necessitated by
various factors that indicated these assets may be impaired, including recent
operating results that did not meet management's expectations, the global
downturn in technology spending, and sustained decline in inSilicon's market
capitalization.
The conclusion of inSilicon's assessment was that indicators of impairment
were present and therefore a test was required. inSilicon performed the asset
impairment test with the assistance of independent valuation experts. The test
was performed by comparing the undiscounted expected cash flows for a five-year
period (the estimated life of the assets), to the carrying amount of the
goodwill and other intangible assets resulting from the business combinations.
The assumptions supporting the estimated cash flows reflect management's best
estimates. Based on the results of the test, inSilicon determined that the
goodwill associated with Xentec was impaired and the write-down was included in
"Impairment of long-lived assets" in the Consolidated Statements of Operations.
With the assistance of independent valuation experts, inSilicon determined
the fair value of the impaired long-lived assets. Fair value was determined
based on the cash flow method and the income approach using the same
assumptions as those used in the initial test of impairment. A write-down of
goodwill and intangible assets
49
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
totaling $9.4 million was recorded during the fourth quarter of fiscal 2001,
reflecting the amount by which the carrying amounts of the assets exceed their
respective fair values. There were no impairment charges of long-lived assets
in fiscal 2000 or 1999 for inSilicon.
Phoenix also conducted an assessment of the carrying value of its long-lived
assets based on the same factors noted above and determined that no impairment
charges were required in fiscal 2001, 2000, or 1999.
Note 10. Income Taxes
The components of income tax expense (credit) from continuing operations are
as follows:
Years ended September 30,
-------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Current:
Federal.................................................. $ (800) $ 882 $ 470
State.................................................... 34 802 1,356
Foreign.................................................. 6,637 8,809 7,594
------- ------- -------
Total current......................................... 5,871 10,493 9,420
Deferred:
Federal.................................................. (5,100) (1,224) (7,161)
State.................................................... (1,428) 570 (1,409)
Foreign.................................................. (176) -- --
------- ------- -------
Total deferred........................................ (6,704) (654) (8,570)
------- ------- -------
Income tax expense (credit)................................ $ (833) $ 9,839 $ 850
======= ======= =======
The reconciliation of the United States Federal statutory rate to the
Company's income tax expense (credit) recorded is as follows:
Years ended September 30,
--------------------------
2001 2000 1999
------- ------- --------
(in thousands)
Tax at U.S. federal statutory rate......................... $(8,654) $10,759 $ 928
State taxes, net of federal tax benefit.................... (1,754) 1,000 (34)
Research and development tax credits....................... (990) (892) (471)
Nondeductible merger and acquisition costs................. 813 562 562
Effect of foreign earnings taxed at less than U.S. rate.... -- (295) (251)
Effect of extraterritorial income exclusion/foreign sales
corporation.............................................. (399) (1,438) --
Foreign taxes.............................................. 3,618 -- --
Valuation allowance........................................ 6,094 -- --
Other...................................................... 439 143 116
------- ------- --------
Income tax expense (credit)................................ $ (833) $ 9,839 $ 850
======= ======= ========
50
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net deferred tax assets and liabilities are as follow:
September 30,
---------------
2001 2000
------- -------
(in thousands)
Deferred tax assets:
Foreign tax credits............................ $ 5,704 $ 6,459
Research and development tax credits........... 4,813 2,809
Minimum tax carryforward....................... 1,216 1,104
Reserves and accruals.......................... 6,493 5,066
Depreciation................................... 1,122 751
Intangible assets.............................. 3,993 --
Net operating loss carryforwards............... 1,952 --
Other.......................................... 68 --
------- -------
Total........................................ 25,361 16,189
Less valuation allowance....................... 8,908 2,814
------- -------
Net deferred tax assets...................... 16,453 13,375
Deferred tax liabilities:
Capitalized software and other intangibles, net 2,374 2,613
Other.......................................... 150 414
Total deferred tax liabilities............... 2,524 3,027
------- -------
Net deferred tax assets......................... $13,929 $10,348
======= =======
Due to the uncertainty surrounding the timing of the realization of the
benefit of certain tax attributes in future tax returns, the Company has
recorded a valuation allowance against otherwise recognizable net deferred tax
assets. Realization of the Company's net deferred tax assets is dependent upon
its generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced. The increase in valuation allowance by
approximately $6.1 million in fiscal 2001 reflects the uncertainty regarding
the realizability of inSilicon's deferred tax assets.
