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 JUNE 30, 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 (I.R.S. Employer Identification Number)
of incorporation or organization)
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 25,202,609
----------------------------- -------------------------
Class Number of Shares Outstanding at
July 31, 2001
PHOENIX TECHNOLOGIES LTD.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Condensed Consolidated Balance Sheets as of
June 30, 2001 and September 30, 2000............................3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 2001 and 2000..............4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 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.....17
PART II OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
Exhibits.......................................................18
Reports on Form 8-K............................................18
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, 2001 September 30, 2000
------------- ------------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 22,674 $ 55,017
Short-term investments 44,289 52,701
Accounts receivable, net of allowances of $1,488 at June 30, 28,007 39,868
2001 and $2,283 at September 30, 2000
Deferred income taxes 7,926 3,926
Other current assets 8,112 4,494
--------- ---------
Total current assets 111,008 156,006
Investments 3,409 4,473
Property and equipment, net 12,182 13,272
Computer software costs, net 18,091 5,385
Goodwill and intangible assets, net 28,752 7,937
Deferred income tax 10,767 10,287
Other assets 2,000 1,400
--------- ---------
Total Assets $ 186,209 $ 198,760
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 4,490 $ 3,945
Accrued compensation and related liabilities 9,092 10,554
Deferred revenue 4,431 4,733
Income taxes payable 3,778 5,254
Other accrued liabilities 6,548 6,988
--------- ---------
Total current liabilities 28,339 31,474
Long-term obligations 563 1,449
Deferred income taxes 3,267 3,865
--------- ---------
Total Liabilities 32,169 36,788
--------- ---------
Minority Interest 17,304 13,672
--------- ---------
Stockholders' Equity:
Preferred stock, $.10 par value,
500 shares authorized, none issued -
Common stock, $.001 par value, 60,000 shares authorized,
25,141 and 25,608 shares issued and outstanding at June
30, 2001 and September 30, 2000 25 26
Additional paid-in capital 163,400 153,534
Retained earnings 53,316 53,890
Accumulated translation adjustment (1,852) (380)
Cost of treasury stock (4,753 and 3,377 shares at
June 30, 2001 and September 30, 2000) (78,153) (58,770)
--------- ---------
Total stockholders' equity 136,736 148,300
--------- ---------
Total Liabilities and Stockholders' Equity $ 186,209 $ 198,760
========= =========
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 June 30, Nine months ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
--------------- -------------- -------------- ---------------
Revenues:
License fees $ 27,129 $ 31,696 $ 82,429 $ 89,922
Services 4,605 4,807 13,841 13,677
--------------- -------------- -------------- ---------------
Total revenues 31,734 36,503 96,270 103,599
--------------- -------------- -------------- ---------------
Cost of revenues:
License fees 1,315 981 2,448 2,703
Services 3,982 4,900 11,372 13,614
Amortization of purchased technology 756 314 1,392 942
--------------- -------------- -------------- ---------------
Total cost of revenues 6,053 6,195 15,212 17,259
--------------- -------------- -------------- ---------------
Gross Margin 25,681 30,308 81,058 86,340
Operating expenses:
Research and development 11,886 8,925 34,324 29,133
Sales and marketing 8,894 8,664 28,680 23,328
General and administrative 5,902 4,820 17,719 14,385
Amortization 1,689 555 3,358 1,665
Stock-based compensation 379 118 1,004 570
Restructuring cost 1,525 - 1,525 -
--------------- -------------- -------------- ---------------
Total operating expenses 30,275 23,082 86,610 69,081
--------------- -------------- -------------- ---------------
Income (loss) from operations (4,594) 7,226 (5,552) 17,259
Interest and other income, net 1,204 1,395 2,539 2,740
Minority Interest 706 (10) 1,475 15
--------------- -------------- -------------- ---------------
Income (loss) before income taxes (2,684) 8,611 (1,538) 20,014
Income tax expense (benefit) (996) 2,759 (964) 6,406
--------------- -------------- -------------- ---------------
Net Income (loss) $ (1,688) $ 5,852 $ (574) $ 13,608
=============== ============== ============== ===============
Earnings (loss) per share:
Basic $ (0.07) $ 0.23 $ (0.02) $ 0.54
Diluted $ (0.07) $ 0.21 $ (0.02) $ 0.49
Shares used in earnings (loss) per share calculation:
Basic 25,098 25,871 25,162 24,975
Diluted 25,098 28,130 25,162 27,770
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 4
PHOENIX TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended June 30,
----------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (574) $ 13,608
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 9,189 7,577
Stock-based compensation 1,004 570
