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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period __________ to __________.
Commission file number 0-17111
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PHOENIX TECHNOLOGIES LTD.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2685985
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 EAST PLUMERIA DRIVE, SAN JOSE, CALIFORNIA 95134
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(Address of principal executive offices, including zip code)
(408) 570-1000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
(Title of each Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 31, 1997, was $260,026,121 based upon the last
reported sales price of the Common Stock in the National Market System, as
reported by NASDAQ.
The number of shares of the registrant's Common Stock outstanding as of October
31, 1997 was 16,912,268.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A in connection with the 1997 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
The Exhibit Index begins on page 17 of this Report.
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1
PART I
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 THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MAY
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
PART II, ITEM 7 (MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS) OF THIS FORM 10-K UNDER THE HEADING "BUSINESS" AND
IN OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 1. BUSINESS
GENERAL
Phoenix Technologies Ltd. was incorporated in the Commonwealth of
Massachusetts on September 17, 1979, and was reincorporated in the State of
Delaware on December 24, 1986. Unless the context indicates otherwise, the
"Company" or "Phoenix" refers to Phoenix Technologies Ltd. and its subsidiaries.
Phoenix designs, develops and markets system and chip level software for
Personal Computers ("PCs"), peripheral devices and information appliances. This
software provides compatibility, connectivity and manageability of the various
components and technologies used in PCs, peripheral devices and information
appliances. The Company provides these products primarily to PC manufacturers,
PC peripheral equipment manufacturers, integrated circuit manufacturers, and
system board manufacturers (collectively, "OEMs"). Phoenix's products assure
compatibility with industry standards and permit OEMs to introduce new products
quickly while enabling product differentiation and increasing system value.
Phoenix system software products can reduce an OEM's product time to market,
development risks, and support costs.
The Company markets and licenses its products and services worldwide,
primarily to OEMs. The Company's system software customers range from large PC
manufacturers to small system integrators. The Company's revenue consists of
license and engineering fees. Phoenix markets its products and services
primarily through a direct sales force, but also through regional distributors
and sales representatives. Phoenix promotes its products through Company
newsletters and technical bulletins, coverage in trade and business press
articles, advertising, and participation in industry trade shows and
conferences.
Rapid technological change and the frequent introduction of new products
incorporating new technologies characterize the personal computer industry. The
introduction of products embodying new technologies often results in the
emergence of new industry standards, rendering existing products obsolete. To
remain competitive, manufacturers must respond quickly to such technological
changes. This rapid pace of change can benefit Phoenix as it provides a
continuous flow of opportunities for the Company to provide high value
technology and support to its customers. However, if the Company or its
customers are unable, for technological or other reasons, to develop products in
a timely manner in response to changes in the PC or information appliance
industries, the Company's business would be materially and adversely affected.
The Company develops, and licenses and/or purchases from others, software
products to market to OEMs. Due to rapid technological changes, the Company
expects to continue to dedicate significant resources to the development and
acquisition of new products and enhancements to existing products. However,
there can be no assurance that the Company's product development efforts will be
successful or, even if they are successful, that any resulting products will
achieve market acceptance.
Research and development costs from continuing operations, before the
capitalization of internally developed software costs, were 38%, 32% and 25% of
total revenue in fiscal 1997, 1996 and 1995, respectively. On an actual dollar
basis, these costs grew to $31,338,000 in fiscal 1997, a 38% increase from
fiscal 1996; $22,764,000 in fiscal 1996, an 84% increase from fiscal 1995. The
Company capitalized approximately
2
$4,989,000, $2,136,000 and $1,336,000 of internally developed software in
fiscal 1997, 1996 and 1995, respectively. The Company believes continued
investment in new and evolving technologies is essential to meet rapidly
changing industry requirements. In addition, the Company purchased or
licensed additional technology related assets in the amount of $1,223,000 in
fiscal 1997, $544,000 in fiscal 1996 and $338,000 in fiscal 1995. These
assets consist of purchased research and development and prepaid royalties
under licenses from third parties for PC diagnostics and user assistance
technology and products.
In fiscal 1997 and 1996, one customer accounted for 12% and 10%,
respectively, of total revenue. No customer accounted for 10% or more of
revenue in fiscal 1995. In fiscal 1997, 1996 and 1995, approximately 63%, 55%
and 52%, respectively, of the Company's revenue was attributable to customers
outside the United States.
In fiscal 1997, Intel Corporation began shipping products containing
Phoenix system software under a seven-year agreement (the "Technology
Agreement") signed in December 1995. Under the Technology Agreement, Phoenix
licensed certain of its system-level software to Intel for incorporation into
Intel's motherboard products for desktop and server computers. The Technology
Agreement requires Phoenix to provide Intel with a dedicated engineering team to
support Intel under the agreement and develop agreed-upon enhancements to the
licensed software. In addition, Phoenix is assisting Intel in its transition to
Phoenix's system-level software; the transition is expected to be completed in
fiscal 1998. In consideration of the license grants and other commitments made
by Phoenix, the agreement requires Intel to pay Phoenix minimum annual fees and
royalties. These minimum amounts can be exceeded depending on levels of
shipment by Intel of Intel products containing the licensed software. The
maximum license fees payable by Intel to Phoenix under the Technology Agreement
during its seven-year term is $82 million; however, there can be no assurances
that Intel will ship the volume of products required to entitle Phoenix to such
maximum fees.
Concurrently with the signing of the Technology Agreement, Phoenix and
Intel entered into a Common Stock and Warrant Purchase Agreement (the "Equity
Agreement") whereby Intel agreed to purchase 894,971 shares of Phoenix common
stock, together with a warrant to purchase an additional 1,073,965 shares. The
closing of the sale of the stock and the warrant occurred on February 15, 1996.
DESCRIPTION OF BUSINESS
The Company is divided into two related product divisions: the PC Systems
Division ("PCSD") and the Special Products Division ("SPD"). PCSD includes the
Company's desktop, laptop and server system software, and previously included
the PC application software product line. SPD includes the Company's
PhoenixPICO, Virtual Chips and Interconnect Software product lines.
During fiscal 1997, Phoenix expanded the capabilities of its PC firmware
through enhancements to its core PhoenixBIOS 4.0 product, playing a significant
role in new PC industry initiatives with Intel, Microsoft, Compaq and others;
developing and delivering Advanced Configuration and Power Interface ("ACPI");
developing and acquiring new products, as well as supporting multiple operating
systems and processor architectures in its PICO product line, and expanding its
suite of synthesizable cores in its Virtual Chips product line.
PC SYSTEMS DIVISION
In the PC system software product area, the Company develops and markets
software products that enable PC, peripheral, and motherboard manufacturers to
integrate existing and emerging industry standards and new technologies into PC
platforms. The Company offers an extensive line of system software, including
Basic Input/Output System ("BIOS") products, for desktop, portable, and server
PC systems based on the Intel x86 architecture. The system software products
include system BIOS products for various chip sets and system busses, video
subsystems, keyboard controllers, and power management. The Company's products
support the latest processors, chip sets, system busses, and interconnect
technologies, such as ACPI.
The introduction of new hardware architectures, microprocessors, peripheral
equipment and operating systems within the PC industry has increased the
complexity, time, and cost to develop system software products.
3
The Company believes that OEM customers license the Company's system software
products, rather than develop these products internally, (1) in order to
assure compatibility with industry standards, (2) release products to market
faster, (3) reduce product development risks, (4) reduce product development
and support costs, and (5) differentiate their system offerings with advanced
features. Price competition and time to market pressures are causing
manufacturers to re-examine in-house development and deployment of their new
systems. The Company believes there is an increasing trend of OEMs to
outsource system software requirements to third parties.
The demand for the Company's PC system software products depends
principally on (1) PC manufacturers licensing rather than developing their own
PC system software, (2) the sales success of the Company's OEM customers, (3)
the emergence of new PC technologies requiring system-level software to achieve
increased system functionality, user value, and performance, and (4) the
functions and features offered in the Company's products compared to those of
its competitors. The growth rate of sales in the personal computer industry
fluctuates from time to time based on numerous factors, including general
economic conditions, capital spending levels, new product introductions and
shortages of key components.
PHOENIXBIOS 4.0. Phoenix introduced PhoenixBIOS 4.0 as its core desktop
systems firmware product in 1993. Since then, the Company has continuously
released improvements to the core product. The Company believes the success of
this product is attributable to its reliability and advanced features, including
its fourth generation modular architecture, Plug and Play support, and advanced
development tools and methodology.
In fiscal 1996, Phoenix announced Release 6.0 of PhoenixBIOS 4.0. Release
6 includes over 50 enhancements designed to improve manufacturing customers'
ability to more easily develop their own extensions for product differentiation
or to improve support, and to deploy new products with reduced costs for
customization work. Release 6.1, an enhanced version of PhoenixBIOS 4.0, was
introduced in fiscal 1997.
Phoenix worked with Microsoft, Intel and Toshiba on the development of the
ACPI specification for interfacing the operating system to the motherboard and
supporting hardware. ACPI replaces Advanced Power Management, Plug and Play and
other BIOS runtime services and is required for the next version of Microsoft's
Windows operating system, which is due in 1998. Phoenix was first to provide
fully compliant ACPI system software. Phoenix has partnered with thirteen of
its major customers to develop the system software to implement the
specification and is assisting its customers in obtaining Microsoft
certification on its new Windows operating system.
NOTEBIOS 4.0 AND ADVANCED SYSTEMS SOFTWARE AND APPLICATIONS FOR PORTABLE
SYSTEMS. Phoenix offers its NoteBIOS system software for use with portable or
notebook computers. The product's capabilities include advanced power
management, SMI support, Save to Disk, Plug and Play, Portable Pentium CPU
support, and smart batteries. The Company believes that a majority of notebook
PCs shipped worldwide in fiscal 1997 with commercial BIOS were delivered with
Phoenix's NoteBIOS.
