DELAWARE 04-2685985
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 31, 1997, was $260,026,121 based upon the last reported sales price of the Common Stock in the National Market System, as reported by NASDAQ.
The number of shares of the registrant's Common Stock outstanding as of October 31, 1997 was 16,912,268.
Portions of the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A in connection with the 1997 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
The Exhibit Index begins on page 17 of this Report.
THIS REPORT ON FORM 10-K, INCLUDING WITHOUT LIMITATION THE BUSINESS SECTION AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
ITEM 1. BUSINESS
GENERAL
Phoenix Technologies Ltd. was incorporated in the Commonwealth of Massachusetts on September 17, 1979, and was reincorporated in the State of Delaware on December 24, 1986. Unless the context indicates otherwise, the "Company" or "Phoenix" refers to Phoenix Technologies Ltd. and its subsidiaries.
Phoenix designs, develops and markets system and chip level software for Personal Computers ("PCs"), peripheral devices and information appliances. This software provides compatibility, connectivity and manageability of the various components and technologies used in PCs, peripheral devices and information appliances. The Company provides these products primarily to PC manufacturers, PC peripheral equipment manufacturers, integrated circuit manufacturers, and system board manufacturers (collectively, "OEMs"). Phoenix's products assure compatibility with industry standards and permit OEMs to introduce new products quickly while enabling product differentiation and increasing system value. Phoenix system software products can reduce an OEM's product time to market, development risks, and support costs.
The Company markets and licenses its products and services worldwide, primarily to OEMs. The Company's system software customers range from large PC manufacturers to small system integrators. The Company's revenue consists of license and engineering fees. Phoenix markets its products and services primarily through a direct sales force, but also through regional distributors and sales representatives. Phoenix promotes its products through Company newsletters and technical bulletins, coverage in trade and business press articles, advertising, and participation in industry trade shows and conferences.
Rapid technological change and the frequent introduction of new products incorporating new technologies characterize the personal computer industry. The introduction of products embodying new technologies often results in the emergence of new industry standards, rendering existing products obsolete. To remain competitive, manufacturers must respond quickly to such technological changes. This rapid pace of change can benefit Phoenix as it provides a continuous flow of opportunities for the Company to provide high value technology and support to its customers. However, if the Company or its customers are unable, for technological or other reasons, to develop products in a timely manner in response to changes in the PC or information appliance industries, the Company's business would be materially and adversely affected.
The Company develops, and licenses and/or purchases from others, software products to market to OEMs. Due to rapid technological changes, the Company expects to continue to dedicate significant resources to the development and acquisition of new products and enhancements to existing products. However, there can be no assurance that the Company's product development efforts will be successful or, even if they are successful, that any resulting products will achieve market acceptance.
Research and development costs from continuing operations, before the capitalization of internally developed software costs, were 38%, 32% and 25% of total revenue in fiscal 1997, 1996 and 1995, respectively. On an actual dollar basis, these costs grew to $31,338,000 in fiscal 1997, a 38% increase from fiscal 1996; $22,764,000 in fiscal 1996, an 84% increase from fiscal 1995. The Company capitalized approximately
In fiscal 1997 and 1996, one customer accounted for 12% and 10%, respectively, of total revenue. No customer accounted for 10% or more of revenue in fiscal 1995. In fiscal 1997, 1996 and 1995, approximately 63%, 55% and 52%, respectively, of the Company's revenue was attributable to customers outside the United States.
In fiscal 1997, Intel Corporation began shipping products containing Phoenix system software under a seven-year agreement (the "Technology Agreement") signed in December 1995. Under the Technology Agreement, Phoenix licensed certain of its system-level software to Intel for incorporation into Intel's motherboard products for desktop and server computers. The Technology Agreement requires Phoenix to provide Intel with a dedicated engineering team to support Intel under the agreement and develop agreed-upon enhancements to the licensed software. In addition, Phoenix is assisting Intel in its transition to Phoenix's system-level software; the transition is expected to be completed in fiscal 1998. In consideration of the license grants and other commitments made by Phoenix, the agreement requires Intel to pay Phoenix minimum annual fees and royalties. These minimum amounts can be exceeded depending on levels of shipment by Intel of Intel products containing the licensed software. The maximum license fees payable by Intel to Phoenix under the Technology Agreement during its seven-year term is $82 million; however, there can be no assurances that Intel will ship the volume of products required to entitle Phoenix to such maximum fees.
Concurrently with the signing of the Technology Agreement, Phoenix and Intel entered into a Common Stock and Warrant Purchase Agreement (the "Equity Agreement") whereby Intel agreed to purchase 894,971 shares of Phoenix common stock, together with a warrant to purchase an additional 1,073,965 shares. The closing of the sale of the stock and the warrant occurred on February 15, 1996.
DESCRIPTION OF BUSINESS
The Company is divided into two related product divisions: the PC Systems Division ("PCSD") and the Special Products Division ("SPD"). PCSD includes the Company's desktop, laptop and server system software, and previously included the PC application software product line. SPD includes the Company's PhoenixPICO, Virtual Chips and Interconnect Software product lines.
During fiscal 1997, Phoenix expanded the capabilities of its PC firmware through enhancements to its core PhoenixBIOS 4.0 product, playing a significant role in new PC industry initiatives with Intel, Microsoft, Compaq and others; developing and delivering Advanced Configuration and Power Interface ("ACPI"); developing and acquiring new products, as well as supporting multiple operating systems and processor architectures in its PICO product line, and expanding its suite of synthesizable cores in its Virtual Chips product line.