Minority interest (1,475) (15)
Deferred income tax (1,078) (498)
Change in operating assets and liabilities:
Accounts receivable 11,861 (9,289)
Other assets (4,047) (5,952)
Accounts payable 545 (615)
Accrued compensation and related liabilities (1,712) (2,671)
Other accrued liabilities (1,079) (2,397)
Deferred Revenue (302) 13
Income taxes payable (5,476) (1,860)
--------- ---------
Net cash provided by (used in) operating activities 6,856 (1,529)
--------- ---------
Cash flows from investing activities:
Maturity of short-term and long-term investments 297,851 367,791
Purchases of short-term and long-term investments (288,875) (380,773)
Purchases of property and equipment (3,605) (3,590)
Additions to computer software (2,904) (244)
Acquisition of businesses, net of cash acquired (24,779) -
--------- ---------
Net cash provided by (used in) investing activities (22,312) (16,816)
--------- ---------
Cash flows from financing activities:
Proceeds from stock purchases under stock option and stock purchase plans 8,008 17,885
Repurchase of common stock (19,384) (6,289)
Proceeds from issuance of stock - 37,168
Repurchase of warrant (2,900) -
Repayment of long term-obligations (1,139) -
--------- --------
Net cash provided by (used in) financing activities (15,415) 48,764
--------- --------
Effect of exchange rate changes on cash and cash equivalents (1,472) 1,605
Net increase in cash and cash equivalents (32,343) 32,024
Cash and cash equivalents at beginning of period 55,017 24,873
-------- --------
Cash and cash equivalents at end of period $ 22,674 $ 56,897
============ =============
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. (together with its subsidiaries, "Phoenix" or
the "Company") is a global leader in platformware system-enabling software
solutions for PCs and connected digital devices. Its software provides
compatibility, connectivity, security and manageability of the various
components and technologies used in such devices. Phoenix provides these
products primarily to platform and peripheral manufacturers (collectively,
"OEMs") that range from large PC manufacturers to small system integrators.
Phoenix also provides training, consulting, maintenance and engineering services
to its customers. It markets and licenses its products and services primarily
through a direct sales force, as well as through regional distributors and sales
representatives. The Company has four business units (one of which, inSilicon
Corporation ("inSilicon"), is a majority-owned subsidiary), each of which
delivers leading products and professional services that enable connected
computing.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of June
30, 2001 and for the three and nine-months ended June 30, 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
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 condensed consolidated
balance sheet as of September 30, 2000 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, 2000.
In the opinion of the management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Company's
financial position, results of operations and cash flows for the interim periods
presented. The operating results for the three and nine-month periods ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2001, or for any other future period.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number
of common shares outstanding during each period. Diluted earnings per share is
computed using the weighted-average number of common and dilutive
common-equivalent 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 and nine months ended June 30, 2001. The effects of outstanding options
and warrants were not included in the calculation of diluted net loss per share,
as their inclusion would be anti-dilutive.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Page 6
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal year 2001, the Company adopted Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establish accounting and
reporting standards for derivative instruments and for hedging activities. The
Company does not hold any derivative financial instrument and does not engage in
hedging activities. Accordingly, the adoption of SFAS 133 does not have an
impact on the Company's financial position, results of operations or cash flows.
NOTE 3. PURCHASE COMBINATIONS
During the first nine months of fiscal 2001, the Company completed a
number of business combinations, which were accounted for as purchases. The
amounts allocated to goodwill and purchased intangible assets are being
amortized on a straight-line basis. The estimated asset lives are determined
based on projected future economic benefits and expected life cycles of the
technologies. The amounts allocated to Purchased Technology are being amortized
over periods of 3 to 6 years, the amounts allocated to Other Intangible Assets
(comprised of customer lists and assembled work force costs) are being amortized
over periods of 2 and 6 years, and the amounts allocated to Goodwill are being
amortized over periods of 5 and 6 years.