Net undistributed earnings of certain foreign subsidiaries amounted to
approximately $15.0 million as of September 30, 2001. These earnings are
considered to be indefinitely reinvested, and accordingly, no provision for
U.S. Federal and state income taxes has been provided thereon. Upon
distribution of these earnings in the form of dividends or otherwise, the
Company would be subject to U.S. income taxes (subject to an adjustment for
foreign tax credits) of approximately $1.5 million.
As of September 30, 2001, the Company had available for U.S. Federal income
tax purposes foreign tax credits of $2.4 million, which expire in the years
2003 through 2005, if not utilized. The Company's federal and state research
and development tax credit carryforwards for income tax purposes are
approximately $3.9 million and $0.9 million, respectively. If not utilized, the
federal tax credit carryforwards will begin to expire in fiscal 2003.
51
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Segment Reporting
Segment information is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). This standard requires segmentation based
upon the Company's internal reporting to the Chief Executive Officer and
disclosure of revenues and operating income based upon internal accounting
methods. The Company had four reportable segments: Platform Enabling,
inSilicon, Information Appliance, and PhoenixNet(TM).
Platform Enabling: Provides system-enabling software that is used in the
design, deployment and ongoing operation of industry standard desktop, notebook
and server PCs. The Platform Enabling's flagship software products provide
support for current technologies and industry standards, allowing systems and
device manufacturers to base new product designs on a range of microprocessors,
chipsets, and operating systems combinations.
inSilicon: Provides communications technology that is used by semiconductor
and systems companies to design complex semiconductors called systems-on-a-chip
that are critical components of wired and wireless products. inSilicon provides
cores, related silicon subsystems and firmware to customers that use its
technologies in hundreds of different digital devices ranging from network
routers to handheld computers.
Information Appliance: Provides technology to electronics OEMs to develop
information appliance designs. Information Appliance software delivers an
easy-to-implement, low cost/high value architecture that enables "instant-on"
Internet access and browsing capability for devices such as Internet TV,
interactive screen phones, and handheld appliances. This division was launched
in March 2001.
PhoenixNet(TM): Provides technology infrastructure that enables security
products and services designed to deliver a higher level of trust to both
devices and device-aware e-business applications through device authentication.
Applications using this infrastructure for virtual private networks (VPNs) and
the Internet are supported by a global network of Regional Device Authorities.
The Company evaluates operating segment performance based on revenues, gross
margin, and income or loss from operations. It has not historically allocated
assets to its individual operating segments.
52
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended September 30,
----------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Revenues:
Platform Enabling.............................. $ 96,668 $118,604 $106,872
inSilicon...................................... 19,079 24,676 18,954
Information Appliance.......................... 3,531 -- --
PhoenixNet/TM/................................. 2,159 1,105 --
-------- -------- --------
Total..................................... $121,437 $144,385 $125,826
======== ======== ========
Gross margin:
Platform Enabling.............................. $ 79,974 $100,269 $ 80,896
inSilicon...................................... 16,052 21,558 10,048
Information Appliance.......................... 2,206 -- --
PhoenixNet/TM/................................. 2,140 1,095 --
-------- -------- --------
Total..................................... $100,372 $122,922 $ 90,944
======== ======== ========
Income (loss) from operations:
Platform Enabling.............................. $ 16,241 $ 37,485 $ 13,146
inSilicon...................................... (21,573) (1,903) (12,082)
Information Appliance.......................... (4,451) -- --
PhoenixNet/TM/................................. (14,985) (8,757) (5,725)
-------- -------- --------
Total..................................... $(24,768) $ 26,825 $ (4,661)
======== ======== ========
During fiscal 2001, inSilicon recorded a $9.4 million impairment charge
related to goodwill arising from the acquisition of Xentec, which was reflected
in the $21.6 million inSilicon operating loss.
