UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
-----------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to ____________ .
Commission file number 0-17111
-------
PHOENIX TECHNOLOGIES LTD.
-------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-2685985
--------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
411 East Plumeria Drive, San Jose, California 95134
---------------------------------------------------
(Address of principal executive offices, including zip code)
(408) 570-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.001 25,234,039
------------------------------- ------------------------------------------
Class Number of Shares Outstanding at December
31, 2001
PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31 and September 30, 2001............................ 3
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 2001 and 2000................. 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2001 and 2000................. 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits...................................................... 23
Reports on Form 8-K........................................... 23
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31, September 30,
2001 2001
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 32,647 $ 62,084
Short-term investments 28,779 2,950
Accounts receivable, net of allowances of
$3,351 and $2,374 at December 31 and
September 30, 2001 27,815 21,527
Prepaid royalties and maintenance 5,548 5,623
Deferred income taxes 5,177 5,186
Other current assets 5,765 6,572
----------- ------------
Total current assets 105,731 103,942
Property and equipment, net 9,474 10,793
Computer software costs, net 15,915 17,602
Goodwill and intangible assets, net 15,660 17,104
Deferred income taxes 8,736 8,743
Other assets 3,470 2,427
----------- ------------
Total assets $ 158,986 $ 160,611
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,243 $ 2,949
Accrued compensation and related liabilities 12,833 9,918
Deferred revenue 8,365 5,088
Accrued acquisition costs 828 1,802
Income taxes payable 1,204 3,201
Other accrued liabilities 4,930 4,378
----------- ------------
Total current liabilities 31,403 27,336
Long-term obligations 609 638
----------- ------------
Total liabilities 32,012 27,974
----------- ------------
Minority interest 12,053 12,941
----------- ------------
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 60,000 shares
authorized, 30,218 and 30,114 shares issued, 25,234 and
25,239 shares outstanding at December 31 and September 30,
2001 30 30
Additional paid-in capital 166,079 165,396
Retained earnings 31,664 35,888
Accumulated other comprehensive income (loss) (2,106) (1,878)
Less: Cost of treasury stock (4,984 and 4,875
shares at December 31 and September 30, 2001) (80,746) (79,740)
----------- ------------
Total stockholders' equity 114,921 119,696
----------- ------------
Total liabilities and stockholders' equity $ 158,986 $ 160,611
=========== ============
See notes to condensed consolidated financial statements
Page 3
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended
December 31,
-----------------------
2001 2000
---------- ---------
Revenues:
License fees $ 26,040 $ 33,877
Services 3,562 4,898
---------- ---------
Total revenues 29,602 38,775
---------- ---------
Cost of revenues:
License fees 1,436 417
Services 1,910 3,633
Amortization of purchased technology 960 314
Restructuring related write-off of purchased
technology 847 -
---------- ---------
Total cost of revenues 5,153 4,364
---------- ---------
Gross Margin 24,449 34,411
Operating expenses:
Research and development 9,065 10,934
Sales and marketing 9,406 9,763
General and administrative 5,982 5,490
Amortization of goodwill and acquired
intangible assets 1,129 555
Stock-based compensation 225 444
Restructuring and related charges 5,142 -
---------- ---------
Total operating expenses 30,949 27,186
---------- ---------
Income (loss) from operations (6,500) 7,225
Interest and other income, net 425 590
Minority interest 1,306 108
---------- ---------
Income (loss) before income taxes (4,769) 7,923
Income tax expense (credit) (545) 2,412
---------- ---------
Net income (loss) $ (4,224) $ 5,511
========== =========
Earnings (loss) per share:
Basic $ (0.17) $ 0.22
Diluted $ (0.17) $ 0.21
Shares used in earnings (loss) per share calculation:
Basic 25,208 25,096
Diluted 25,208 26,636
See notes to condensed consolidated financial statements
Page 4
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
December 31,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (4,224) $ 5,511
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 3,560 2,103
Stock based compensation 225 -
Restructing related write-off of assets 662 -
Restructing related write-off or purchased technologies 847 -
Minority interest (1,306) (108)
Deferred income tax - 316
Change in operating assets and liabilities:
Accounts receivable (6,288) 2,696
Other assets 351 (1,451)
Prepaid royalties and maintenance (1,392) (373)
Accounts payable 294 (78)
Accrued compensation and related liabilities 2,791 (1,719)
Other accrued liabilities (450) (733)
Deferred revenue 3,277 38
Income taxes (1,425) (217)
----------- -----------
Net cash provided by (used in) operating activities (3,078) 5,985
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments 27,768 109,740
Purchases of investments (53,274) (92,665)
Purchases of property and equipment (500) (1,008)
Additions to computer software (119) (1,898)
Acquisition of businesses, net of cash acquired - (2,933)
----------- -----------
Net cash provided by (used in) investing activities (26,125) 11,236
----------- -----------
Cash flows from financing activities:
Proceeds from stock purchases under stock option and stock purchase plans 1,000 3,554
Repurchase of common stock (1,006) (15,895)
Repayment of notes payable - (47)
----------- -----------
Net cash provided by (used in) financing activities (6) (12,388)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (228) (967)
----------- -----------
Net increase in cash and cash equivalents (29,437) 3,866
Cash and cash equivalents at beginning of period 62,084 55,017
----------- -----------
Cash and cash equivalents at end of period $ 32,647 $ 58,883
=========== ===========
See notes to condensed consolidated financial statements
Page 5
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Description of Business
Phoenix Technologies Ltd. ("Phoenix" or the "Company") is the global
leader in device-enabling and management software solutions for Personal
Computers (PCs) and connected digital devices. Phoenix provides its products
primarily to platform and peripheral manufacturers (collectively, "OEMs") that
range from large PC and Information Appliance manufacturers to small system
integrators and value-added resellers. Phoenix also provides training,
consulting, maintenance, and engineering services to its customers. The Company
markets and licenses its products and services through a direct sales force as
well as through regional distributors and sales representatives. The Company has
two business units (one of which, inSilicon Corporation ("inSilicon"), is a
majority-owned subsidiary), both of which deliver leading products and
professional services that enable connected computing.