The following is a summary of purchased transactions completed in
fiscal 2001 (in millions):
-----------------------------------------------------------------------------------------------------------------
Total Total Other
purchase tangible Purchased intangible
Acquired company consideration assets technology assets Goodwill
-----------------------------------------------------------------------------------------------------------------
By Phoenix:
Integrity Sciences, Inc. $ 3.8 $ - $ 3.4 $ - $ 0.4
Ravisent Technologies, Inc. $ 17.8 $ 0.4 $ 8.1 $ - $ 9.3
-----------------------------------------------------------------------------------------------------------------
By inSilicon:
Xentec, Inc. $ 11.8 $ 0.3 $ 0.2 $ 0.5 $ 10.8
HD Lab, K.K. $ 1.6 $ - $ 1.3 $ 0.3 $ -
-----------------------------------------------------------------------------------------------------------------
The following are details of the form of consideration and their fair
values for each acquisition:
-----------------------------------------------------------------------------------------------------------------
Acquired company Form of consideration Fair value
-----------------------------------------------------------------------------------------------------------------
Integrity Sciences, Inc. $2.5 million in cash $2.5 million
75,000 shares of Phoenix's common stock $1.3 million
------------
Total $3.8 million
-----------------------------------------------------------------------------------------------------------------
Ravisent Technologies, Inc. $17.8 million in cash $17.8 million
-----------------------------------------------------------------------------------------------------------------
Xentec, Inc. $3.0 million in cash $3.0 million
15,678 and 618,378 shares of inSilicon common and preferred $7.2 million
stock, respectively
Option to purchase 96,004 shares of inSilicon common stock $1.0 million
Transaction Costs $0.6 million
------------
Total $11.8 million
-----------------------------------------------------------------------------------------------------------------
HD Lab, K.K. $1.6 million in cash $1.6 million
-----------------------------------------------------------------------------------------------------------------
The Integrity Sciences, Inc. acquisition also includes additional
contingent consideration of up to 100,000 shares of the Company's common
stock and cash payment of $1.5 million, if certain revenue and technology
criteria are met.
Page 7
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited, pro forma information shows the results of
operations of the Company for the nine-month periods ended June 30, 2001 and
2000, as if the business combinations had occurred at the beginning of each
period. This data is not indicative of the results of operations that would have
arisen if the business combinations had occurred at the beginning of the
respective periods. Moreover, this data is not intended to be indicative of
future results of operations.
Nine months ended June 30,
------------------------------
2001 2000
------------- -------------
Revenue $ 96,386 $ 104,347
Net Income (Loss) $ (3,798) $ 8,521
Earnings (Loss) per share:
Basic $ (0.15) $ 0.34
Diluted $ (0.15) $ 0.31
NOTE 4. EARNINGS (LOSS) PER SHARE
The following table presents the calculations of basic and diluted
earnings per share under Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" (in thousands, except per share amounts):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ (1,688) $ 5,852 $ (574) $ 13,608
========= ======== ========= ========
Weighted average common shares
outstanding 25,098 25,871 25,162 24,975
Effect of dilutive securities (using the
treasury stock method):
Stock options - 1,769 - 2,289
Warrants - 490 - 506
-------- -------- -------- --------
Total dilutive securities - 2,259 - 2,795
-------- -------- -------- --------
Weighted average diluted common and
equivalent shares outstanding 25,098 28,130 25,162 27,770
========= ======== ========= ========
Earnings (loss) per share:
Basic $ (0.07) $ 0.23 $ (0.02) $ 0.54
========= ======== ========= ========
Diluted $ (0.07) $ 0.21 $ (0.02) $ 0.49
========= ======== ========= ========
Page 8
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMPREHENSIVE INCOME (LOSS)
Following are the components of comprehensive income (loss)
(in thousands):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $(1,668) $ 5,852 $ (574) $13,608
Change in accumulated forign
currency translation adjustments (672) (114) (1,472) 555
-------- -------- -------- --------
Comprehensive income (loss) $(2,340) $ 5,738 $(2,046) $14,163
======== ======== ======== ========
NOTE 6. SEGMENT REPORTING
Segment information is presented in accordance with Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This standard requires segmentation
based upon the Company's internal organization and disclosure of revenue and
operating income based upon internal accounting methods. The Company has four
reportable segments: Platform Enabling, inSilicon, Information Appliance, and
PhoenixNet-TM-.