SPECIAL PRODUCTS DIVISION
PICO. The PICO product line provides system software for industrial, hand
held, and consumer appliances based on the Intel x86 and UNIX platforms in the
emerging information appliance market. Examples of these appliances are hand
held PCs, Personal Digital Assistants ("PDAs"), smart phones, Point-of-Sale
terminals, factory automation devices, digital cameras, car navigation units, or
smart home entertainment (television, stereo) systems. Phoenix PICO BIOS and
related products are used in Industrial Appliances. Phoenix PicoPAL/CE and
related products support hand held and consumer appliances. Phoenix PICO also
provides software products to the digital camera OEM market, including PicoStor
and FLASH memory storage support and Phoenix PicoRay for high speed infrared
data transfer.
VIRTUAL CHIPS. Synthesizable cores are prepackaged circuit descriptions,
delivered in a high level language known as a Hardware Description Language
("HDL"), and used as building blocks for system-level Application Specific
Integrated Circuits ("ASICs"). The resulting ASICs are used in computers and
peripheral devices to
4
provide connectivity using various interconnect standards (e.g., Peripheral
Component Interface ("PCI"), Universal Serial Bus ("USB") and other emerging
standards such as IEEE 1394).
Phoenix acquired Virtual Chips, Inc., a leading supplier of synthesizable
cores for the computer industry in August 1996. Virtual Chips products include
a full line of PCI and USB Synthesizable Cores and Test Environments. In fiscal
1997, Virtual Chips introduced several new product families, including
synthesizable cores and test environments supporting the Accelerated Graphics
Port ("AGP") and Infrared Data Association ("IrDA") interconnect protocols, in
addition to new PCI and USB products.
INTERCONNECT SOFTWARE. The Phoenix Interconnect Software Group ("ISG") is
developing system software to support leading edge interconnect technologies,
such as USB, as well as providing products which support PCMCIA and CardBus
devices on Windows95, WindowsNT and various other operating systems. PlugWorks,
a new product introduced at Fall 1997 Comdex, assures compatibility and
connectivity between CPUs and USB connected peripheral devices. Phoenix
supports CardBus, the latest 32-bit high bandwidth standard option for PC Cards.
WORLDWIDE DEPLOYMENT SERVICES AND SUPPORT
To support its worldwide customer base, Phoenix employs over 400 engineers
and has offices in England, France, Germany, Japan, Korea and Taiwan,
California, Oregon, Massachusetts and Texas. Phoenix has development and
deployment engineering teams. Each new PC or information appliance usually
needs some modification of the system software, and the Company assists
customers in making such modifications. The Company also provides support
services by telephone and on-site.
LEADERSHIP IN MAJOR INDUSTRY INITIATIVES
Phoenix has entered into a number of major initiatives with industry
leaders and standards-setting organizations to develop next generation, system
software products. These initiatives include: (1) working with Microsoft, Intel
and Toshiba on the ACPI specification, (2) developing the Device Bay
specification with Compaq and Microsoft, (3) developing the Desktop Management
Interface ("DMI"), On Now specification and the Simple Boot & Quick Boot
specification with Microsoft, and (4) working on or with several IEEE committees
on 1394 and USB interconnect standards.
Phoenix's relationships with Compaq, Intel, Microsoft, and other industry
leaders give the Company early access to new technology requirements, which the
Company believes facilitates the development of its products. By building upon
its core technology base, the Company is able to tailor its system software
products to conform to the specific requirements of its OEM customers, allowing
its customers to integrate new technologies and introduce their products to
market more effectively.
COMPETITION
In marketing its BIOS, NoteBIOS, PICO and ISG products, Phoenix competes
primarily with three other independent suppliers of BIOS technology: American
Megatrends, Inc., Award Software International Inc. and SystemSoft Corporation.
It also competes for system software business with in-house research and
development departments of PC manufacturers that have significantly greater
financial and technical resources than those of Phoenix. These companies include
Acer Incorporated, Compaq Computer Corporation, Dell Computer Corporation,
International Business Machines Corporation and Toshiba Corporation. In the
Virtual Chips' synthesizable core business, Phoenix competes with major EDA
suppliers such as Mentor Graphics and Synopsys who are attempting to broaden
their design tool business to include synthesizable cores; and small design
houses, such as Sand Microelectronics, Inc., who provide synthesizable cores,
often as part of a design consulting contract. The bases for competition for
the PC system software are primarily product performance and availability,
engineering experience and expertise, product support and price. Phoenix
believes it competes favorably on these bases.
5
REVENUE
Revenue attributable to the Company's PC Systems Division products
accounted for 80%, 78% and 82% of the Company's revenue in fiscal 1997, 1996 and
1995, respectively. Revenue attributable to the Special Products Division
products accounted for 20%, 22% and 18% of total revenue for fiscal 1997, 1996
and 1995, respectively.
INVESTMENTS
In fiscal 1994, the Company sold all the assets of its Printer Software
Division to Xionics Document Technologies, Inc. ("Xionics") in return for a
promissory note and shares of Xionics stock. During fiscal 1995 and fiscal
1996, the Company made an additional loan to Xionics, exchanged a portion of the
note for additional shares and reflected certain adjustments to the purchase
price in the note balance. In September 1996, the Company participated in
Xionics' initial public offering (NASDAQ: XION) of shares and sold 500,000
shares. In fiscal 1997, the Company sold 250,000 shares of Xionics stock for a
gain of $3.2 million. At September 30, 1997, the Company owned approximately
1.2 million shares, representing approximately 10% of total outstanding Xionics
common stock. The Company anticipates continuing to sell shares at the rate of
approximately 100,000 shares per quarter.
In fiscal 1994, the Company sold 80% of its Publishing Division to Softbank
Corporation of Japan ("Softbank"). At that time, Softbank and the Company
established a new entity, Phoenix Publishing Systems, Inc. ("PPSI"), whose name
was later changed to Softbank Content Group ("SCG"), and each contributed their
respective interests in the Publishing Division to SCG in exchange for 80% and
20%, respectively, of the equity of SCG. In September 1997, Phoenix exercised
its right to require Softbank to repurchase the SCG shares for $7.5 million.
EMPLOYEES
As of September 30, 1997, the Company employed 572 persons worldwide, of
whom 420 are in research and development, 96 are in sales and marketing, and 56
are in general and administration.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on trade secret, trademark and copyright laws
and contractual agreements to protect its proprietary rights. The Company
protects the source code of its products as trade secrets and as unpublished
copyrighted works. The Company licenses the source code for its products to its
customers for limited uses. The Company licenses its software products to its
customers. Wide dissemination of the Company's software products makes
protection of the Company's proprietary rights difficult, particularly outside
the United States. Although it is possible for competitors or users to make
illegal copies of the Company's products, the Company believes the rate of
technology change and the continual addition of new product features lessen the
impact of illegal copying. At September 30, 1997, the Company had been issued
three patents and had 15 patent applications in process.
Although the Company believes that its products do not infringe on any
copyright or other proprietary rights of third parties, there are currently
significant legal uncertainties relating to the application of copyright and
patent law in the field of software. The Company has no assurance that third
parties will not obtain, or do not have, patents covering features of the
Company's products, in which event the Company or its customers might be
required to obtain licenses to use such features. If a patent holder refuses to
grant a license on reasonable terms or at all, the Company may be required to
alter certain products or stop marketing them. In recent years, there has been
a marked increase in the number of patents applied for and issued with respect
to software products.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in an 86,602 square foot
building in San Jose, California which the Company leases pursuant to a lease
expiring in November 2003. In fiscal 1997, the Company
6
entered into a five year lease for a 63,000 square foot facility in Irvine,
California. In fiscal 1998, minimum annual lease payments for the San Jose
and Irvine facilities are approximately $1,164,000 and $751,000, respectively,
plus certain additional costs.
The Company also leases smaller office facilities in other locations
including: Norwood, Massachusetts; Beaverton, Oregon; Houston, Texas; Taipei,
Taiwan; Tokyo, Japan; Seoul, Korea; Munich, Germany; Surrey, England; and
Archamps, France.