The Company believes that its products and services enable customers
who specify, develop, and manufacture PCs, information appliances, and
semiconductors to bring leading-edge products to market more quickly while
reducing their costs, providing high value-added features to their customers
and, hence, increasing their competitiveness.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying condensed consolidated
financial statements as of December 31, 2001 and for the three months ended
December 31, 2001 and 2000 have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). All significant intercompany accounts and transactions have been
eliminated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The consolidated balance sheet as of September 30, 2001 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2001.
In the opinion of the management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to fairly present the Company's
financial position, results of operations, and cash flows for the interim
periods presented.
Revenue Recognition. The Company licenses software under non-cancelable
license agreements and provides services including non-recurring engineering
efforts, maintenance consisting of product support services and rights to
upgrades on a when-and-if available basis, and training.
Revenues from software license agreements are recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable. The Company uses the
residual method to recognize revenue when an agreement includes one or more
elements to be delivered at a future date and vendor specific objective evidence
of the fair value of all the undelivered elements exists. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenues. If evidence of fair
value of one or more undelivered elements does not exist, revenues are deferred
and recognized when delivery of those elements occurs or when fair value can be
established. When the Company provides the customer with significant
customization of the software products, revenues are recognized in accordance
with AICPA Statement of Position 81-1 ("Accounting for Performance of
Construction-Type and Certain Production-Type Contracts") which requires
revenues to be recognized using the percentage-of-completion method based on
time and materials or when services are complete. Revenues from arrangements
with distributors or resellers are recognized on a sell-through basis.
Royalty revenues from OEMs are generally recorded in each period based
on estimates of shipments by the OEMs of products containing the Company's
software during the period. Revenues from OEMs for fully paid up, non-refundable
royalties is recorded when the revenue recognition criteria has been met.
Non-recurring engineering service revenues are recognized on a time and
materials basis or when contractual milestones are met. Contractual milestones
involve the use of estimates and approximate the percentage-of-completion
method. Software maintenance revenues are recognized ratably over the
maintenance period which is typically one year. Training and other service
revenues are recognized as the services are performed. Amounts paid in advance
for licenses and services that are in excess of revenues recognized are recorded
as deferred revenues.
Provisions are made for doubtful accounts, estimated returns, and
customer credits.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used for, but not limited to allowance for uncollectible accounts
receivable, accruals for royalty revenues, valuation of investments and
intangibles, product warranty, useful lives for property and equipment and
intangibles, employee benefits, restructuring and related costs, sales returns,
and taxes. Actual results could differ from those estimates. The operating
results for the three months ended December 31, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2002, or for any other future period.
The Company records provisions for estimated sales returns against
revenues and allowances for doubtful accounts against general and administrative
expenses in the same period as the related revenues are recorded. At December 31
and September 30, 2001, these amounts were $3.4 million and $2.4 million,
respectively. These estimates are based on historical sales returns and bad debt
write-offs, analysis of credit memo data, specific identification of probable
bad debts based on collection efforts and other known factors. Actual results
could differ from those estimates.
At December 31 and September 30, 2001, the Company had net goodwill and
intangible assets of $15.7 million and $17.1 million, respectively. In assessing
the recoverability of our goodwill and intangibles assets, the Company makes
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or their related
assumptions change in the future, the Company may be required to record
impairment charges for these assets not previously recorded. During the fourth
quarter ended September 30, 2001, the Company recorded impairment charges on
goodwill for its inSilicon subsidiary in the amount of $9.4 million. Also, as a
result of the restructuring program instituted by inSilicon in the first quarter
of fiscal 2002, the Company recorded an additional impairment of $0.8 million on
capitalized software.
Reclassification. Certain amounts in the prior year's financial
statements have been reclassified to conform to the current year presentation.
Computation of Earnings (Loss) per Share. Basic earnings (loss) per
share is computed using the weighted-average number of common shares outstanding
during each period. Diluted earnings per share
Page 6
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
is computed using the weighted-average number of common and dilutive potential
common shares outstanding during the period. Dilutive common-equivalent shares
primarily consist of employee stock options, computed using the treasury stock
method. The Company reported net losses for the three months ended December 31,
2001. The effects of outstanding options were not included in the calculation of
diluted net loss per share, as their inclusion would be anti-dilutive.
New Accounting Pronouncements. In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and is effective for all business combinations completed after
June 30, 2001. The adoption of SFAS 141 did not have a material effect on the
Company's operating results or financial condition. SFAS 142 requires goodwill
to be tested for impairment under certain circumstances, and written-off when
impaired, rather than being amortized as previous standards required.
Furthermore, SFAS 142 requires purchased intangible assets to be amortized over
their estimated useful lives unless these lives are determined to be indefinite.
SFAS 142 is effective for fiscal years beginning after December 15, 2001. The
Company will adopt SFAS 142 on October 1, 2002 when its new fiscal year begins.
The unamortized goodwill was $14.8 million as of December 31, 2001 and the
amortization of goodwill was $0.9 million for the three months ended December
31, 2001.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), that is applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting
Principles Board Opinion 30, "Reporting the Results of Operations." This
Standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company will adopt SFAS 144 on October 1, 2002 when its
new fiscal year begins and does not expect the adoption will have a material
effect on the Company's operating results or financial condition.