PLATFORM ENABLING: Provides system-enabling software that is used in
the design, deployment and ongoing operation of industry standard desktop,
notebook and server PCs. The Platform Enabling's flagship software products
provide support for current technologies and industry standards, allowing
systems and device manufacturers to base new product designs on a range of
microprocessors, chipsets and operating systems combinations.
INSILICON: Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of digital devices. inSilicon
provides cores, related silicon subsystems and firmware to customers that use
its technologies in hundreds of different digital devices ranging from network
routers to handheld computers.
INFORMATION APPLIANCE: Provides technology to electronics OEMs to
develop information appliance designs. Information Appliance software delivers
an easy-to-implement, low cost/high value architecture that enables "instant-on"
Internet access and browsing capability for devices such as Internet TV,
interactive screen phones, and handheld appliances. This newly created division
was launched on March 27, 2001.
PHOENIXNET-TM-: Provides technology infrastructure that offers a
high level of security for accessing corporate networks and the Internet
through device authentication. Applications using this infrastructure for
virtual private networks (VPNs) and the Internet are supported by a global
network of Regional Device Authorities.
Page 9
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company evaluates operating segment performance based on revenue
and operating income as follows (in thousands):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Platform Enabling $ 22,505 $ 29,445 $ 75,761 $ 85,717
inSilicon 5,041 6,528 15,384 17,213
Information Appliance 3,263 - 3,263 -
PhoenixNet 925 530 1,862 669
--------- --------- --------- ---------
Total $ 31,734 $ 36,503 $ 96,270 $ 103,599
========= ========= ========= =========
Income (loss) from operations:
Platform Enabling $ 2,296 $ 9,466 $ 14,126 $ 26,651
inSilicon (3,168) (244) (7,681) (1,885)
Information Appliance (35) - (997) -
PhoenixNet (3,687) (1,996) (11,000) (7,507)
--------- --------- --------- ---------
Total $ (4,594) $ 7,226 $ (5,552) $ 17,259
========= ========= ========= =========
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 (in thousands):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
North America $ 8,865 $ 11,897 $ 28,930 $ 29,071
Japan 16,030 11,827 34,535 33,647
Taiwan 1,868 9,751 17,550 31,105
Other Asian Countries 2,641 928 8,042 2,567
Europe 2,330 2,100 7,213 7,209
-------- -------- -------- --------
Total $ 31,734 $ 36,503 $ 96,270 $103,599
======== ======== ======== ========
NOTE 7. STOCK REPURCHASE PROGRAM
During the quarter ended December 31, 2000, the Company repurchased
1,028,400 shares of its common stock at a cost of $15.9 million, under a program
that was authorized by the Board of Directors in fiscal 2000. As of December 31,
2000, the fiscal 2000 repurchase program was completed and terminated.
In February 2001, the Board of Directors authorized an additional
program to repurchase up to $30 million of outstanding shares of common stock
over a 12-month period. During the quarter ended March 21, 2001, the Company
repurchased from Intel Corporation an outstanding warrant to purchase 1,073,965
shares of Phoenix Technologies common stock for approximately $2.9 million under
the program. During the quarter ended June 30, 2001, the Company repurchased
347,700 shares of common stock at a cost of $3.5 million.
Page 10
PHOENIX TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. RESTRUCTURING CHARGES
In April 2001, in efforts to optimize operation efficiency and
change its business strategy to address changes in customer demands, the Company
reduced its global workforce by approximately 10%. The restructuring included
refocusing R&D efforts, re-evaluating S&M and G&A resource requirement, and
adjusting overall cost structure given current revenue levels.
The restructuring effort resulted in a charge of approximately
$1.5 million for severance and related cost in the third quarter of fiscal 2001.