The Company considers its leased properties to be in good condition, well
maintained, and generally suitable and adequate for its present and foreseeable
future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, becomes involved in litigation claims and
disputes in the ordinary course of business. There are no material pending
legal proceedings, other than ordinary routine litigation incidental to the
business, to which the Company or any of its subsidiaries is a party or of which
any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ National Market System
under the symbol PTEC. The following table presents the quarterly high and low
bid quotations in the over the counter market, as quoted by NASDAQ. These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
HIGH LOW
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YEAR ENDED SEPTEMBER 30, 1997:
First quarter $19.63 $14.63
Second quarter 19.75 14.75
Third quarter 15.63 11.00
Fourth quarter 16.69 12.75
YEAR ENDED SEPTEMBER 30, 1996:
First quarter $16.13 $ 9.88
Second quarter 15.75 12.88
Third quarter 20.38 13.00
Fourth quarter 19.50 12.75
The Company had 381 shareholders of record as of September 30, 1997. The
Company has never paid cash dividends on its common stock. The Company
currently intends to retain all earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's line of credit agreement restricts the payment of cash dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
SELECTED UNAUDITED QUARTERLY DATA
FISCAL 1997, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 30
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Revenue $20,576 $19,000 $20,508 $22,045
Gross margin 17,487 15,656 16,188 16,749
Income from operations 3,413 2,265 2,331 2,757
Net income 3,217 2,162 2,792 7,484
Net income per share .18 .12 .16 .42
FISCAL 1996, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 30
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Revenue $14,807 $17,935 $18,645 $20,749
Gross margin 11,762 13,849 14,933 16,850
Income from operations 2,503 3,329 2,876 1,968
Income from continuing operations 2,092 2,519 2,338 2,098
Net income 2,092 2,519 2,338 5,850
Income from continuing operations
per share 0.13 0.15 0.13 0.11
Net income per share 0.13 0.15 0.13 0.32
SELECTED PERCENTAGE DATA
FY97 FY96 FY95
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Revenue:
License fees 84% 87% 87%
Services 16 13 13
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Total revenue 100 100 100
Cost of revenue:
License fees 7 10 7
Services 13 10 12
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Total cost of revenue 20 20 19
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Gross margin 80 80 81
Operating expenses:
Research and development 32 29 22
Sales and marketing 21 22 29
General and administrative 14 13 13
Other operating expenses - 1 -
--- --- ---
Total operating expenses 67 65 64
--- --- ---
Income from operations 13 15 17
Interest income, net 4 3 3
Other income, net 11 - 1
--- --- ---
Income before income taxes 28 18 21
Provision for income taxes 9 5 3
--- --- ---
Income from continuing operations 19 13 18
Gain on discontinued operations - 5 -
--- --- ---
Net income 19% 18% 18%
--- --- ---
--- --- ---
8
SELECTED FIVE YEAR DATA
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
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Revenue:
Software $ 82,129 $ 72,136 $49,941 $40,589 $29,651
Publishing - - - 45,584 36,662
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Total revenue 82,129 72,136 49,941 86,173 66,313
Income from continuing operations 15,655 9,047 8,815 19,230* 3,565
Net income 15,655 12,799 8,815 6,794 2,599
Income per common share:
Income from continuing operations $ 0.87 $ 0.52 $ 0.56 $ 1.32 $ 0.26
Net income 0.87 0.73 0.56 0.47 0.19
Cash and short-term investments $ 47,537 $ 57,039 $32,944 $33,889 $ 8,122
Working capital 68,967 63,536 36,796 28,586 15,301
Current ratio 5.4:1 5.2:1 4.1:1 2.2:1 1.8:1
Total assets 126,768 113,549 62,390 63,235 51,616
Long-term debt - - - - -
Stockholders' equity 103,727 89,577 50,418 39,446 31,481
Return on equity 16% 18% 20% 19% 9%
* INCLUDES $23,538 GAIN ON SALE OF PUBLISHING DIVISION AND $9,095 OF OTHER
OPERATING EXPENSES.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's primary business is to provide system software and
engineering services to OEMs and integrators of PCs and information appliances
(special purpose computers).
In August 1996, the Company acquired Virtual Chips, Inc. ("Virtual Chips")
in exchange for 1,241,842 shares of newly issued common stock. The transaction
was accounted for as a pooling of interests and financial information for the
quarters in fiscal 1996 has been restated to reflect Virtual Chips' results of
operations. The financial statements for fiscal 1995 have not been restated as
the results of operations of Virutal Chips were not material in relation to
those of the Company. Shares used in the computation of net income per share
have been restated for all periods presented to give effect to the shares issued
and options assumed by the Company in the transaction. Virtual Chips is a
leading supplier of synthesizable cores for the computer industry.
Synthesizable cores are pre-packaged circuit descriptions used as building
blocks for system-level application specific integrated circuits ("ASICs").
ASICs are used in computers and peripheral devices to connect them using PCI,
USB and other emerging industry standard protocols.
REVENUE
Revenue increased $10.0 million (14%) to $82.1 million in fiscal 1997 from
$72.1 million in fiscal 1996. Revenue increased $22.2 million (44%) in fiscal
1996 from $49.9 million in fiscal 1995. License revenue increased 10% from
fiscal 1996 to 1997, and 44% from fiscal 1995 to 1996. The increase resulted
primarily from an increase
9
in royalty revenue from the Company's expanding customer base, additional
sales to existing customers, as well as increased revenue associated with the
growth of the special products business. Growth in the Company's revenues for
the year was obscured by the effect of product transitions, the largest of
which was the phase out of a consumer application product late in fiscal 1996.
During fiscal 1997, unit growth was greater than revenue growth as the
average royalty per desktop unit declined by approximately 15%. In fiscal
1996, the consumer application product generated $9.5 million of revenue,
compared to $0.4 million in fiscal 1997. Service revenue increased 37% from
fiscal 1996 to fiscal 1997, and 48% from fiscal 1995 to 1996. The increases
in service revenue are generally consistent with the growth in unit volumes.
In addition, the life cycle of designs has generally shortened, resulting in
more design and Company services for a given volume of units.
Revenue in fiscal 1997 increased over fiscal 1996 in all regions. In
fiscal 1997 and 1996, one customer accounted for 12% and 10% of revenues,
respectively. No customers accounted for 10% or more of revenue in fiscal 1995.
GROSS MARGIN
Gross margin as a percent of revenue was 80%, 80% and 81% for fiscal 1997,
1996 and 1995, respectively. License fee gross margin was 91%, 88% and 92% for
fiscal 1997, 1996 and 1995, respectively. The increase in license fee gross
margin from fiscal 1996 to fiscal 1997 was a result of lower third-party
royalties from the phase-out of a consumer application product, offset by an
increase in the amortization of capitalized computer software costs. The
decrease from fiscal 1995 to fiscal 1996 is primarily due to increases in
royalty expense and amortization of capitalized computer software costs. Service
gross margin was 23%, 25% and 8% in fiscal 1997, 1996 and 1995, respectively.
The decrease from fiscal 1996 to fiscal 1997 results principally from a
reorganization of U.S. engineering effective April 1st. Development and field
engineering were separated to facilitate improved focus in each group. The
increase from fiscal 1995 to fiscal 1996 in service gross margin is attributable
to productivity improvements in service engineering.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $26.3 million, $20.6 million and
$11.0 million in fiscal 1997, 1996 and 1995, respectively. The increase in
research and development expenses from fiscal 1996 to fiscal 1997 is primarily
due to an increase in the Company's engineering staff to continue development of
system-level software and the creation of a new product line to develop and
market software to connect computers and peripheral devices. For the past year,
the Company's investment in research and development also has trended higher in
order to implement the Intel alliance and to expand the Company's products
beyond the PC motherboard. The increase as a percent of revenue from fiscal
1995 to fiscal 1996 is primarily due to the creation of a new product line to
develop and market software to connect computers and peripheral devices and the
acquisition of Virtual Chips, Inc.
The Company capitalized approximately $5.0 million, $2.1 million and $1.3
million of internally developed software costs in fiscal 1997, 1996 and 1995,
respectively. These amounts were offset by amortization of capitalized software
costs of $4.6 million, $3.2 million and $1.2 million in fiscal 1997, 1996 and
1995, respectively. The Company believes that continued investment in new and
evolving technologies is essential to meet rapidly changing industry
requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $17.4 million, $15.5 million and $14.4
million in fiscal 1997, 1996 and 1995, respectively. The increases in fiscal
1997 and fiscal 1996 are primarily due to growth in sales and marketing
headcount associated with higher revenues. The decrease as a percent of revenue
in fiscal 1996 resulted primarily from the discontinuance of advertising
expenses related to products marketed through the retail channel.
10
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $11.6 million, $9.7 million and
$6.7 million in fiscal 1997, 1996 and 1995, respectively. The increases in
fiscal 1997 and 1996 are primarily from increases in salaries and related
benefits associated with continued headcount growth. Fiscal 1997 also includes
non-recurring charges related to the consolidation of facilities in northern and
southern California.
COSTS OF ACQUISITION
Costs of acquisition of $0.9 million in fiscal 1996 include the costs
associated with the acquisition of Virtual Chips, Inc. in fiscal 1996.
INTEREST INCOME, NET
Net interest income was $2.9 million, $2.2 million and $1.7 million in
fiscal 1997, 1996 and 1995, respectively. The increase in net interest income
over the years is primarily due to the increase in the average cash balances
available for investment in the respective periods.
OTHER INCOME, NET
On September 30, 1997, Phoenix exercised its right to require Softbank
Corporation of Japan to repurchase the Softbank Content Group shares owned by
the Company for $7.5 million and recorded a gain on investment of $6.2 million.
During fiscal 1997, the Company sold 250,000 shares of common stock of Xionics
Document Technologies, Inc. ("Xionics") and recorded a gain on investment of
$3.2 million.
DISCONTINUED OPERATIONS
In September 1996, the Company sold 500,000 shares of common stock of
Xionics in its initial public offering. In addition, the Company received
payment on a promissory note. The gain on the repayment of the note and sale of
the stock in the amount of $3.8 million was recorded as a gain from discontinued
operations, net of income taxes of $2.3 million, to the extent such amounts were
previously written off in previous fiscal years by a charge to discontinued
operations. The remaining amount of $294,000 in fiscal year 1996, which
represents investment gains, was recorded in continuing operations as other
income on the Company's income statement. As of September 30, 1997, the Company
held 1,205,000 shares of Xionics stock which are carried in marketable
securities at fair value.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $7.4 million, $3.9 million
and $1.5 million in fiscal 1997, 1996 and 1995, respectively. The Company's
effective tax rate was 32%, 30% and 14% in fiscal 1997, 1996 and 1995,
respectively. The higher tax rate in fiscal 1997 is primarily due to a decrease
in the tax benefit from losses in the prior years, partially offset by the
reinstatement of the federal research and development tax credit. The Company's
effective tax rate has been lower than the statutory rate primarily due to
various federal and state tax credits and tax benefit of prior year losses. The
provisions for fiscal 1997 and 1995 include income tax benefits in the fourth
quarters of $0.4 million and $1.3 million resulting from a reduction in the
Company's valuation allowance related to its deferred tax assets. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires
recognition of deferred tax assets when the probability of recovery is more
likely than not.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," which is required to be adopted by the Company on September 30, 1998
with quarterly disclosure. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, primary
11
and fully diluted earnings per share will be replaced with basic and diluted
earnings per share. If SFAS 128 had been effective for fiscal 1997 and 1996,
it would have resulted in a basic net income per share of $0.93 and $0.81 and
diluted earnings per share of $0.87 and $0.73, respectively.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which will be required
to be adopted by the Company in fiscal 1999. In October 1997, the Accounting
Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition," which will be required to be adopted by the
Company on September 30, 1999. Adoption of these statements is not expected to
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.