The Company also records geographic information based on country of sale,
which is categorized into five major regions: North America, Japan, Taiwan,
Other Asian Countries, and Europe:
Years ended September 30,
--------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Revenues:
North America..................................... $ 34,613 $ 41,121 $ 40,907
Japan............................................. 46,878 48,994 36,596
Taiwan............................................ 21,705 41,409 33,828
Other Asian Countries............................. 9,870 3,405 2,999
Europe............................................ 8,371 9,456 11,496
-------- -------- --------
Total........................................ $121,437 $144,385 $125,826
======== ======== ========
Net income (loss) from foreign operations was approximately ($1.4 million),
$1.8 million, and ($2.5 million) for fiscal 2001, 2000, and 1999, respectively.
One customer accounted for 12% of total revenues in fiscal 2001. Another
customer accounted for 19% and 11% of revenues in fiscal 2000 and 1999,
respectively. No other customer accounted for more than 10% of revenues in
fiscal 2001, 2000, or 1999.
53
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Commitments
The Company has commitments related to office facilities under operating
leases. Total rent expense was $5.4 million, $4.7 million, and $4.5 million in
fiscal 2001, 2000, and 1999, respectively.
On September 30, 2001, future minimum operating lease payments are required
as follows (in thousands):
Years ending September 30,
--------------------------
2002................................... $ 5,120
2003................................... 2,895
2004................................... 1,182
2005................................... 886
2006................................... 877
2007 and thereafter.................... 844
-------
Total minimum lease payments........... $11,804
=======
Note 13. Stockholders' Equity
Sales of Common Stock and Issuance of Warrants. In February 2001, the
Company repurchased from Intel Corporation the outstanding warrant to purchase
approximately 1,074,000 shares of Phoenix Technologies common stock for
approximately $2.9 million in cash. The repurchase was to eliminate potential
dilution to the Company's existing shareholders. Under the original agreement
entered in February 1996, the Company sold approximately 895,000 newly issued,
unregistered shares of its common stock and a warrant to purchase approximately
1,074,000 additional shares of its common stock to Intel Corporation for $10.4
million. The purchase rights under the warrant vested over a four-year period,
beginning in December 1996. The warrant was to expire in April 2001.
Stock Repurchase Program. In February 2001, the Board of Directors
authorized a program to repurchase up to $30 million of outstanding shares of
common stock over a 12-month period. In fiscal 2001, the Company repurchased
approximately 469,000 shares of its common stock at a cost of $5.1 million
under the fiscal 2001 program. In fiscal 2001, the Company repurchased
approximately 1,498,000 shares of its common stock at a cost of $21.0 million
under the fiscal 2001 and 2000 repurchase programs.
In fiscal 2000, the Board of Directors authorized a program to repurchase
$30 million of outstanding shares of common stock over a 24-month period. In
fiscal 2000, the Company repurchased approximately 836,000 shares at a cost of
$14.5 million under the fiscal 2000 program. Also, during the first quarter of
fiscal 2001, the Company repurchased approximately 1,028,000 shares of common
stock at a cost of $15.9 million under the fiscal 2000 repurchase program. As
of December 31, 2000, the fiscal 2000 repurchase program was completed and
terminated. In fiscal 2000, the company repurchased approximately 1,011,000
shares at a cost of $16.6 million under the fiscal 2000 and 1999 repurchase
programs.
In fiscal 1999, the Board of Directors authorized two programs to repurchase
outstanding shares of common stock. Under these programs, the Company
repurchased approximately 3,300,000 shares during fiscal 1999 at a total
aggregate cost of $34.1 million.
Employee Stock Purchase Plan. The Phoenix Technologies Ltd. 1991 Employee
Stock Purchase Plan ("1991 ESPP") allows eligible employees to purchase shares
at six month intervals, through payroll deductions,
54
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 lower. The maximum amount each
employee may contribute during an offering period is 10% of gross base pay. As
of September 30, 2001, approximately 1,065,000 shares had been issued under the
Purchase Plan and approximately 169,000 shares remained reserved for future
issuance.