As of June 30, 2001, expenses of $1.3 million had been paid and approximately
$0.2 million was accrued and expected to be paid through the first quarter of
fiscal 2002.
Page 11
ITEM 2. 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 21 (E) of the Securities
Exchange Act 1934, as amended. These statements include, but are not limited to,
statements concerning increases in research and development activities, future
liquidity and financing requirements, expected price erosion, plans to make
acquisitions, dispositions or strategic investments, expectation of increased
sales to original equipment manufacturers, and plans to improve and enhance
existing products and develop new products.
These forward-looking statements 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 product 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, and failure to recruit and
retain key employees. 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, 2000.
COMPANY OVERVIEW
We are a global leader in platformware system-enabling software
solutions for PCs and connected digital devices. Our software provides
compatibility, connectivity, security and manageability of the various
components and technologies used in such devices. These products are primarily
provided to platform and peripheral manufacturers (collectively, "OEMs") that
range from large PC manufacturers to small system integrators. We also provide
training, consulting, maintenance and engineering services to our customers. Our
products and services are primarily marketed and licensed through a direct sales
force, as well as through regional distributors and sales representatives. We
have four business units (one of which, inSilicon Corporation ("inSilicon"), is
a majority-owned subsidiary), each of which delivers leading products and
professional services that enable connected computing.
Our operations include the following:
PLATFORM ENABLING: Provides system-enabling software that is used in
the design, deployment and ongoing operation of industry standard desktop,
notbook and server PCs. The Platform Enabling's flagship software products
provide support for current technologies and industry standards, allowing
systems and device manufacturers to base new product designs on a range of
microprocessors, chipsets and operating systems combinations.
INSILICON: Provides communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of digital devices. inSilicon
provides cores, related silicon subsystems and firmware to customers that use
its technologies in hundreds of different digital devices ranging from network
routers to handheld computers.
INFORMATION APPLIANCE: Provides technology to electronics OEMs to
develop information appliance designs. Information Appliance software delivers
an easy-to-implement, low cost/high value architecture that enables "instant-on"
Internet access and browsing capability for devices such as Internet TV,
interactive screen phones, and handheld appliances. This newly created division
was launched on March 27, 2001.
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PHOENIXNET-TM-: Provides technology infrastructure that offers a high
level of security for accessing corporate networks and the Internet through
device authentication. Applications using this infrastructure for virtual
private networks (VPNs) and the Internet are supported by a global network of
Regional Device Authorities.
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 and nine-month periods ended June 30, 2001 and 2000 were
as follows (dollars in thousands):
% of Consolidated
Amount Revenue
----------------------- ----------------------
2001 2000 % CHANGE 2001 2000
----------- ---------- ----------- ---------- ----------
Three months ended June 30:
Platform Enabling $ 22,505 $ 29,445 -23.60% 70.9% 80.7%
inSilicon 5,041 6,528 -22.80% 15.9% 17.9%
Information Appliance 3,263 - - 10.3% -
PhoenixNet 925 530 74.50% 2.9% 1.4%
----------- ---------- ---------- ----------
Total revenues $ 31,734 $ 36,503 -13.10% 100.0% 100.0%
=========== ========== ========== ==========
Nine months ended June 30:
Platform Enabling $ 75,761 $ 85,717 -11.60% 78.7% 82.8%
inSilicon 15,834 17,213 -10.60% 16.0% 16.6%
Information Appliance 3,263 - - 3.4% -
PhoenixNet 1,862 669 178.30% 1.9% 0.6%
----------- ---------- ---------- ----------
Total revenues $ 96,270 $ 103,599 -7.10% 100.0% 100.0%
=========== ========== ========== ==========
Total revenues in the third quarter and first nine months of fiscal
2001 decreased by 13.1% and 7.1%, respectively, from the comparable periods in
fiscal 2000, primarily as a result of the global economic downturn and the
continued softness in the PC industry.