FLUCTUATIONS IN OPERATING RESULTS
The tables in Part II, Item 6 of this Form 10-K include selected unaudited
quarterly consolidated results of operations for fiscal 1997 and 1996. This
information was derived from the Company's unaudited consolidated financial
statements that, in the opinion of management, reflect all recurring adjustments
necessary to fairly present this information, when read in conjunction with the
Company's Consolidated Financial Statements. The results of operations for any
period are not necessarily indicative of the results to be expected for any
future period.
Phoenix's future operating results may vary substantially from period to
period. The timing and amount of its license fees are subject to a number of
factors that make estimating revenues and operating results prior to the end of
a quarter uncertain. While Phoenix receives recurring revenue on royalty-based
license agreements and some agreements contain minimum quarterly royalty
commitments, a significant amount of license fees in any quarter is dependent on
signing agreements and delivering the licensed software in that quarter.
Generally, Phoenix has experienced a pattern of recording 50% or more of its
quarterly revenues in the third month of the quarter. Phoenix has historically
monitored its revenue bookings through regular, periodic worldwide forecast
reviews during the quarter. However, while these reviews keep management
informed of areas where additional selling effort may be needed in order to meet
the internal plans and market expectations, there can be no assurances that this
process will result in revenue expectations being met. Operating expenses for
any year are normally based on the attainment of planned revenue levels for that
year and are incurred ratably throughout the period. As a result, if revenues
are less than planned in any period while expense levels remain relatively
fixed, Phoenix's operating results would be adversely affected for that period.
In addition, the incurring of unplanned expenses could adversely affect
operating results for the period in which such expenses were incurred.
BUSINESS RISKS
The additional following factors should be considered carefully when
evaluating Phoenix and its business.
PRODUCT DEVELOPMENT
Phoenix's long-term success will depend on its ability to enhance its
existing products and to introduce new products on a timely and cost-effective
basis that meet the needs of its current customers in their present markets and
of current and future customers in new and emerging markets. There can be no
assurance that Phoenix will be successful in developing new products or in
enhancing existing products or that new or enhanced products will meet market
requirements. Delays in introducing new products can adversely impact
acceptance and revenue generated from the sale of such products. Phoenix has,
from time to time, experienced such delays. Phoenix's software products and
their enhancements contain complex code which may contain undetected errors or
bugs when first introduced, despite testing. There can be no assurance that new
products or enhancements will not contain errors or bugs that will adversely
affect commercial acceptance of such products or enhancements.
12
PROTECTION OF INTELLECTUAL PROPERTY
Phoenix relies on a combination of patent, trade secret, copyright,
trademark laws and contractual provisions to protect its proprietary rights in
its software products. There can be no assurance that these protections will be
adequate or that competitors will not independently develop technologies that
are substantially equivalent or superior to Phoenix's technology. In addition,
copyright and trade secret protection for Phoenix's products may be unavailable
or unreliable in certain foreign countries. The Company has been issued 3
patents with respect to its current product offerings and has a number of patent
applications pending with respect to certain of the products it markets.
Phoenix maintains an active internal program designed to identify internally
developed inventions worthy of being patented. There can be no assurance that
any of the applications pending will be approved and patents issued or that
Phoenix's engineers will be able to develop technologies capable of being
patented. As the number of software patents increases, Phoenix believes that
software developers may become increasingly subject to infringement claims.
There can be no assurance that a third party will not assert that its patents or
other proprietary rights are violated by products offered by Phoenix. Any such
claims, whether or not meritorious, can be time consuming and expensive to
defend, and could have an adverse effect on Phoenix's business, results of
operations and financial condition. Infringement of valid patents or copyrights
or misappropriation of valid trade secrets could also have an adverse effect on
Phoenix's business, results of operations and financial condition. In addition,
such claims if alleged against certain Phoenix customers, may give rise to
indemnity or other obligations on the part of Phoenix.
DEPENDENCE ON THIRD-PARTY PROVIDERS OF TECHNOLOGY
Phoenix's products use certain products and technologies of various third
party software developers, including both complete products offered as
extensions of Phoenix's product lines and technology used in the enhancement of
internally developed products. These products are licensed under contractual
agreements, which in some cases are for limited time periods and in some cases
provide for termination under certain circumstances. There can be no assurance
that the technology plans and directions for the third party products will
remain compatible with Phoenix's needs, that these third-party providers will
commit adequate development resources to maintain or enhance these products and
technologies, or that the license agreements with limited duration will be
renewed upon expiration. In such circumstances, Phoenix may not be able to
obtain or develop substitute products or technology, which could adversely
affect Phoenix's business, results of operation and financial condition.
IMPORTANCE OF MICROSOFT AND INTEL
For a number of years, Phoenix has worked closely with Microsoft
Corporation and Intel Corporation in developing standards for the PC Industry.
In addition, Phoenix supplies its system level software technology to Intel.
Phoenix remains optimistic regarding its relationships with these two industry
leaders. There can, however, be no assurance that either Microsoft or Intel
will not develop alternative product strategies which could conflict with
Phoenix's product plans and marketing strategies and, accordingly, adversely
impact Phoenix's business and results of operations. Presently, there is little
overlap or conflict in Phoenix's product offerings and strategies and those of
Intel. Windows NT and Windows CE, Microsoft's newer operating systems,
incorporate some functionality that has traditionally resided in the BIOS. Both
Intel and Microsoft, in their endeavors to add value, incorporate features or
functions provided by Phoenix in silicon or the operating system, respectively.
Therefore, Phoenix must continually create new features and functions to sustain
as well as increase its added value to OEMs. There can be no assurances that
Phoenix will be successful in these efforts.
ATTRACTION AND RETENTION OF KEY PERSONNEL
Phoenix believes it employs more BIOS engineers than any other company in
the PC industry. Virtual Chips' products are based on new and emerging
technologies which are different from BIOS technologies. Phoenix's ability to
achieve its revenue and operating performance objectives will depend in large
part on its ability to attract and retain technically qualified engineers. The
available pool of engineering talent is limited for both operations.
Accordingly, failure to attract, retain and grow its research and development
teams could adversely affect Phoenix's business and operating results.
13
DEPENDENCE ON KEY CUSTOMERS; CONCENTRATION OF CREDIT RISK
The loss of any key customer and the inability of the Company to replace
revenues provided by a key customer could have a material adverse effect on the
Company's business and financial condition. The Company's customer base
consists principally of large OEMs in the PC market and as a result, the Company
maintains individually significant receivable balances from major OEMs. If
these OEMs fail to meet their guaranteed minimum royalty payments and other
payment obligations, the Company's operating results could be adversely
affected. As of September 30, 1997, the three largest receivable balances
collectively represented approximately 44% of total accounts receivable.
COMPETITION
The market for Phoenix's products is very competitive. Phoenix competes
primarily with three other independent suppliers with respect to its system-
level software products: Award Software International Inc., SystemSoft
Corporation and American Megatrends, Inc. It also competes for BIOS business
with in-house research and development departments of PC manufacturers that have
significantly greater financial and technical resources than those of Phoenix.
These companies include Acer Inc., Compaq Computer, Dell Computer, International
Business Machines and Toshiba. In the synthesizable core business, Phoenix
competes with businesses such as Mentor Graphics Corporation, Synposys
Corporation and Cadence Systems who have resources far greater than those of
Phoenix and with other companies such as Sand Microelectronics, Inc. There can
be no assurance that Phoenix will continue to compete successfully with its
current competitors or that it will be able to compete successfully with new
competitors.
INTERNATIONAL SALES AND ACTIVITIES
Revenue derived from Phoenix's international operations comprises a
majority of total revenues. There can be no assurances that Phoenix will not
experience significant fluctuations in international revenues. While the major
portion of Phoenix's license fee or royalty contracts are U.S. dollar
denominated, Phoenix is entering into an increasing number of contracts
denominated in local currencies. Phoenix has sales and engineering offices in
England, France, Germany, Japan, Korea and Taiwan and uses software engineering
firms in Israel and India. Phoenix's operations and financial results could be
adversely affected by factors associated with international operations such as
changes in foreign currency exchange rates, uncertainties relative to regional
economic circumstances, political instability in emerging markets, and
difficulties in staffing and managing foreign operations, as well as by other
risks associated with international activities.
VOLATILE MARKET FOR PHOENIX STOCK
The market for Phoenix's stock is highly volatile. The trading price of
Phoenix common stock has been, and will continue to be, subject to fluctuations
in response to operating and financial results, announcements of technological
innovations, new products or customer contracts by Phoenix and its competitors,
changes in Phoenix's or its competitors' product mix or product direction,
changes in Phoenix's revenue mix and revenue growth rates, changes in
expectations of growth for the PC industry, as well as other events or factors
which Phoenix may not be able to influence or control. Statements or changes in
opinions, ratings or earnings estimates made by brokerage firms and industry
analysts relating to the market in which Phoenix does business, companies with
which Phoenix competes or relating to Phoenix specifically could have an
immediate and adverse effect on the market price of Phoenix's stock. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations that have particularly affected the market price for many
high-technology companies and that often have been unrelated to the operating
performance of these companies.
CERTAIN ANTI-TAKEOVER EFFECT
Phoenix's Certificate of Incorporation, Bylaws and Stockholder Rights Plan
and the Delaware General Corporation Law include provisions that may be deemed
to have anti-takeover effects and may delay, defer or
14
prevent a takeover attempt that stockholders might consider in their best
interests. These include provisions under which members of the Board of
Directors are divided into three classes and are elected to serve staggered
three year terms. The Stockholder Rights Plan permits holders of Phoenix
common stock to purchase shares of Series A Junior participating preferred
stock in the event of the acquisition by a third party of 20% or more of
Phoenix's outstanding common stock or if a third party announces its tender
offer for at least 30% of Phoenix's outstanding common stock. If Phoenix is
acquired in a merger or other business combination, each right will entitle
its holder to purchase a number of shares of Phoenix common stock which equals
the exercise price of the right divided by one-half of the then current market
price of Phoenix common stock. In addition, in connection with the February
1996 sale of shares representing 6% of the outstanding Phoenix common stock
and of a warrant to purchase an additional 7%, Phoenix granted Intel
Corporation certain rights in the event of solicited or unsolicited offers to
acquire Phoenix.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's primary sources of liquidity included
cash, cash equivalents and short-term investments of $47.5 million, and
available borrowings under a bank credit facility of $10.0 million. There were
no borrowings outstanding under the bank credit facility at September 30, 1997.