Page 7
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Earnings (Loss) per Share
The following table presents the calculations of basic and diluted
earnings (loss) per share required under Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"):
Three months ended
December 31,
--------------------------------
2001 2000
--------------- -------------
(in thousands, except per share
amounts)
Net income (loss) $ (4,224) $ 5,511
=============== =============
Weighted average common shares
outstanding 25,208 25,096
Effect of dilutive securities (using the
treasury stock method):
Stock options -- 1,366
Warrants -- 174
--------------- -------------
Total dilutive securities -- 1,540
--------------- -------------
Weighted average diluted common and
equivalent shares outstanding 25,208 26,636
=============== =============
Earnings (loss) per share:
Basic $ (0.17) $ 0.22
=============== =============
Diluted $ (0.17) $ 0.21
=============== =============
Note 4. Comprehensive Income (Loss)
Following are the components of comprehensive income (loss):
Three months ended
December 31,
--------------------------------
2001 2000
--------------- -------------
(in thousands)
Net income (loss) $ (4,224) $ 5,511
Change in accumulated foreign
currency translation adjustments (228) (967)
--------------- -------------
Comprehensive income (loss) $ (4,452) $ 4,544
=============== =============
Page 8
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5. Restructuring and Related Charges and Write-offs
The Company incurred $6.0 million of restructuring related charges and
write-offs in the first quarter of fiscal 2002, consisting of $5.2 million in
restructuring related charges and $0.8 million of write-off of purchased
technology. Details of the charges are as follows:
. In October 2001, in light of continuing global economic downturn and
industry trends, Phoenix announced a restructuring program that
identified and eliminated approximately 140 positions across all
business functions from its global workforce. This restructuring
program was to align Phoenix's expense structure with current market
conditions to return to profitability. This reduction resulted in a
charge of $3.9 million for severance expenses in the first quarter of
fiscal 2002. As of December 31, 2001, approximately $1.9 million was
paid and an additional $2.0 million were accrued. The severance
accruals are expected to be paid through the end of fiscal 2002.
. In December 2001, in an effort to align its operating expenses with
the anticipated level of future revenues, inSilicon announced and
implemented a workforce reduction plan. As a result, charges totaling
$2.1 million were recorded during the first quarter of fiscal 2002.
The charges included $0.3 million in severance costs related to the
termination of approximately 30 positions, $0.3 million in charges
related to exiting 2 facilities, $0.7 million of fixed asset and
intangible assets related to the acquisition of HD Lab in December
2000 that were impaired by the restructuring program, and $0.8
million of write-down to the net realizable value of previously
capitalized software in the Bluetooth product line. As of December
31, 2001, approximately $0.3 million was paid and an additional $0.3
million were accrued and expected to be paid through the end of
fiscal 2002. All terminations were completed by December 31, 2001.
As part of the restructuring program, inSilicon decided to terminate
the development of its Bluetooth product line and focus on its core
communication products in fiscal 2002. As a result, current net book
value of $1.7 million for the capitalized software of the Bluetooth
technology was written down to the estimated net realizable value of
$0.9 million. The net realizable value was estimated base on
expressed interest from inSilicon customers, as well as a detailed
market analysis of prospective customers. This asset will be reviewed
for impairment on a quarterly basis, and additional charges may be
recorded, if impaired.
In April 2001, in efforts to optimize operational efficiency and change
its business strategy to address changes in customer demands, the Company
reduced its global workforce by approximately 70 employees across all business
functions. All terminations were completed as of September 30, 2001. The
restructuring program resulted in a charge of approximately $1.5 million for
severance and related cost in the third quarter of fiscal 2001 and was paid off
as of December 31, 2001.
Note 6. Segment Reporting
As part of the restructuring program announced in October 2001, Phoenix
also implemented a re-organization that aligned its corporate actions with
corporate strategy to improve customer focus, unify product marketing,
streamline engineering, and create a market driven development process. The new
organization is structured by function. The Chief Executive Officer assesses the
Company's performance by regularly reviewing the operating results for its two
reportable segements: Phoenix and inSilicon. The two reportable segments were
established based on the criteria set forth in the Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), including evaluating
Page 9
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company's internal reporting structure to the Chief Executive Officer and
disclosure of revenues and operating expenses. Results from the first quarter of
fiscal 2001 were reclassified to conform with the fiscal 2002 presentation.
Phoenix. Provides leading device-enabling and management software
solutions for Personal Computers (PCs) and connected digital devices primarily
to platform and peripheral manufacturers (collectively, "OEMs") that range from
large PC and Information Appliance manufacturers to small system integrators and
value-added resellers. Phoenix also provides training, consulting, maintenance,
and engineering services to its customers. Phoenix's products and services
enable customers who specify, develop, and manufacture PCs, information
appliances, and semiconductors to bring leading-edge products to market more
quickly while reducing their costs, providing high value-added features to their
customers and, hence, increasing their competitiveness
InSilicon. Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of wired and wireless products.
inSilicon provides cores, related silicon subsystems and firmware to customers
that use its technologies in hundreds of different digital devices ranging from
network routers to handheld computers.
The Company evaluates operating segment performance based on revenue and
operating income or loss from operations:
Three months ended
December 31,
---------------------
2001 2000
-------- --------
(in thousands)
Revenues:
Phoenix $ 25,089 $ 33,720
inSilicon 4,513 5,055
-------- --------
Total $ 29,602 $ 38,775
======== ========
Income (loss) from operations:
Phoenix $ (2,310) $ 8,162
inSilicon (4,190) (937)
-------- --------
Total $ (6,500) $ 7,225
======== ========
Page 10
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company also reports revenues by geographic area, which is
categorized into five major countries/regions: North America, Japan, Taiwan,
other Asian countries, and Europe:
Three months ended
December 31,
----------------------
2001 2000
---------- ----------
(in thousands)
Revenues:
North America $ 6,905 $10,381
Japan 9,747 14,187
Taiwan 7,458 9,240
Other Asian Countries 3,101 3,199
Europe 2,391 1,768
---------- ----------
Total $29,602 $38,775
========== ==========
Note 7. Stock Repurchase Program
In February 2001, the Board of Directors authorized a program to
repurchase up to $30 million of outstanding shares of common stock over a
12-month period. In the first quarter of fiscal 2002, the Company repurchased
approximately 109,000 shares of its common stock at a cost of $1.0 million under
the fiscal 2001 program. Also, in fiscal 2001, the Company repurchased
approximately 469,000 shares of its common stock at a cost of $5.1 million under
the same fiscal 2001 program.