Platform Enabling revenues in the third quarter and first nine months
of fiscal 2001 decreased by 23.6% and 11.6%, respectively, from the comparable
periods of fiscal 2000, mainly due to continued softness in the PC industry
which had a significant negative impact on our core business in the Taiwan
market.
inSilicon revenues, net of intercompany transactions, declined by 22.8%
and 10.6% in the third quarter and in the first nine months of fiscal 2001,
respectively, from the comparable periods in fiscal 2000, due to a decrease in
demand in North America in the third quarter of fiscal 2001, resulting from
increasingly cautious purchasing behavior of customers in the current economic
environment.
Information Appliance first generated revenues in the third quarter of
fiscal 2001. North America and Japan were the two main regions contributing to
these revenues.
PhoenixNet revenues increased by 74.5% and 178.3% in the third quarter
and the first nine months of fiscal 2001, primarily due to a shift in business
focus from homepage and search settings solutions to device authentication
security products and services. During the quarter ended June 30, 2001,
PhoenixNet completed significant agreements with regional device authority
industry leaders. Comparison of PhoenixNet revenues for the first nine months of
fiscal 2001 to the comparable period in fiscal 2000 is not applicable, as
PhoenixNet first generated revenues in the second quarter of fiscal 2000.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenues by geographic region for the three and nine months ended June
30, 2001 and 2000, were as follows (dollars in thousands):
% of Consolidated
Amount Revenue
----------------------- ----------------------
2001 2000 % CHANGE 2001 2000
----------- ---------- ----------- ---------- ----------
Three months ended June 30:
North America $ 8,865 $ 11,897 -25.50% 28.0% 32.6%
Japan 16,030 11,827 35.50% 50.5% 32.4%
Taiwan 1,868 9,751 -80.80% 5.9% 26.7%
Other Asian Countries 2,641 928 184.60% 8.3% 2.5%
Europe 2,330 2,100 11.00% 7.3% 5.8%
----------- ---------- ---------- ----------
Total revenues $ 31,734 $ 36,503 -13.10% 100.0% 100.0%
=========== ========== ========== ==========
Nine months ended June 30:
North America $ 28,930 $ 29,071 -0.50% 30.0% 28.1%
Japan 34,535 33,647 2.60% 35.9% 32.5%
Taiwan 17,550 31,105 -43.60% 18.2% 30.0%
Other Asian Countries 8,042 2,567 213.30% 8.4% 2.5%
Europe 7,213 7,209 0% 7.5% 6.9%
----------- ---------- ---------- ----------
Total revenues $ 96,270 $ 103,599 -7.10% 100.0% 100.0%
=========== ========== ========== ==========
Revenues from Taiwan declined by 80.8% and 43.6% in the third
quarter and the first nine months of fiscal 2001, respectively, from the
comparable periods in fiscal 2000. The global economic downturn and the
continued softness in the PC industry resulted in a decline in demand for
system enabling software particularly in our Taiwan market. Revenues from
other Asian countries increased due to expanded sales in the PhoenixNet
security products and Information Appliance software solutions.
Two customers accounted for 19% and 12%, respectively, of total
revenues for the three-month period ended June 30, 2001, whereas one of these
customers accounted for 15% of total revenues during the nine-month period of
fiscal 2001. For the three and nine-month periods ended June 30, 2000, the same
customer accounted for 13% of total revenues in both periods.
GROSS MARGIN
Gross margin as a percentage of revenues for the three-month period
ended June 30, 2001, decreased to 80.9% from 83.0% from the comparable period in
fiscal 2000 due to lower margin on Information Appliance and inSilicon product
sales. Gross margin as a percentage of revenues for the nine-month period ended
June 30, 2001 increased to 84.2% from 83.3%, from the comparable period in
fiscal 2000 due to a shift to higher margin services.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and nine-month periods
ended June 30, 2001 increased by $3.0 million and $5.0 million, respectively,
from the comparable periods in fiscal 2000. The increase between the periods
reflected expenses related to recent acquisitions, investment in the newly
formed Information Appliance division, on-going incremental development efforts
associated with our
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
system enabling software, and establishment of development centers in Asia.