The Company believes that its existing sources of liquidity will be sufficient
to satisfy the Company's cash requirements for at least the next twelve months.
Pursuant to a share repurchase program whereby the Board of Directors
authorized the repurchase of up to 1,000,000 shares of its outstanding common
stock, the Company repurchased and retired approximately 386,000 shares at a
cost of approximately $5.0 million in fiscal 1997.
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities during fiscal 1997 was $7.8
million, resulting primarily from cash provided by net income, adjusted for non-
cash items. Net cash used in investing activities was $10.2 million which
consisted primarily of purchases of short-term investments of $55.8 million,
purchases of property and equipment of $6.6 million, and additions to computer
software costs of $6.2 million for use in the Company's operations and was
partially offset by maturities of short-term investments of $56.2 million and
proceeds from sale of marketable securities of $3.2 million. Cash used for
financing activities during fiscal 1997 was $0.8 million resulting from
purchases of $5.0 million of treasury stock, partially offset by $4.2 million
from the exercise of common stock options and issuance of stock under the
Company's employee stock purchase plan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors of the
Company will be contained in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A in connection with the 1998 annual meeting of
its stockholders (the "Proxy Statement") and is incorporated herein by this
reference.
The executive officers of the Company, each of whom serve at the discretion
of the Board of Directors, as of the date of this Form 10-K are as follows:
Name Age Position
---- --- --------
Jack Kay 51 President and Chief Executive Officer
David Frodsham 41 Vice President and General Manager,
PC Systems Division
Stuart J. Nichols 37 Vice President, General Counsel and
Secretary
Robert J. Riopel 55 Vice President, Finance,
Chief Financial Officer and Treasurer
Craig Slayter 47 Vice President and General Manager,
Worldwide Field Operations
Mr. Kay joined the Company as Vice President of Worldwide Sales in May
1990. In January, 1992, he was appointed Senior Vice President and Chief
Operating Officer. In June, 1994, he was promoted to President and Chief
Operating Officer. Effective October 1, 1995, he was promoted to President and
Chief Executive Officer.
Mr. Frodsham was President of Distributed Information Processing Ltd., a
British company that was acquired by Phoenix in 1994. At that time, he became
General Manager, Europe until his appointment as Vice President and General
Manager, PC Systems Division in July 1997.
Mr. Nichols joined the Company in May 1997 as Vice President, General
Counsel and Secretary. For two years before joining the Company, Mr. Nichols
was General Counsel for Samsung Semiconductor, Inc., a subsidiary of Samsung
Electronics Co., Ltd. From 1989 to 1995, Mr. Nichols served as Corporate
Counsel for Varian Associates, Inc.
Mr. Riopel joined the Company as Vice President, Finance, Chief Financial
Officer, and Treasurer in February 1995. For two years before joining the
Company, Mr. Riopel was Senior Vice President, Finance and Administration and
Chief Financial Officer for OpenVision Technologies, Inc., a developer of system
management software for client-server systems. From 1989 to 1993, Mr. Riopel
served as Vice President, Finance for the international division of Silicon
Graphics, Inc.
Mr. Slayter has been employed in various management positions since he
joined the Company in July 1987. Mr. Slayter served as General Manager, Asia-
Pacific Division, from April 1988 through September 1994. He was promoted to
Vice President, Asia Pacific Operations in October 1994. Since April 1996, Mr.
Slayter has served as the Vice President and General Manager of the Special
Products Division. In September 1997, Mr. Slayter was promoted to the position
of Vice President and General Manager, Worldwide Field Operations.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during, and with respect to, its most recent
fiscal year and written representations that no other reports were required, if
any, the filing requirements of Section 16(a) applicable to its officers,
directors and 10% Stockholders were satisfied.
16
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Phoenix Technologies
Ltd. and its subsidiaries are filed as part of this report on Form 10-K:
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets as of September 30, 1997 and 1996. . . . . . . 23
Consolidated Statements of Income for the years ended September 30, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 27
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 financial statements or notes
thereto. The financial statements and financial statement schedules follow the
signature page hereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of fiscal 1997.
(c) EXHIBITS
3.2 By-laws of the Registrant as amended through February 6, 1995
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8, Registration No. 333-03065 (the
"1996 ESPP S-8")).
3.6 Certificate of Ownership (incorporated herein by reference to Exhibit
3.6 to the 1988 Form 10-K).
17
3.8 Rights Agreement dated as of October 31, 1989 between the Registrant
and The First National Bank of Boston (incorporated herein by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
October 31, 1989 (the "1989 8-K")).
3.12 Restated Certificate of Incorporation of the Registrant dated as of
December 12, 1997.
4.1 Rights Agreement dated as of October 31, 1989 between the Company and
The First National Bank of Boston - filed as Exhibit 4.1 to the October
31, 1989 Form 8-K, and incorporated herein by this reference.
10.4 Employment agreement dated June 9, 1994 between the Registrant and Jack
Kay - filed as Exhibit 10.9 to the Company's Quarterly Report on Form
10-Q filed on August 15, 1994 and incorporated herein by this reference.
10.9 Letter Amendment dated as of December 30, 1993 to Line of Credit
Agreement dated November 25, 1991 between the Registrant and Silicon
Valley Bank filed as exhibit 10.17 to the Company's Form 10-Q filed on
February 14, 1994 and incorporated herein by this reference.
10.10 Purchase Agreement dated March 15, 1994 between the Company and
Softbank Corporation filed as exhibit 10.18 to the Company's Form 10-Q
filed May 16, 1994 and incorporated herein by this reference.
10.13 Amendment No. 1 to Purchase Agreement by and between Phoenix
Technologies Ltd. and Softbank Corporation dated as of March 15, 1994
- filed as Exhibit 2.02 to the Company's Current Report on Form 8-K
dated September 30, 1994 and incorporated herein by this reference.
10.14 Asset Purchase Agreement made as of September 30, 1994 by and between
the Registrant and Xionics International Holdings, Inc. - filed as
Exhibit 2.01 to the Company's Current Report on Form 8-K dated November
8, 1994 and incorporated herein by this reference.
10.15 1994 Equity Incentive Plan, as amended through February 28, 1996 -
filed as Exhibit 10.17 to the Company's Report on Form 10-K for the
fiscal year ended September 30, 1995 (the "1995 10-K") and
incorporated herein by this reference.
10.16 Amended and Restated Employee Stock Purchase Plan, as amended by
through February 28, 1996 - filed as Exhibit 4.10 to the 1996 ESPP S-8
and incorporated herein by this reference.
10.21 Amended and Restated Lease Agreement dated March 15, 1995 between The
Prudential Insurance Company of America and the Company with respect to
certain facilities located at 846 University Avenue, Norwood, MA -
filed as Exhibit 10.23 to the 1995 10-K and incorporated herein by this
reference.
10.22 Agreement dated December 18, 1995 between Intel Corporation and the
Company filed as Exhibit 10.24 to the Company's Report on Form 10-Q for
the quarter ended December 31, 1995 as amended by a Form 10-Q/A-1 (the
"December 1995 10-Q") and incorporated herein by this reference.
Portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
10.23 Common Stock and Warrant Purchase Agreement dated as of December 18,
1995 by and between the Company and Intel Corporation - filed as
Exhibit 10.25 to the December 1995 10-Q and incorporated herein by this
reference.
18
10.24 Warrant to Purchase Shares of Common Stock of the Company dated
February 15, 1996 - filed as Exhibit 2 to the Schedule 13D of Intel
Corporation dated February 23, 1996 with respect to the purchase by
Intel of shares of the Company's common stock and of a warrant to
purchase shares of the Company's common stock (the "Intel Schedule
13D") and incorporated herein by this reference.
10.25 Investor Rights Agreement, dated December 18, 1995, between the Company
and Intel Corporation - filed as Exhibit 3.2 to the Intel Schedule 13D
and incorporated herein by this reference.
10.26 Standard Industrial Lease - Full Net between The Equitable Life
Assurance Society of the United States as Landlord and Phoenix
Technologies Ltd. as Tenant dated as of May 15, 1996 for that certain
property located at 411 E. Plumeria Drive, San Jose, California - filed
as Exhibit 10.20 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by this reference.
10.28 Industrial Lease (Single Tenant; Net) dated as of October 1, 1996 by
and between The Irvine Company and Phoenix Technologies Ltd. For that
certain property located at 135 Technology Drive, Irvine, California
filed as Exhibit 10.28 to the 1996 Form 10-K and incorporated herein
by this reference.
10.29 Equity Incentive Plan, as amended through December 12, 1996
incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-20447).
10.30 Loan Agreement dated as of February 28, 1997 by and between Silicon
Valley Bank and Phoenix Technologies Ltd filed as Exhibit 10.30 to the
Company's Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by this reference.
11.1 Statement re computation of earnings per share (primary earnings per
share).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors (Ernst & Young LLP).