Note 8. Stock Options Exchange Program
On December 6, 2001, the Company announced a voluntary stock option
exchange program for its eligible employees. Under the program, Company
employees were offered the opportunity, if they so chose, to cancel certain
outstanding stock options previously granted to them under Phoenix Technologies
Ltd. 1999 Stock Plan, in exchange for new options that will be granted from the
same stock plan. The new options will be for three-fourths of the number of
shares (split-adjusted) cancelled. Based on the January 22, 2002 cancellation
date, those employees who chose to participate in the offer were required to
tender all options granted since June 6, 2001. Approximately 209,000 stock
options from 67 eligible employees were accepted and cancelled. The new options
will be granted on July 23, 2002, six months and one day from the cancellation
date, which was January 22, 2002. The exercise price of these new options will
be equal to the fair market value of the Company's common stock on the date of
grant. This voluntary exchange program complies with FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44")
and, accordingly, is not expected to result in any variable compensation
charges. Members of Phoenix's Board of Directors, employees who are considered
officers for the purposes of Section 16(b) of the Securities Exchange Act of
1934, as amended, and employees of inSilicon are not eligible to participate in
this program.
Note 9. Subsequent Event
In January 2002, Phoenix acquired certain assets of StorageSoft, Inc.
("StorageSoft"), a developer of drive diagnostic utilities and hard drive
imaging software that reduces the cost to own, deploy, and manage multiple PCs,
pursuant to an Asset Acquisition Agreement dated December 21, 2001. With the
acquisition, Phoenix further expands its next-generation FirstWareTM product
line and distribution channels in the "White Box" manufacturing, PC system
builder, and corporate markets. Under the terms of the agreement, Phoenix
acquired substantially all of StorageSoft's assets for $6.0 million in cash and
$6.0 million in Phoenix common shares.
Page 11
ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q, including without limitation the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements include, but are not limited to,
statements concerning future liquidity and financing requirements, expected
price erosion, plans to make acquisitions, dispositions or strategic
investments, expectation of sales volume to original equipment manufacturers (or
"OEM"), and plans to improve and enhance existing products and develop new
products.
Certain information and statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this report, including statements containing words such as
"could," "expects," "may," "anticipates," "believes," "intends," "estimates,"
"plans," and similar expressions, are forward-looking statements. The
forward-looking statements of the Company are subject to risks and
uncertainties. Some of the factors that could cause future results to materially
differ from the recent results or those projected in the forward-looking
statements include, but are not limited to, significant increases or decreases
in demand for our products, increased competition, lower prices and margins,
failure to successfully develop and market new products and technologies,
competitor introductions of superior products, continued industry consolidation,
instability and currency fluctuations in international markets, product defects,
failure to secure intellectual property rights, results of litigation, failure
to retain and recruit key employees, acts of war or global terrorism, power
shortage, and unexpected natural disasters. For a more detailed discussion of
certain risks associated with our business, see the "Business Risks" section in
our Annual Report on Form 10-K for the year ended September 30, 2001.
Company Overview
We, Phoenix Technologies, Ltd. ("Phoenix"), are the global leader in
device-enabling and management software solutions for Personal Computers (PCs)
and connected digital devices. We provide our products primarily to platform and
peripheral manufacturers (collectively, "OEMs") that range from large PC and
Information Appliance manufacturers to small system integrators and value-added
resellers. We also provide training, consulting, maintenance, and engineering
services to our customers. Phoenix markets and licenses its products and
services through a direct sales force as well as through regional distributors
and sales representatives.
We believe that our products and services enable customers who specify,
develop, and manufacture PCs, information appliances, and semiconductors to
bring leading-edge products to market more quickly while reducing their costs,
providing high value-added features to their customers and, hence, increasing
their competitiveness.
Our operations include the following:
Phoenix. Provides leading device-enabling and management software
solutions for Personal Computers (PCs) and connected digital devices primarily
to platform and peripheral manufacturers (collectively, "OEMs") that range from
large PC and Information Appliance manufacturers to small system integrators and
value-added resellers. Phoenix also provides training, consulting, maintenance,
and engineering services to its customers. Phoenix's products and services
enable customers who specify, develop, and manufacture PCs, information
appliances, and semiconductors to bring leading-edge products to market more
quickly while reducing their costs, providing high value-added features to their
customers and, hence, increasing their competitiveness.
InSilicon. Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of wired and wireless products.
inSilicon provides cores, related silicon subsystems and firmware to
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
customers that use its technologies in hundreds of different digital devices
ranging from network routers to handheld computers.
Results of Operations
Revenues
Our products are generally designed into personal computer systems,
information appliances and semiconductors. License fee and service revenues by
segment for the three months ended December 31, 2001 and 2000 were as follows:
% of Consolidated
Amount Revenue
------------------- -----------------
2001 2000 % Change 2001 2000
-------- --------- -------- ------ -------
(in thousands)
Phoenix $ 25,089 $ 33,720 -25.6% 84.8% 87.0%
inSilicon 4,513 5,055 -10.7% 15.2% 13.0%
-------- --------- -------- ------ -------
Total revenues $ 29,602 $ 38,775 -23.7% 100.0% 100.0%
======== ========= ======== ====== =======
Total revenues in the first quarter of fiscal 2002 decreased by 23.7%
from the comparable period in fiscal 2001, primarily as a result of the global
economic slowdown and the softness in the PC market.
Phoenix revenues in the first quarter of fiscal 2002 decreased by 25.6%
from the comparable period in fiscal 2001, mainly due to a decrease in the core
system enabling business in all regions except for Europe. This is the result of
lower demand in the notebook and industrial PC platform products.
inSilicon revenues in the first quarter of fiscal 2002 declined by
10.7% from the comparable period in fiscal 2000, due primarily to the
challenging economic environment, particularly in North America.