Stock Option Plans. The Company has various incentive stock option plans for
employees, officers, directors, consultants, and independent contractors.
Incentive stock options may not be granted at a price less than 100% (110% in
certain cases) of the fair market value of the shares on the date of grant.
Nonqualified options may not be granted at a price less than 85% of the fair
value of the shares on the date of grant unless it is performance based. To
date, all grants of incentive stock options, except for performance-based
options, have been made at fair market value or greater. Options vest evenly
over a period determined by the Company's Board of Directors, generally four
years, and have a term not exceeding ten years.
The following table sets forth the option activity under the Company's
option plans all periods presented (in thousands, except per-share amounts):
Options Outstanding
------------------------
Weighted Average
Shares Exercise Price
------ ----------------
Balance as of September 30, 1998....... 6,626 $ 8.52
Options granted...................... 3,279 9.07
Options exercised.................... (674) 4.80
Options canceled..................... (1,476) 9.46
------
Balance as of September 30, 1999....... 7,755 8.90
Options granted...................... 2,259 16.15
Options exercised.................... (2,254) 7.10
Options canceled..................... (1,861) 10.41
------
Balance as of September 30, 2000....... 5,899 11.92
Options granted...................... 2,915 13.31
Options exercised.................... (911) 7.80
Options canceled..................... (1,180) 14.72
------
Balance as of September 30, 2001....... 6,723 $12.66
======
On September 30, 2001, the number of shares exercisable under the stock
option plans was approximately 2,818,000.
55
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
as of September 30, 2001 (in thousands, except per-share amounts):
Options Outstanding Options Exercisable
------------------------------------------- ---------------------
Range Number Weighted Average Weighted Number Weighted
of of Remaining Contractual Average of Average
Exercise Prices Shares Life (years) Exercise Price Shares Exercise Price
--------------- ------ --------------------- -------------- ------ --------------
$ 0.01 - $ 7.55... 639 5.76 $ 4.68 571 $ 4.49
$ 7.69 - $ 9.70... 1,084 7.75 9.02 459 8.53
$10.03 - $11.13... 956 7.88 10.93 478 10.95
$11.19 - $13.75... 1,390 8.27 12.80 468 12.40
$13.81 - $16.75... 1,429 8.59 14.80 462 15.32
$16.88 - $28.56... 1,225 8.59 18.76 380 18.98
----- ---- ------ ----- ------
$ 0.01 - $28.56... 6,723 8.02 $12.66 2,818 $11.29
===== ==== ====== ===== ======
Amortization of deferred stock-based compensation. The Company amortizes
deferred stock-based compensation for options that were granted below market
value at the date of grant over the respective vesting period of the options
granted. For fiscal 2001, amortization of deferred stock-based compensation was
$37,000 and the unamortized deferred stock-based compensation as of September
30, 2001 was $701,000. There were no unamortized deferred stock-based
compensation for fiscal 2000 and 1999.