23.2 Consent of Independent Accountants (Coopers & Lybrand, L.L.P.).
27 Financial Data Schedule.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOENIX TECHNOLOGIES LTD.
By: /s/ Jack Kay
----------------------------------
Jack Kay
President and Chief Executive Officer
Date: December 15, 1997
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Jack Kay /s/ Robert J. Riopel
- --------------------------------- ---------------------------------
Jack Kay Robert J. Riopel
Director and Principal Principal Finance and
Executive Officer Accounting Officer
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Charles Federman /s/ Lawrence G. Finch
- --------------------------------- ---------------------------------
Charles Federman Lawrence G. Finch
Director Director
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Ronald D. Fisher /s/ Lance E. Hansche
- --------------------------------- ---------------------------------
Ronald D. Fisher Lance E. Hansche
Director Director
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Anthony P. Morris
- ---------------------------------
Anthony P. Morris
Director
Date: December 15, 1997
-----------------
20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the consolidated balance sheets of Phoenix Technologies Ltd.
as of September 30, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in Part IV, Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The consolidated
financial statements and schedule of Phoenix Technologies Ltd. for the year
ended September 30, 1995 were audited by other auditors whose report dated
October 27, 1995, expressed an unqualified opinion on those statements and
schedule.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Phoenix Technologies Ltd. as of September 30, 1997 and 1996, and
the consolidated results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Jose, California
October 21, 1997
21
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the consolidated financial statements and the financial
statement schedule of Phoenix Technologies Ltd. as of September 30, 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Phoenix Technologies Ltd. as of September 30, 1995, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule for the year ended September
30, 1995 referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
San Jose, California
October 27, 1995
22
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $22,169 $25,752
Short-term investments 25,368 31,287
Accounts receivable, net of allowances of
$608 in 1997 and $467 in 1996 21,129 16,225
Deferred income taxes 2,754 2,719
Prepaids and other current assets 13,069 2,809
-------- --------
Total current assets 84,489 78,792
Other marketable securities 26,524 21,831
Property and equipment, net 9,607 5,099
Computer software costs, net 4,880 3,694
Other assets 1,268 4,133
-------- --------
Total assets $126,768 $113,549
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,707 $ 2,589
Payroll and related liabilities 3,434 3,279
Accrued license fees and royalties 747 1,299
Other accrued liabilities 2,452 2,799
Income taxes payable 6,047 3,955
Discontinued operations 135 1,335
-------- --------
Total current liabilities 15,522 15,256
Deferred income taxes 7,159 8,561
Other liabilities 360 155
Commitments - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 40,000 shares
authorized, 16,895 and 16,636 shares issued
and outstanding at September 30, 1997 and 1996 17 17
Additional paid-in capital 71,131 68,509
Retained earnings 20,366 8,113
Unrealized gain on available-for-sale securities 12,570 13,098
Accumulated translation adjustment (357) (160)
-------- --------
Total stockholders' equity 103,727 89,577
-------- --------
Total liabilities and stockholders' equity $126,768 $113,549
-------- --------
-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenue:
License fees $68,903 $62,497 $43,448
Services 13,226 9,639 6,493
------- ------- -------
Total revenue 82,129 72,136 49,941
Cost of revenue:
License fees 5,893 7,482 3,633
Services 10,156 7,260 5,949
------- ------- -------
Total cost of revenue 16,049 14,742 9,582
------- ------- -------
Gross margin 66,080 57,394 40,359
Operating expenses:
Research and development 26,349 20,628 11,038
Sales and marketing 17,400 15,522 14,355
General and administrative 11,565 9,679 6,696
Costs of acquisition - 889 -
------- ------- -------
Total operating expenses 55,314 46,718 32,089
------- ------- -------
Income from operations 10,766 10,676 8,270
Interest income, net 2,908 2,177 1,725
Other income, net 9,348 73 303
------- ------- -------
Income before income taxes 23,022 12,926 10,298
Provision for income taxes 7,367 3,879 1,483
------- ------- -------
Income from continuing operations 15,655 9,047 8,815
Gain on discontinued operations
(after income taxes of $2,300) - 3,752 -
------- ------- -------
Net income $15,655 $12,799 $ 8,815
------- ------- -------
------- ------- -------
Income per share:
Income from continuing operations $ 0.87 $ 0.52 $ 0.56
Income from discontinued operations - 0.21 -
------- ------- -------
------- ------- -------
Net income per share $ 0.87 $ 0.73 $ 0.56
------- ------- -------
------- ------- -------
Shares used in computation 18,023 17,456 15,763
------- ------- -------
------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1997
UNREALIZED
RETAINED GAIN ON
ADDITIONAL EARNINGS AVAILABLE- ACCUMULATED TOTAL
COMMON STOCK PAID-IN (ACCUMULATED FOR-SALE TRANSLATION STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT CAPITAL DEFICIT) SECURITIES ADJUSTMENT EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 12,697 $13 $49,276 $(9,843) $ - $ - $ 39,446
Stock purchases under stock
option and stock purchase plans 892 1 3,317 - - - 3,318
Tax benefit on exercise of stock
options - - 1,893 - - - 1,893
Cancellation of treasury shares (30) - 350 (350) - - -
Repurchases of common stock 369 - (1,126) (1,854) - - (2,980)
Net income - - - 8,815 - - 8,815
Accumulated translation adjustment - - - - - (74) (74)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1995 13,928 14 53,710 (3,232) - (74) 50,418
Effect of pooling of interests 658 1 6 (39) - - (32)
Conversion of notes receivable 206 - 706 - - - 706
Deferred compensation, net - - 49 - - - 49
Sale of common stock and warrant,
net of costs 961 1 10,441 - - - 10,442
Stock purchases under stock
option and stock purchase plans 1,035 1 3,651 - - - 3,652
Tax benefit on exercise of stock
options - - 536 - - - 536
Repurchases of common stock (152) - (590) (1,415) - - (2,005)
Unrealized gain on available for
sale securities - - - - 13,098 - 13,098
Net income - - - 12,799 - - 12,799
Accumulated translation adjustment - - - - - (86) (86)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1996 16,636 17 68,509 8,113 13,098 (160) 89,577
Deferred compensation, net - - 66 - - - 66
Stock purchases under stock
option and stock purchase plans 645 - 3,630 - - - 3,630
Tax benefit on exercise of stock
options - - 538 - - - 538
Repurchases of common stock (386) - (1,612) (3,402) - - (5,014)
Unrealized gain on available for
sale securities - - - - (528) - (528)
Net income - - - 15,655 - - 15,655
Accumulated translation adjustment - - - - - (197) (197)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1997 16,895 $17 $71,131 $20,366 $12,570 $(357) $103,727
------- --- ------- ------- ------- ----- --------
------- --- ------- ------- ------- ----- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
PHOENIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 15,655 $ 12,799 $ 8,815
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 7,504 5,051 3,050
Provision for relocation (42) (525) (876)
Gain on recovery of assets previously written off - (6,051) -
Realized gain on sale of other marketable securities (3,217) (294) -
Sale of minority interest in PPSI (6,247) - -
Compensation costs related to stock issuance 66 49 -
Equity investment - 170 (170)
Deferred income taxes (1,098) 410 (1,300)
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (4,969) (4,305) 4,020
Prepaids and other assets (715) (53) (351)
Accounts payable 116 955 (1,798)
Payroll and related liabilities 188 788 74
Other accrued liabilities (395) 147 (2,494)
Income taxes payable 2,152 1,234 (1,335)
Discontinued operations (1,200) 611 (4,479)
------- ------- -------
Total adjustments (7,857) (1,813) (5,659)
------- ------- -------
Net cash provided by operations 7,798 10,986 3,156
------- ------- -------
Cash flows from investing activities:
Maturity of short-term and long-term investments 56,156 21,261 23,086
Purchases of short-term and long-term investments (55,813) (45,401) (25,863)
Proceeds from sale of other marketable securities 3,217 - -
Proceeds from recovery on assets previously written off - 6,774 -
Purchases of property and equipment (6,561) (4,328) (1,596)
Additions to computer software costs (6,212) (2,680) (1,674)
Other investing activities (969) (32) -
------- ------- -------
Net cash used in investing activities (10,182) (24,406) (6,047)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrant - 10,442 -
Proceeds from issuance of convertible debt securities - 706 -
Proceeds from stock purchases under stock option and stock purchase plans 4,168 4,188 3,317
Repurchases of common stock (5,014) (2,005) (2,980)
Repayment of short-term borrowings - - (1,241)
------- ------- -------
Net cash provided by (used in) financing activities (846) 13,331 (904)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (353) 44 73
------- ------- -------
Net decrease in cash and cash equivalents (3,583) (45) (3,722)
Cash and cash equivalents at beginning of fiscal year 25,752 25,797 29,519
------- ------- -------
Cash and cash equivalents at end of fiscal year $22,169 $25,752 $25,797
------- ------- -------
------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
PHOENIX TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF OPERATIONS
The Company designs, develops, markets and supports standards-based
system software and synthesizable cores for personal computers and other
microprocessor-based products. The Company sells to OEMs and integrators of
PCs, information appliances and peripheral devices. Phoenix provides
training, consulting, maintenance and engineering services to its customers.
The Company operates seven development and support centers in four countries.
Most sales are made through the Company's direct sales force, but sales
through technically certified distributors is increasing as a percent of
revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
the financial statements. Certain amounts in the prior years' financial
statements have been reclassified to conform to the fiscal 1997 presentation.
USE OF ESTIMATES. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Such estimates include the allowance for doubtful accounts,
sales returns and customer credits, net realizable value of capitalized
computer software costs, and the valuation allowance on deferred tax assets.
REVENUE RECOGNITION. The Company's revenue is derived from license fees
and engineering services sold primarily to OEMs. Revenue from software
license fees is recognized when the software has been delivered, providing
that no significant vendor obligations remain outstanding, customer
acceptance is reasonably assured and collectibility is deemed probable.
Revenue recognized from software licenses with initial or minimum guaranteed
payments is limited to amounts due within 90 days. Additional software
license fees are recognized as per unit royalties exceed the initial or
minimum guaranteed payments. Insignificant vendor obligations, if any,
remaining after contract execution and shipment are accounted for by accruing
the costs related to the remaining obligations.