Revenues by geographic region for the three months ended December 31,
2001 and 2000, were as follows:
% of Consolidated
Amount Revenue
------------------- -----------------
2001 2000 % Change 2001 2000
-------- --------- -------- ------ -------
(in thousands)
North America $ 6,905 $ 10,381 -33.5% 23.3% 26.8%
Japan 9,747 14,187 -31.3% 32.9% 36.6%
Taiwan 7,458 9,240 -19.3% 25.2% 23.8%
Other Asian Countries 3,101 3,199 -3.1% 10.5% 8.3%
Europe 2,391 1,768 35.2% 8.1% 4.6%
-------- --------- -------- ------ -------
Total revenues $ 29,602 $ 38,775 -23.7% 100.0% 100.0%
======== ========= ======== ====== =======
Compared to the same period one year ago, revenues in the first quarter
of fiscal 2002 for North America, Japan, Taiwan, and Other Asian Countries
declined by 33.5%, 31.3%, 19.3% and 3.1%, respectively. The decrease was due
primarily to the economic slowdown in the global economy which had a significant
impact on the PC market. Revenues from Europe increased by 35.2% due to
increased sales in the desktop platform in the first quarter of fiscal 2002, as
compared to the comparable period in fiscal 2001.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We recorded $10.7 million of revenues from OEM customers relating to
volume royalty license agreements in the first quarter of fiscal 2002 compared
to $9.7 million in the same quarter in fiscal 2001 and $4.4 million in the
fourth quarter of fiscal 2001. These agreements were non refundable and due and
payable on normal terms. If a customer decides not to enter into a volume
royalty license agreement in a future quarter, there could be a quarter in which
we would not have any revenue from that customer as they would return to payment
of royalties on reported shipments.
We accrued $4.9 million of royalty revenues from our OEM customers in
the first fiscal quarter of 2002 compared with $6.0 million in the same period
in fiscal 2001. We have processes in place to reasonably estimate the royalty
revenues, including obtaining estimates of production from our OEM customers,
utilizing historical experience, evaluating estimates based on the cyclical
patterns, and other relevant current information. Although Management believes
that it has a reliable basis for making reasonable estimates, the actual results
could differ.
One customer, Fujitsu, accounted for 11% of total revenues for the
three months ended December 31, 2001. A different customer, Sony, accounted for
20% of total revenues for the three months ended December 31, 2000.
Gross Margin
Gross margin as a percentage of revenues for the three months ended
December 31, 2001 decreased to 82.6% from 88.7% in the comparable period of
fiscal 2001. Included in the cost of revenues was $1.0 million and $0.3 million
of amortization of purchased technologies from business combinations for the
three months ended December 31, 2001 and 2000, respectively. Also included in
the cost of revenues for the three months ended December 31, 2001 was a $0.8
million restructuring related write-down of capitalized software to its net
realizable value by inSilicon. Excluding the amortization of purchased
technologies and write-down of capitalized software, gross margin as a
percentage of revenues for the three months ended December 31, 2001 decreased to
88.7% from 89.6% in the comparable period of fiscal 2001. The decrease in gross
margin in the first quarter of fiscal 2002 was due to lower margins on inSilicon
product sales.
Research and Development Expenses
Research and development expenses were $9.1 million and $10.9 million
for the three months ended December 31, 2001 and 2000, respectively. As a
percentage of revenues, these expenses represented 30.6% and 28.2%,
respectively. The decrease in research and development expenses was due
primarily to reduced payroll and related expenses, as a result of the
restructuring program implemented during the first quarter of fiscal 2002 and a
re-allocation of resources to sales support functions. In addition, the
implementation of a more disciplined market driven product development process
also contributed to the decline in expenses.
Sales and Marketing Expenses
Sales and marketing expenses were $9.4 million and $9.8 million for the
three months ended December 31, 2001 and 2000, respectively. As a percentage of
revenues, these expenses represented 31.8% and 25.2%, respectively. The decrease
in sales and marketing expenses was due primarily to the workforce reduction
programs and disciplines in discretionary spending, partly offset by
re-distribution of resources to enhance sales and marketing functions to be more
customer-focused.
General and Administrative Expenses
General and administrative expenses for the three months ended December
31, 2001 increased by $0.5 million from the comparable period in fiscal 2001.
The increase was mainly attributable to additional bad debt provision and higher
inSilicon expenses in strategic business consulting services. As a percentage of
revenues, general and administrative expenses in the three months ended December
31, 2001 increased to 20.2% from 14.2% in the comparable period of fiscal 2001,
primarily due to the decline in total revenues.
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Amortization Expenses
Amortization of goodwill and acquired intangible assets were $1.1
million and $0.6 million for the three months ended December 31, 2001 and 2000,
respectively. The increase was due primarily to the business combinations
completed during fiscal 2001.
Stock-Based Compensation
Stock-based compensation was $0.2 million and $0.4 million for the
three months ended December 31, 2001 and 2000, respectively. Charges in both
periods were primarily due to the amortization of granting of options to
purchase Phoenix and inSilicon stock at exercise prices less than the fair
market value on the grant date.
Restructuring and Related Charges
We incurred $6.0 million of restructuring related charges and
write-offs in the first quarter of fiscal 2002, consisting of $5.2 million in
restructuring related charges and $0.8 million of write-off of purchased
technology. Details of the charges are as follows:
. In October 2001, in light of continuing global economic downturn
and industry trends, Phoenix announced a restructuring program
that identified and eliminated approximately 140 positions across
all business functions from its global workforce. This
restructuring program was to align Phoenix's expense structure
with current market conditions to return to profitability. This
reduction resulted in a charge of $3.9 million for severance
expenses in the first quarter of fiscal 2002. As of December 31,
2001, approximately $1.9 million was paid and an additional $2.0
million were accrued. The severance accruals are expected to be
paid through the end of fiscal 2002. As a result of the
restructuring program announced in October 2001, we expect pretax
savings of $10.0 million on an annualized basis starting from the
second quarter of fiscal 2002.