As a percentage of revenues, research and development expenses in the three
and nine-month periods ended June 30, 2001 increased to 37.5% and 35.7% from
24.5% and 28.1%, respectively, for the comparable periods of fiscal 2000,
primarily due to higher expenses as noted above and a decline in revenues.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three and nine-month periods ended
June 30, 2001 increased by $0.2 million and $5.4 million, respectively, from the
comparable periods in fiscal 2000. As a percentage of revenues, sales and
marketing expenses in the three and nine-month periods ended June 30, 2001
increased to 28.0% and 29.8% from 23.7% and 22.5%, respectively, for the
comparable periods of fiscal 2000. The increase was due primarily to the
increase in the size of our direct sales force and the expansion of our
distribution channels to position ourselves for growth in the security and
Information Appliance markets. Management has made a conscious effort to
increase sales and marketing efforts through the reallocation of resources.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and nine-month
periods ended June 30, 2001 increased by $1.1 million and $3.3 million,
respectively, from the comparable periods in fiscal 2000. The increases are
mainly attributable to investment in infrastructure, higher inSilion expenses
related to an increase in the bad debt provision and addition of new personnel.
As a percentage of revenues, general and administrative expenses in the three
and nine-month periods ended June 30, 2001 increased to 18.6% and 18.4%,
respectively, from the 13.2% and 13.9% for in the comparable periods of fiscal
2000, primarily due to the decline in total revenues and higher expenses as
noted above.
AMORTIZATION EXPENSES
Amortization of goodwill and acquired intangible assets included in
operating expense was $1.7 million and $3.4 million for the three and nine-month
periods ended June 30, 2001, respectively, as compared to $0.6 million and $1.7
million from the comparable periods in fiscal 2000. Amortization of goodwill and
acquired intangible assets relates primarily to various acquisitions (see Note 3
to Condensed Financial Statements).
STOCK-BASED COMPENSATION
The stock-based compensation charges in both the three and nine-month
periods ended during fiscal years 2001 and 2000 were primarily due to the
granting of options to purchase inSilicon stock at exercise prices less than the
fair market value of inSilicon common stock on the grant date.
RESTRUCTURING CHARGES
In April 2001, in efforts to optimize operation efficiency and
change its business strategy to address changes in customer demands, the Company
reduced its global workforce by approximately 10%. The restructuring included
refocusing R&D efforts, re-evaluating S&M and G&A resource requirement, and
adjusting overall cost structure given current revenue levels.
The restructuring effort resulted in a charge of approximately
$1.5 million for severance and related cost in the third quarter of fiscal 2001.
As of June 30, 2001, expenses of $1.3 million had been
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
paid and approximately $0.2 million was accrued and expected to be paid by the
first quarter of fiscal 2002.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, for the three and nine-month periods
ended June 30, 2001, decreased 13.7% and 7.3%, respectively, from the comparable
periods in fiscal 2000, primarily due to a decrease in cash balance from funding
stock repurchase program and making additional acquisitions.
PROVISION FOR INCOME TAXES
Our effective tax rates, excluding minority interest, for the three
months and nine months ended June 30, 2001, were 29% and 32%, respectively,
compared to 32.0% for the comparable periods of fiscal 2000. For federal income
tax purposes, we do not file a consolidated return with inSilicon as we own less
than 80% of inSilicon's issued outstanding voting stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, our principal source of liquidity consisted of cash
and cash equivalents, and short-term investments totaling $67.0 million, of
which $31.6 million was owned and restricted for the use of inSilicon. The
primary sources of cash during the first nine months of fiscal 2001 were $6.9
million from operating activities, net sales of short-term investments of $9.0
million and proceeds from issuance of stock under various stock plans of $8.0
million. The primary uses of cash during the first nine months of fiscal 2001
were $24.8 million to fund certain acquisitions (see Note 3 to Condensed
Financial Statements), $22.3 million for the repurchase of common stock and
warrants, and $6.5 million for the purchase of property, equipment and computer
software.
We believe that current cash, short-term investment balances and cash
flow from operations will be sufficient to meet our operating and capital
requirements on a short-term and long-term basis.
Page 16
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, 2000.
Page 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) None
(b) The Company filed no reports on Form 8-K during the three
months ended June 30, 2001.
Page 18
SIGNATURE
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: August 3, 2001 By: /s/ JOHN M. GREELEY
-------------- -----------------------
John M. Greeley
Senior Vice President and Chief Financial Officer
Page 19