Customers entering into license agreements with the Company for
customized products are typically charged engineering fees that vary
according to the amount of engineering work performed. Engineering fees are
recognized as revenue on a time and materials basis or when contractual
milestones are met. Maintenance revenues are recognizable ratably over the
contract period.
Allowances for estimated returns and customer credits are recorded in the
same period as the related revenues.
In fiscal 1997 and fiscal 1996, one customer accounted for 12% and 10% of
revenues, respectively. No customers accounted for 10% or more of revenues
in fiscal 1995.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity
of less than three months are considered cash equivalents.
SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES. Short-term
investment securities consist of U.S. government and agency obligations,
bankers' acceptances, corporate debt securities and commercial paper with
original maturities generally ranging from three months to one year.
Short-term investments are classified as held-to-maturity as the Company has
the intent and the ability to hold them until maturity. Such investments are
27
recorded at amortized cost. At September 30, 1997, 1996 and 1995, the fair
value of such short-term investments approximated amortized cost and gross
unrealized holding gains and losses were not material.
Other marketable securities consist of the shares of Xionics Document
Technologies, Inc. ("Xionics") and U.S. government agency obligations, owned
by the Company. The shares of Xionics common stock are recorded at fair
value based on quoted market prices and classified as available-for-sale.
The unrealized gain on the Xionics investment, less deferred income taxes,
has been recorded as a separate component of stockholders' equity. The
carrying value of the Xionics shares and the related deferred income taxes
and unrealized gain are adjusted to the current market value in each period.
The U.S. government agency obligations have maturities greater than one
year, and the Company has the intent and ability to hold them until maturity.
These securities are recorded at amortized cost. At September 30, 1997 and
1996, the fair value of such securities approximated amortized cost and gross
unrealized holding gains were not material.
CREDIT RISK. Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments with high credit qualified financial institutions. The Company
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. At September 30, 1997, three customers accounted for 17%,
15% and 12% of accounts receivable, respectively. At September 30, 1996, two
customers accounted for 12% and 11% of accounts receivable, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and
depreciated using the straight-line method over their estimated useful lives,
typically three to five years. Leasehold improvements are recorded at cost
and amortized over the lesser of their useful lives or the remaining term of
the related lease.
COMPUTER SOFTWARE COSTS. Computer software costs consist of internally
developed and purchased software. Costs incurred in the research and
development of new software products and enhancements to existing products
are expensed as incurred until technological feasibility has been
established, at which time, such costs are capitalized. Capitalized computer
software costs are amortized over the economic life of the product, generally
three years, using the straight-line method or a ratio of current revenues to
total anticipated revenues.
The Company evaluates the net realizable value and amortization periods
of computer software costs on an ongoing basis relying on a number of factors
including operating results, business plans, budgets and economic
projections. In addition, the Company's evaluation considers non-financial
data such as market trends and customer relationships, buying patterns and
product development cycles.
INCOME TAXES. Income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of enactment.
NET INCOME PER SHARE. Net income per share is computed using the
weighted average number of common and dilutive common stock equivalents
outstanding. Dilutive common stock equivalents consist of outstanding stock
options and warrants, which are included in the computation using the
treasury stock method. Shares used in the computation of net income per share
have been restated for the years ended September 30, 1996 and 1995 to give
effect to the shares issued and options assumed by the Company in the
acquisition of Virtual Chips.
28
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 ("APB 25"), "Accounting for
Stock Issued to Employees." The Company has adopted disclosure only
criteria, described in Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" effective for fiscal
1997. See Note 9 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial
Accounting Standards Board issued Statements of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share," which is required to be
adopted by the Company on September 30, 1998 with quarterly disclosure. At
that time, the Company will be required to change the method currently used
to compute earnings per share and to restate such amounts for all prior
periods. Under the new requirements, primary and fully diluted earnings per
share will be replaced with basic and diluted earnings per share. If SFAS
128 had been effective for fiscal 1997 and 1996, it would have resulted in a
basic net income per share of $0.93 and $0.81 and diluted earnings per share
of $0.87 and $0.73, respectively.
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," and Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures About Segments of an Enterprise and Related Information,"
which will be required to be adopted by the Company in fiscal 1999. In
October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," which will be
required to be adopted by the Company on September 30, 1999. Adoption of
these statements is not expected to have a significant impact on the
Company's consolidated financial position, results of operations or cash
flows.
CASH FLOW INFORMATION. Supplemental cash flow information is as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid during the year, net of refunds $6,373 $2,905 $1,125
Supplemental schedule of non-cash activities:
Conversion of debt securities to common stock $ - $ 706 $ -
3. SHORT TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES
The short-term investments and other marketable securities were as follows:
OTHER
SHORT-TERM MARKETABLE
INVESTMENTS SECURITIES
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1997 1996
- ------------------------------------------------------------------------------
U.S. government and agency obligations $17,388 $30,290 $ 5,574 $ -
Xionics common stock - - 20,950 21,831
Commercial paper 3,957 - - -
Bankers' acceptances 1,985 997 - -
Corporate securities 2,038 - - -
------- ------- ------- -------
$25,368 $31,287 $26,524 $21,831
------- ------- ------- -------
------- ------- ------- -------
29
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------
Equipment $ 8,763 $10,618
Leasehold improvements 3,778 1,365
Furniture and fixtures 2,183 2,496
------- -------
14,724 14,479
Less accumulated depreciation and amortization 5,117 9,380
------- -------
$ 9,607 $ 5,099
------- -------
------- -------
Depreciation and amortization expense related to property and equipment
totaled $1,795,000, 1,825,000 and $1,278,000 for fiscal 1997, 1996 and 1995,
respectively.
5. COMPUTER SOFTWARE COSTS
Computer software with costs of $6,212,000, $2,680,000 and $1,674,000 was
purchased or capitalized during fiscal 1997, 1996 and 1995, respectively.
Amortization charged to cost of revenue was $5,026,000, $3,224,000 and
$1,244,000 during fiscal 1997, 1996 and 1995, respectively. Accumulated
amortization of capitalized computer software costs was $1,988,000 and
$2,356,000 at September 30, 1997 and 1996, respectively.
6. UNSECURED LINE OF CREDIT
At September 30, 1997, there were no outstanding borrowings on the
Company's $10,000,000 unsecured bank line of credit. Borrowings on the line
bear interest at the bank's prime rate of interest plus 1%. The line of
credit agreement contains various covenants which require the Company to
operate at a profit and meet certain financial ratios, and it restricts the
payment of cash dividends. The line of credit expires in February 1998.
7. INCOME TAXES
The components of the provision for income taxes from continuing
operations are as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------
Current:
Federal $ 860 $ 829 $ 294
State 1,151 707 96
Foreign 6,454 4,213 1,093
Deferred:
Federal (915) (1,462) -
State (183) (408) -
------ ------- ------
Provision for Income Taxes $7,367 $ 3,879 $1,483
------ ------- ------
------ ------- ------
30
Reconciliation of the United States federal statutory rate to the
Company's effective tax rate is as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 8,058 $ 4,524 $ 3,501
State taxes, net of federal tax benefit 629 195 66
Foreign taxes not previously benefited - - 659
Tax benefit of prior year losses - (1,328) (2,784)
Research and development tax credits (1,180) (269) -
Nondeductible merger costs - 311 -
Other (140) 446 41
------- ------- -------
Provision for income taxes $ 7,367 $ 3,879 $ 1,483
------- ------- -------
------- ------- -------
The components of net deferred tax assets and liabilities are as follows:
SEPTEMBER 30,
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------
Deferred Tax Assets:
Foreign tax credits $1,710 $1,308
Research and development tax credits 1,787 1,325
Minimum tax carryforward 667 864
Reserves and accruals 1,053 795
Depreciation 1,465 1,516
Other 1,308 1,611
------- -------
Total 7,990 7,419
Less valuation allowance 2,814 3,185
------- -------
Net deferred tax assets 5,176 4,234
Deferred tax liabilities:
Capitalized software, net 1,187 1,343
Unrealized gain on available-for-sale securities 8,394 8,733
------- -------
Total deferred tax liabilities 9,581 10,076
------- -------
Net deferred tax assets (liabilities) $(4,405) $(5,842)
------- -------
------- -------
Due to the uncertainty surrounding the timing of the realization of the
benefit of its tax attributes in future tax returns, the Company has recorded
a valuation allowance against otherwise recognizable net deferred tax assets.
At September 30, 1997, the Company had available for federal income tax
purposes foreign tax credits of $514,000, which expire in 2002 and research
and development tax credits of $1,787,000, which expire in the years 2001
through 2012.
8. COMMITMENTS
The Company leases office facilities under operating leases. Total rent
expense was $3,141,000, $2,410,000 and $1,673,000 in fiscal 1997, 1996 and
1995, respectively.
31
At September 30, 1997, future minimum operating lease payments are
required as follows:
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
- ---------------------------------------------------------------------
1998 $ 3,628
1999 3,090
2000 2,741
2001 2,794
2002 2,283
2003 and thereafter 3,527
---------
Total minimum lease payments $ 18,063
---------
---------
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK. As of September 30, 1997 and 1996, no preferred stock
was issued or outstanding.
STOCKHOLDER RIGHTS PLAN. The Company has a stockholder rights plan which
provides existing stockholders with the right to purchase one one-hundredth
preferred share for each share of common stock held in the event of certain
changes in the Company's ownership. These rights may serve as a deterrent to
certain abusive takeover tactics which are not in the best interests of
stockholders. This plan expires in fiscal 1999.
STOCK REPURCHASE PLAN. Pursuant to a share repurchase program whereby
the Board of Directors authorized the repurchase of up to 1,000,000 shares of
its outstanding common stock, the Company repurchased and retired
approximately 386,000 shares at a cost of approximately $5.0 million in
fiscal 1997.
STOCK OPTION PLANS. The Company has various incentive stock option plans
for employees, officers, consultants and independent contractors. Incentive
stock options may not be granted at a price less than 100% (110% in certain
cases) of the fair market value of the shares on the date of grant.