. In December 2001, in an effort to align its operating expenses
with the anticipated level of future revenues, inSilicon announced
and implemented a workforce reduction plan. As a result, charges
totaling $2.1 million were recorded during the first quarter of
fiscal 2002. The charges included $0.3 million in severance costs
related to the termination of approximately 30 positions, $0.3
million in charges related to exiting 2 facilities, $0.7 million
of fixed asset and intangible assets related to the acquisition of
HD Lab in December 2000 that were impaired by the restructuring
program, and $0.8 million of write-down to the net realizable
value of previously capitalized software in the Bluetooth product
line. As of December 31, 2001, approximately $0.3 million was paid
and an additional $0.3 million were accrued and expected to be
paid through the end of fiscal 2002. All terminations were
completed by December 31, 2001. inSilicon anticipated annualized
cost savings of approximately $2.8 million from this restructuring
program.
As part of the restructuring program, inSilicon decided to
terminate the development of its Bluetooth product line and focus
on its core communication products in fiscal 2002. As a result,
current net book value of $1.7 million for the capitalized
software of the Bluetooth technology was written down to the
estimated net realizable value of $0.9 million. The net realizable
value was estimated base on expressed interest from inSilicon
customers, as well as a detailed market analysis of prospective
customers. This asset will be reviewed for impairment on a
quarterly basis, and additional charges may be recorded, if
impaired.
In April 2001, in efforts to optimize operational efficiency and change
its business strategy to address changes in customer demands, we reduced its
global workforce by approximately 70 employees
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
across all business functions. All terminations were completed as of September
30, 2001. The restructuring program resulted in a charge of approximately $1.5
million for severance and related cost in the third quarter of fiscal 2001 and
was paid off as of December 31, 2001.
Interest and Other Income, Net
Interest and other income, net, were $0.4 million and $0.6 million for the
three months ended December 31, 2001 and 2000, respectively. The decrease was
primarily due to lower yields from lower cash and short-term investment balance
from funding the stock repurchase program and acquisitions during fiscal 2001.
Provision for Income Taxes
An income tax benefit of $0.5 million was recorded for the three-month
period ended December 31, 2001, as compared to a $2.4 million income tax
provision in the comparable period in fiscal 2001. The income tax benefit for
the first quarter of fiscal 2002 is lower than the expected benefit at a
statutory rate primarily due to a change in the valuation allowance related to
inSilicon's deferred tax assets. The income tax provision for the first quarter
of 2001 is lower than the expected provision at a statutory rate primarily due
to various federal and state tax credits and lower tax rates imposed on earnings
in certain foreign jurisdictions.
On a legal entity basis, Phoenix recorded a tax benefit of $0.7 million to
reflect an anticipated tax benefit from its losses in the quarter that will be
realized by the end of the year, while inSilicon recorded a tax provision of
$0.2 million for foreign withholding taxes paid or accrued in relation to sales
to Southeast Asia in the quarter that are not anticipated to be creditable.
inSilicon is not consolidated for Federal income tax purposes, as Phoenix owns
less than 80% of inSilicon's outstanding voting stock as of December 31, 2001.
Liquidity and Capital Resources
At December 31, 2001, our principal source of liquidity consisted of cash
and cash equivalents, and short-term investments totaling $61.4 million, of
which $28.6 million was owned by inSilicon. The primary sources of cash during
the first quarter of fiscal 2002 were proceeds from issuance of stock under
various stock plans of $1.0 million. The primary uses of cash for the same
period were $3.1 million from operating activities, net purchase of investments
of $25.5 million and $1.0 million for the repurchase of common stock, and $0.6
million for the purchase of property, equipment and computer software.
We believe that current cash and short-term investment balances and cash
flow from operations will be sufficient to meet our operating and capital
requirements for the next twelve months.
Stock Options Exchange Program
On December 6, 2001, we announced a voluntary stock option exchange program
for our eligible employees. Under the program, our employees were offered the
opportunity, if they so chose, to cancel certain outstanding stock options
previously granted to them under Phoenix Technologies Ltd. 1999 Stock Plan, in
exchange for new options that will be granted from the same stock plan. The new
options will be for three-fourths of the number of shares (split-adjusted)
cancelled. Based on the January 22, 2002 cancellation date, those employees who
chose to participate in the offer were required to tender all options granted
since June 6, 2001. Approximately 209,000 stock options from 67 eligible
employees were accepted and cancelled. The new options will be granted on July
23, 2002, six months and one day from the cancellation date, which was January
22, 2002. The exercise price of these new options will be equal to the fair
market value of our common stock on the date of grant. This voluntary exchange
program complies with FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") and, accordingly, is not
expected to result in any variable compensation charges. Members of Phoenix's
Board of Directors, employees who are considered officers for the purposes of
Section 16(b) of the Securities Exchange Act of 1934, as amended, and employees
of inSilicon are not eligible to participate in this program.
Page 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations to be accounted for using the purchase method of accounting and is
effective for all business combinations completed after June 30, 2001. The
adoption of SFAS 141 did not have a material effect on our operating results or
financial condition. SFAS 142 requires goodwill to be tested for impairment
under certain circumstances, and written-off when impaired, rather than being
amortized as previous standards required. Furthermore, SFAS 142 requires
purchased intangible assets to be amortized over their estimated useful lives
unless these lives are determined to be indefinite. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. We will adopt SFAS 142 on
October 1, 2002 when our new fiscal year begins. The unamortized goodwill was
$14.8 million as of December 31, 2001 and the amortization of goodwill was $0.9
million for the three months ended December 31, 2001.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), that is applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting
Principles Board Opinion 30, "Reporting the Results of Operations." This
Standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. We will adopt SFAS 144 on October 1, 2002 when our new
fiscal year begins and does not expect the adoption will have a material effect
on our operating results or financial condition.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates are used for, but
not limited to allowance for uncollectible accounts receivable, accruals for
royalty revenues, valuation of investments and intangibles, product warranty,
useful lives for property and equipment and intangibles, employee benefits,
restructuring and related costs, sales returns, and taxes. Actual results could
differ from those estimates. The operating results for the three months ended
December 31, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2002, or for any other future
period.