Disclosures of Stock-Based Compensation Plans. The Company accounts for its
stock-based compensation plans in accordance with the provisions of APB 25. If
compensation cost for the Company's stock-based compensation plan had been
determined based on the fair value method at the grant date, as prescribed in
SFAS 123, the Company's net income (loss) and net income (loss) per share would
have been as follows:
Years ended September 30,
------------------------
2001 2000 1999
-------- ------- ------
(in thousands, except per
share amounts)
Net income (loss):
As reported...................................... $(18,002) $20,902 $1,804
Pro forma........................................ $(24,810) 19,290 (370)
Basic earnings (loss) per share:
As reported...................................... $ (0.72) $ 0.85 $ 0.07
Pro forma........................................ (0.99) 0.78 (0.01)
Diluted earnings (loss) per share:
As reported...................................... $ (0.72) $ 0.77 $ 0.07
Pro forma........................................ (0.99) 0.71 (0.01)
56
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted in fiscal 2001, 2000, and 1999 reported
below has been estimated as of the date of the grant using a Black-Scholes
multiple option pricing model with the following assumptions for the years
ended September 30, 2001, 2000, and 1999:
Employee Employee Stock
Stock Options Purchase Plan
---------------- ----------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Expected life from vest date (in years)... 0.70 0.70 0.70 0.50 0.50 0.50
Risk-free interest rate................... 5-6% 6-7% 5-6% 5-6% 6-7% 5-6%
Volatility................................ 0.76 0.88 0.56 0.76 0.88 0.56
Dividend yield............................ None None None None None None
The weighted average estimated fair value of employee stock options granted
during fiscal 2001, 2000, and 1999 was $7.27, $9.60, and $3.48 per share,
respectively. The weighted average estimated fair value of shares granted under
the 1991 ESPP during fiscal 2001, 2000, and 1999 was $6.28, $5.07, and $2.58,
respectively.
Note 14. Retirement Plans
The Company has a retirement plan ("401(k) Plan") which qualifies under
Section 401(k) of the Internal Revenue Code. This plan covers U.S. employees
who meet minimum age and service requirements and allows participants to defer
a portion of their annual compensation on a pre-tax basis. In addition, the
Company's contributions to the 401(k) Plan may be made at the discretion of the
Board of Directors. In January 1996, the Company began making a matching
contribution of 25% of each participant's contribution, up to a match of $1,000
per year per participant. The matching contributions vest over a four-year
period, which starts with the participant's employment start date with the
Company. Effective January 1, 2000, the Company matches employee contributions
to the 401(k) plan at 100% up to the first 3% of salary contributed to the plan
and 50% on the next 3% of salary, up to a maximum company match of $3,000 per
participant per year. The Company's contributions to the 401(k) Plan for fiscal
2001, 2000, and 1999 were $0.9 million, $0.8 million, and $0.4 million,
respectively.
Note 15. Subsequent Events (unaudited)
Restructuring Program
In October 2001, due to continuing global economic downturn and industry
trends, Phoenix announced a restructuring program that would reduce its global
workforce by approximately 15%. This restructuring program will align the
Company's expense structure with current market conditions.
In December 2001, inSilicon announced a restructuring program to realign
ongoing expense structure. This restructuring program includes a global
workforce reduction of approximately 20% and will also result in a substantial
non-cash write-down of previously capitalized software. The restructuring is
expected to be completed by the first quarter of fiscal 2002.
Employee Stock Purchase Plan
In November 2001, the Board of Directors adopted the 2001 Employee Stock
Purchase Plan ("2001 ESPP) and reserved 200,000 shares of common stock for
issuance, subject to stockholder approval. The 1991 ESPP will terminate in
February 2002 and be replaced by the 2001 ESPP.
57
SCHEDULE II
PHOENIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED SEPTEMBER 30, 2001
(in thousands)
Balance at
Beginning of Balance at End
Year Ended Year Provisions Deductions(1) Other of Year
- ---------- ------------ ---------- ------------- ----- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
September 30, 2001............. $ 790 $1,491 $(1,069) $(60) $1,152
September 30, 2000............. $1,460 $ 272 $ (877) $(65) $ 790
September 30, 1999............. $1,113 $ 709 $ (362) $ -- $1,460
ALLOWANCE FOR SALES RETURNS
September 30, 2001............. $1,492 $1,443 $(1,713) $ -- $1,222
September 30, 2000............. $1,363 $1,317 $(1,188) $ -- $1,492
September 30, 1999............. $1,410 $ 670 $ (717) $ -- $1,363
ALLOWANCE FOR DEFERRED TAX VALUATION
September 30, 2001.............
$2,814 $6,094 $ -- $ -- $8,908
September 30, 2000.............
$2,814 $ -- $ -- $ -- $2,814
September 30, 1999.............
$2,814 $ -- $ -- $ -- $2,814
- ---------------------
(1) Deductions in allowance for doubtful accounts primarily represent the
write-off of uncollectable accounts receivable.
58