Nonqualified options may not be granted at a price less than 85% of the fair
value of the shares on the date of grant. To date, all grants have been made
at fair market value or greater. Options vest over a period determined by
the Board of Directors, generally four years, and have a term not exceeding
ten years.
Option activity under the plans, including the options assumed in the
Virtual Chips acquisition, was as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------
Shares under option, September 30, 1994 3,604,316 $4.32
Options granted 477,000 $8.50
Options exercised (821,721) $3.64
Options canceled (292,674) $5.82
---------
Shares under option, September 30, 1995 2,966,921 $5.03
Options granted 1,334,377 $12.01
Options exercised (812,049) $3.69
Options canceled (161,207) $8.01
---------
Shares under option, September 30, 1996 3,328,042 $8.01
Options granted 1,236,540 $14.07
Options exercised (555,684) $4.44
Options canceled (216,446) $12.81
---------
Shares under option, September 30, 1997 3,792,452 $10.25
---------
---------
32
At September 30, 1997, the number of shares exercisable under stock
option plans was 1,718,309 and 362,584 shares were available for grant.
The following table summarizes information about stock options
outstanding at September 30, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number Weighted Number
Range Outstanding Average Weighted Exercisable Weighted
of at Remaining Average at Average
Exercise Prices Sept. 30, 1997 Contractual Life Exercise Price Sept. 30,1997 Exercise Price
- ---------------------------------------------------------------------------------------------------------
$ 0.3100-$ 0.3100 67,700 8.37 $ 0.3100 67,700 $ 0.3100
$ 2.3800-$ 3.8750 459,327 3.83 $ 2.7167 459,140 $ 2.7162
$ 4.0000-$ 8.5000 1,086,560 6.46 $ 5.6506 823,600 $ 5.5883
$ 8.6300-$13.5000 978,852 9.03 $12.3353 155,164 $11.8091
$13.8125-$17.0000 817,033 9.23 $15.0961 131,876 $15.1589
$17.1250-$19.8750 382,980 8.90 $18.4119 80,829 $18.5344
--------- ---- -------- --------- --------
$ 0.3100-$19.8750 3,792,452 7.68 $10.2489 1,718,309 $ 6.5181
--------- ---- -------- --------- --------
--------- ---- -------- --------- --------
SALE OF COMMON STOCK AND WARRANT. In February 1996, the Company sold
894,971 newly issued, unregistered shares of its common stock and a warrant
to purchase 1,073,965 additional shares of the Company's common stock to
Intel Corporation for $10.4 million. The purchase rights under the warrant
vest annually, beginning in December 1996, in increments of 214,793 shares
for each of the first three years and 429,586 shares for the fourth year.
The warrant becomes fully exercisable in the event of an acquisition of the
Company or termination of a technology agreement between the two parties.
The price at which the warrant may be exercised is $12.88 per share at
September 30, 1997, increasing in annual increments to $15.22 per share. The
warrant expires in April 2001.
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock
Purchase Plan ("ESPP") allows eligible employees to purchase shares at six
month intervals, through payroll deductions, at 85% of the fair market value
of the Company's common stock at the beginning or end of the six-month
period, whichever is less. The maximum amount each employee may contribute
during an offering period is 10% of gross base pay. As of September 30,
1997, 508,789 shares had been issued under the ESPP and 141,211 shares
remained reserved for future issuance.
DISCLOSURES OF STOCK-BASED COMPENSATION PLANS. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123.
This information is required to be determined as if the Company had accounted
for its employee stock options granted subsequent to September 30, 1995 under
the fair value method of that statement. The fair value of options granted
in fiscal 1997 and 1996 reported below has been estimated as of the date of
the grant using a Black-Scholes multiple option pricing model with the
following assumptions:
Employee Stock Options Employee Stock Purchase Plan
Year ended September 30, Year ended September 30,
1997 1996 1997 1996
------------------- -------------------
Expected life (in Years) 0.90 0.90 0.50 0.50
Risk-free interest rate 6-7% 5-7% 5-6% 5-6%
Volatility 0.63 0.69 0.63 0.69
Dividend yield None None None None
The weighted average estimated fair value of employee stock options
granted during fiscal 1997 and 1996 was $6.08 and $7.34 per share
respectively. The weighted average estimated fair value of shares granted
under the Employee Stock Purchase Plan during fiscal 1997 and 1996 was $4.75
and $5.44, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the vesting period of
the
33
options. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant date for awards
under those plans consistent with the method of SFAS 123, the Company's net
income and net income per share would have been as follows (in thousands,
except for earnings per share information):
Year ended September 30,
1997 1996
---------------------------
Net income:
As reported $15,655 $12,799
Pro forma $11,725 $11,793
Net income per share:
As reported $ 0.87 $ 0.73
Pro forma $ 0.67 $ 0.69
Because SFAS No. 123 is applicable only to options granted subsequent to
September 30, 1995, the pro forma effect will not be fully reflected until
fiscal year 2000.
10. VIRTUAL CHIPS ACQUISITION
In August 1996, the Company acquired all of the outstanding capital of
Virtual Chips in exchange for 1,241,842 shares of the Company's common stock.
Virtual Chips is a leading supplier of synthesizable cores for the computer
industry. The Company also assumed Virtual Chips outstanding stock options,
which were converted to options to purchase approximately 147,959 shares of
the Company's common stock. The merger was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements of the
Company for fiscal 1996 were restated to include the operations of Virtual
Chips. The financial statements for fiscal 1995 were not restated as the
results of operations of Virtual Chips were not material in relation to those
of the Company. However, shares used to compute net income per share were
restated for fiscal 1996 and 1995 to give effect to the shares issued and
options assumed by the Company in the transaction. Costs of acquisition in
fiscal 1996 of $889,000 are the costs associated with the acquisition of
Virtual Chips, Inc. in August 1996.
11. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In fiscal 1994, the Company sold all the
assets of its Printer Software Division to Xionics in return for a promissory
note and shares of Xionics common stock. Interest at 8% per annum was
received quarterly; no payments of principal were due before January 1997.
During fiscal 1995 and 1996, the Company made an additional loan to Xionics,
exchanged a portion of the note for additional common shares and reflected
certain adjustments to the purchase price in the note balance. In September
1996, Xionics completed an initial public offering of its common stock and
repaid the net amount due to the Company. The Company sold 500,000 of its
Xionics shares in the offering. The amounts received were recorded as a gain
on disposal of discontinued operations, net of income taxes, to the extent
such amounts were previously written off by a charge to discontinued
operations. The balance of the amount received of $294,000 represents
investment income and was recorded as other income. In fiscal 1997 the
Company sold 250,000 additional shares of Xionics common stock for a realized
gain of $3,217,000 which was recorded as other income. At September 30,
1997, the Company held 1,205,381 shares of Xionics stock with a market value
of $17.38 per share, which represents approximately 10% of total outstanding
Xionics common stock.
PUBLISHING DIVISION. In fiscal 1994, the Company sold 80% of its
Publishing Division to Softbank Corporation of Japan ("Softbank"). At that
time, Softbank and the Company established a new entity, Phoenix Publishing
Systems, Inc., later renamed Softbank Content Group ("SCG"), and each
contributed their respective interests in the Publishing Division to SCG in
exchange for 80% and 20%, respectively, of the equity of SCG. On September
30, 1997, Phoenix exercised its right to require Softbank to repurchase the
SCG shares owned by the Company for $7,500,000 and recorded a gain of
$6,247,000 which is included in other income. At September 30,
34
1997, a receivable from Softbank in the amount of $7,500,000 was included in
other current assets, and in October 1997, payment was received.
OTHER INVESTMENTS. Other assets at September 30, 1996 and 1995 include
equity and other investments in Softbank, Inc., a joint venture company in
the amount of $2,388,000. The investment was subsequently exchanged for a
non-interest bearing $2,310,000 note receivable from Softbank Holdings, Inc.,
which is included in other current assets at September 30, 1997. The note
was subsequently collected in October 1997.
12. INTERNATIONAL INFORMATION
The Company licenses its products worldwide. Export revenues were made
principally to the following geographic areas:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
Asia/Pacific $28,066 $27,716 $16,246
Europe 9,374 7,328 3,258
------- ------- -------
$37,440 $35,044 $19,504
------- ------- -------
------- ------- -------
A summary of foreign operations, principally represented by locations in
the Asia/Pacific region, is presented below.
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
Revenues $14,327 $4,248 $4,108
Operating income 3,498 2,120 1,136
Income before income taxes 3,526 2,107 1,304
Identifiable assets 8,186 4,849 6,777
13. RETIREMENT PLANS
The Company has a retirement plan which is qualified under Section 401(k)
of the Internal Revenue Code. This plan covers substantially all U.S.
employees who meet minimum age and service requirements and allows
participants to defer a portion of their annual compensation on a pre-tax
basis. In addition, Company contributions to the plan may be made at the
discretion of the Board of Directors. In January 1996, the Company began
making a matching contribution of 25% of each participant's contribution, up
to a match of $1,000 per year per participant. The matching contributions
vest over a four year period which starts with the participant's employment
start date with the Company. The Company's contributions for fiscal 1997 and
1996 were $264,000 and $158,000, respectively.
35
Schedule II
PHOENIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS FOR THE
THREE FISCAL YEARS ENDED SEPTEMBER 30, 1997
Balance at Charged to Charged
Allowance for Beginning Costs and to Other Balance at
Doubtful Accounts of Year Expenses Accounts Deductions(1) Recoveries End of Year
- ----------------- ---------- ----------- -------- ------------- ---------- -----------
Year Ended September 30, 1997 $467,000 $148,000 $ -- $ 7,000 $ -- $608,000
Year Ended September 30, 1996 430,000 94,000 -- 88,000 31,000 467,000
Year Ended September 30, 1995 657,000 60,000 329,000 785,000 169,000 430,000
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
36