We record provisions for estimated sales returns against revenues and
allowances for doubtful accounts against general and administrative expenses in
the same period as the related revenues are recorded. At December 31 and
September 30, 2001, these amounts were $3.4 million and $2.4 million,
respectively. These estimates are based on historical sales returns and bad debt
write-offs, analysis of credit memo data, specific identification of probable
bad debts based on collection efforts and other known factors. Actual results
could differ from those estimates.
At December 31 and September 30, 2001, we had net goodwill and intangible
assets of $15.7 million and $17.1 million, respectively. In assessing the
recoverability of our goodwill and intangibles assets, we make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets not previously recorded. During the fourth quarter ended September 30,
2001, we recorded impairment charges on goodwill for our inSilicon subsidiary in
the amount of $9.4 million. Also, as a result of the restructuring program
instituted by inSilicon in the first quarter of fiscal 2002, we recorded an
additional impairment of $0.8 million on capitalized software.
Business Risks
The additional following factors should be considered carefully when
evaluating our business.
Product Development
Our long-term success will depend on our ability to enhance existing
products and to introduce new products timely and cost-effectively that meet the
needs of customers in present and emerging markets. There can be no assurance
that we will be successful in developing new products or in enhancing existing
products or that new or enhanced products will meet market requirements. Delays
in introducing new products can adversely impact acceptance and revenues
generated from the sale of such products. We have, from time to time,
experienced such delays. Our software products and their enhancements contain
complex code that may contain undetected errors and/or bugs when first
introduced. There can be no assurance that new products or enhancements will not
contain errors or bugs that will adversely affect commercial acceptance of such
new products or enhancements. The introduction of new products depends on
acceptance of e-commerce and adoption of digital devices.
Protection of Intellectual Property
We rely on a combination of patent, trade secret, copyright, trademark, and
contractual provisions to protect our proprietary rights in our software
products. There can be no assurance that these protections will be adequate or
that competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. In addition, copyright
and trade secret protection for our products may be unavailable or unreliable in
certain foreign countries. We have been
Page 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
issued thirty patents with respect to our current product offerings and have
seventy patent applications pending with respect to certain of the products we
market. Phoenix maintains an active internal program designed to identify
internally developed inventions worthy of being patented. There can be no
assurance that any of the applications pending will be approved and patents
issued or that our engineers will be able to develop technologies capable of
being patented. Also, as the number of software patents increases, we believe
that companies that develop software products may become increasingly subject to
infringement claims.
There can be no assurance that a third party will not assert that our
patents or other proprietary rights are violated by products offered by Phoenix.
Any such claims, whether or not meritorious, may be time consuming and expensive
to defend, can trigger indemnity obligations owed by us to third parties, and
may have an adverse effect on our business, results of operations and financial
condition. Infringement of valid patents or copyrights or misappropriation of
valid trade secrets, whether alleged against us, or our customers, and
regardless of whether such claims have merit, could also have an adverse effect
on our business, results of operations and financial condition.
Importance of Microsoft and Intel
For a number of years, Phoenix has worked closely with leading software and
semiconductor companies in developing standards for the PC industry. We remain
optimistic regarding relationships with these industry leaders. However, there
can be no assurance that leading software and semiconductor companies will not
develop alternative product strategies that could conflict with our product
plans and marketing strategies. Action by such companies may adversely impact
our business and results of operations. Presently, there is little overlap or
conflict in our product offerings, although these companies now incorporate some
functionality that has traditionally resided in the BIOS. These leading software
and semiconductor companies, in their endeavors to add value, incorporate
features or functions provided by Phoenix either in the silicon or in the
operating system. Therefore, we must continuously create new features and
functions to sustain, as well as increase, our software's added value to OEMs.
There can be no assurances that we will be successful in these efforts.
Attraction and Retention of Key Personnel
Our ability to achieve our revenue and operating performance objectives
will depend in large part on our ability to attract and retain technically
qualified engineering, sales, marketing, and finance personnel. Semiconductors
IP and Internet products are based on new and emerging technologies that are
different from BIOS technologies. The available pool of engineering talent is
limited for all lines of businesses. Accordingly, failure to attract, retain and
grow our talents could adversely affect our business and operating results. All
of our executive officers and key personnel are employees at-will. Phoenix might
not be able to execute its business plan if we were to lose the services of any
of our key personnel. Several of our executives and key employees joined Phoenix
only recently and have had only a limited time to work together. Our management
team might not be able to work effectively together or with the rest of our
employees to develop our technology and manage our continuing operations.
Dependence on Key Customers; Concentration of Credit Risk
The loss of any key customer and our inability to replace revenues provided
by a key customer may have a material adverse effect on our business and
financial condition. Phoenix's customer base includes large OEMs in the PC,
semiconductor and Internet markets, system integrator value-added reseller, and
motherboard manufacturers. As a result, we maintain individually significant
receivable balances due from some of them. If these customers fail to meet
guaranteed minimum royalty payments and other payment obligations, our operating
results could be adversely affected. We maintain estimated
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
accruals and allowances for such exposures. As of December 31, 2001, our largest
receivable from any one customer represented approximately 11% of total accounts
receivable.
Competition
The market for our BIOS products is very competitive, resulting in downward
pricing pressure. In marketing our BIOS products, we compete primarily with
in-house research and development departments of PC manufacturers that may have
significantly greater financial and technical resources than ours. These
companies include Acer Incorporated, Compaq Computer Corporation, Dell Computer
Corporation, IBM Corporation, and Toshiba Corporation. We also compete for
system software business with other independent suppliers, ranging from small,
privately held companies to Acer Softech, Inc., a division of Acer Laboratories,
Inc., a major Taiwan chip and motherboard supplier. There can be no assurance
that we will continue to compete successfully with our current competitors or
potential new competitors. There can be no assurance that intense competition in
the industry and particular actions of our competitors will not have an adverse
effect on our business, operating results and financial condition. Due to the
competitive nature of the business and the overall price pressures within the PC
market, we expect that prices on many of our products may decrease in the future
and that such price decreases could have an adverse impact on our results of
operations or financial condition.
The SIP industry is very competitive and is characterized by constant
technological change, rapid rates of product obsolescence, and frequently
emerging new suppliers. Our existing competitors include other merchant
semiconductor intellectual property (or "SIP") suppliers, such as the Inventra
Division of Mentor Graphics Corporation' Inventra Division, Synopsys Inc.,
Enthink, Inc., Gain Technology Corporation, and the VaAutomation subsidiary of
ARC Cores, Inc.; and suppliers of ASICs, such as LSI Logic Corporation, the ASIC
divisions of IBM Corporation, Lucent Technologies, Inc., Toshiba Corporation,
and NEC Corporation. We also compete with the internal development groups of
large, vertically integrated semiconductor and systems companies, such as Intel
Corporation, Motorola Inc., Cisco Systems, Inc., and Hewlett-Packard Company. In
these companies, SIP developed for an individual project sometimes is subject to
efforts by the company to be re-used the SIP in multiple projects. Companies
whose principal business is providing design services as work-for-hire, such as
Intrinsix Corporation, Sci-worxSican Corporation, Parthus Technologies plc, and
the Tality subsidiary of Cadence Design Systems, Inc., also provide competition.
In the FirstWare software area, we compete with individual component
software suppliers such as Symantec Corporation and other companies that develop
diagnostic and repair software, as well as in-house solutions.
In the Internet and securities business, there are many distribution
vehicles for our partners to reach PC end users, including PC OEM companies, PC
and hardware registration companies and Internet web sites. Many have greater
resources than Phoenix.
In the information appliance area, we compete primarily with research and
development departments of software developers that may have significantly
greater financial and technical resources than Phoenix. These companies include
OpenTV Corporation, Wind River Systems, Inc., Liberate Technologies, and
Microsoft Corporation. We also compete for software business with other
independent suppliers, ranging from small, privately-held companies to in-house
research and development departments of major OEMs.
International Sales and Activities
Revenues derived from the international operations of our BIOS product
family comprise a majority of total revenues. There can be no assurances that we
will not experience significant fluctuations
Page 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
in international revenues. While the major portion of our license fee or royalty
contracts are U.S. dollar denominated, we are entering into a number of
contracts denominated in local currencies. Phoenix has sales and engineering
offices in Germany, Japan, Korea, Taiwan, and China. Our operations and
financial results may be adversely affected by factors associated with
international operations, such as changes in foreign currency exchange rates,
uncertainties relative to regional economic circumstances, political instability
in emerging markets, difficulties in attracting qualified employees, and
language, cultural and other difficulties managing foreign operations.
Recent Terrorist Attacks
On September 11, 2001, the United States was a target of terrorist attacks
of unprecedented scope. These attacks have caused instability in the global
financial markets, and have contributed to downward pressure on stock prices of
United States publicly traded companies. This instability has resulted in a
slowdown in the economy. These attacks may lead to armed hostilities or to
further acts of terrorism and civil disturbances in the United States, or
elsewhere, which may further contribute to economic instability in the United
States and could have a material adverse effect on our business, financial
condition and operating results.
Volatile Market for Phoenix Stock
The market for our stock is highly volatile. The trading price of our
common stock has been, and will continue to be, subject to fluctuations in
response to operating and financial results, announcements of technological
innovations, new products or customer contracts by us or our competitors,
changes in our or our competitors' product mix or product direction, changes in
our revenue mix and revenue growth rates, changes in expectations of growth for
the PC industry, as well as other events or factors which we may not be able to
influence or control. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms and industry analysts relating to the market
in which Phoenix does business, companies with which Phoenix competes or
relating to it specifically could have an immediate and adverse effect on the
market price of our stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price for many small capitalization, high-technology
companies and have often included factors other than the operating performance
of these companies.
Certain Anti-Takeover Effects
Our Certificate of Incorporation, Bylaws and Stockholder Rights Plan and
the Delaware General Corporation Law include provisions that may be deemed to
have anti-takeover effects and may delay, defer or prevent a takeover attempt
that stockholders might consider in their best interests. These include
provisions under which members of the Board of Directors are divided into three
classes and are elected to serve staggered three-year terms.
Rapid Change with the Internet
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility, quality of service,
potential tax or other government regulation, may affect the use of the Internet
as a medium to distribute or support our software products and the functionality
of some of our products. If we are unsuccessful in timely assimilating changes
in the Internet environment in our business operations and product development
efforts, our future net revenues and operating results could be adversely
affected.
Page 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Disruptions
While Phoenix has not been the target of software viruses specifically
designed to impede the performance of its products, such viruses could be
created and deployed against its products in the future. Similarly, experienced
computer programmers or hackers may attempt to penetrate our network security or
the security of our web sites from time to time. A hacker who penetrates our
network or web sites could misappropriate proprietary information or cause
interruptions of our services. We might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
virus creators and/or hackers.
Page 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest rate, foreign
currency exchange rates, and investment, refer to Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended September 30, 2001.
Page 22
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable
ITEM 2 CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Asset Acquisition Agreement with StorageSoft, Inc. dated
December 21, 2001.
(b) Reports on Form 8-K
The Company did not file reports on Form 8-K during the quarter
ended December 31, 2001.
Page 23
Pursuant to the requirements 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.
Date: February 5, 2002
----------------
By: /s/ JOHN M. GREELEY
-------------------
John M. Greeley
Senior Vice President, Finance and Chief
Financial Officer
Page 24