PC SYSTEMS DIVISION
In the PC system software product area, the Company develops and markets software products that enable PC, peripheral, and motherboard manufacturers to integrate existing and emerging industry standards and new technologies into PC platforms. The Company offers an extensive line of system software, including Basic Input/Output System ("BIOS") products, for desktop, portable, and server PC systems based on the Intel x86 architecture. The system software products include system BIOS products for various chip sets and system busses, video subsystems, keyboard controllers, and power management. The Company's products support the latest processors, chip sets, system busses, and interconnect technologies, such as ACPI.
The introduction of new hardware architectures, microprocessors, peripheral equipment and operating systems within the PC industry has increased the complexity, time, and cost to develop system software products.
The demand for the Company's PC system software products depends principally on (1) PC manufacturers licensing rather than developing their own PC system software, (2) the sales success of the Company's OEM customers, (3) the emergence of new PC technologies requiring system-level software to achieve increased system functionality, user value, and performance, and (4) the functions and features offered in the Company's products compared to those of its competitors. The growth rate of sales in the personal computer industry fluctuates from time to time based on numerous factors, including general economic conditions, capital spending levels, new product introductions and shortages of key components.
PHOENIXBIOS 4.0. Phoenix introduced PhoenixBIOS 4.0 as its core desktop systems firmware product in 1993. Since then, the Company has continuously released improvements to the core product. The Company believes the success of this product is attributable to its reliability and advanced features, including its fourth generation modular architecture, Plug and Play support, and advanced development tools and methodology.
In fiscal 1996, Phoenix announced Release 6.0 of PhoenixBIOS 4.0. Release 6 includes over 50 enhancements designed to improve manufacturing customers' ability to more easily develop their own extensions for product differentiation or to improve support, and to deploy new products with reduced costs for customization work. Release 6.1, an enhanced version of PhoenixBIOS 4.0, was introduced in fiscal 1997.
Phoenix worked with Microsoft, Intel and Toshiba on the development of the ACPI specification for interfacing the operating system to the motherboard and supporting hardware. ACPI replaces Advanced Power Management, Plug and Play and other BIOS runtime services and is required for the next version of Microsoft's Windows operating system, which is due in 1998. Phoenix was first to provide fully compliant ACPI system software. Phoenix has partnered with thirteen of its major customers to develop the system software to implement the specification and is assisting its customers in obtaining Microsoft certification on its new Windows operating system.
NOTEBIOS 4.0 AND ADVANCED SYSTEMS SOFTWARE AND APPLICATIONS FOR PORTABLE SYSTEMS. Phoenix offers its NoteBIOS system software for use with portable or notebook computers. The product's capabilities include advanced power management, SMI support, Save to Disk, Plug and Play, Portable Pentium CPU support, and smart batteries. The Company believes that a majority of notebook PCs shipped worldwide in fiscal 1997 with commercial BIOS were delivered with Phoenix's NoteBIOS.
SPECIAL PRODUCTS DIVISION
PICO. The PICO product line provides system software for industrial, hand held, and consumer appliances based on the Intel x86 and UNIX platforms in the emerging information appliance market. Examples of these appliances are hand held PCs, Personal Digital Assistants ("PDAs"), smart phones, Point-of-Sale terminals, factory automation devices, digital cameras, car navigation units, or smart home entertainment (television, stereo) systems. Phoenix PICO BIOS and related products are used in Industrial Appliances. Phoenix PicoPAL/CE and related products support hand held and consumer appliances. Phoenix PICO also provides software products to the digital camera OEM market, including PicoStor and FLASH memory storage support and Phoenix PicoRay for high speed infrared data transfer.
VIRTUAL CHIPS. Synthesizable cores are prepackaged circuit descriptions, delivered in a high level language known as a Hardware Description Language ("HDL"), and used as building blocks for system-level Application Specific Integrated Circuits ("ASICs"). The resulting ASICs are used in computers and peripheral devices to
Phoenix acquired Virtual Chips, Inc., a leading supplier of synthesizable cores for the computer industry in August 1996. Virtual Chips products include a full line of PCI and USB Synthesizable Cores and Test Environments. In fiscal 1997, Virtual Chips introduced several new product families, including synthesizable cores and test environments supporting the Accelerated Graphics Port ("AGP") and Infrared Data Association ("IrDA") interconnect protocols, in addition to new PCI and USB products.
INTERCONNECT SOFTWARE. The Phoenix Interconnect Software Group ("ISG") is developing system software to support leading edge interconnect technologies, such as USB, as well as providing products which support PCMCIA and CardBus devices on Windows95, WindowsNT and various other operating systems. PlugWorks, a new product introduced at Fall 1997 Comdex, assures compatibility and connectivity between CPUs and USB connected peripheral devices. Phoenix supports CardBus, the latest 32-bit high bandwidth standard option for PC Cards.
WORLDWIDE DEPLOYMENT SERVICES AND SUPPORT
To support its worldwide customer base, Phoenix employs over 400 engineers and has offices in England, France, Germany, Japan, Korea and Taiwan, California, Oregon, Massachusetts and Texas. Phoenix has development and deployment engineering teams. Each new PC or information appliance usually needs some modification of the system software, and the Company assists customers in making such modifications. The Company also provides support services by telephone and on-site.
LEADERSHIP IN MAJOR INDUSTRY INITIATIVES
Phoenix has entered into a number of major initiatives with industry leaders and standards-setting organizations to develop next generation, system software products. These initiatives include: (1) working with Microsoft, Intel and Toshiba on the ACPI specification, (2) developing the Device Bay specification with Compaq and Microsoft, (3) developing the Desktop Management Interface ("DMI"), On Now specification and the Simple Boot & Quick Boot specification with Microsoft, and (4) working on or with several IEEE committees on 1394 and USB interconnect standards.
Phoenix's relationships with Compaq, Intel, Microsoft, and other industry leaders give the Company early access to new technology requirements, which the Company believes facilitates the development of its products. By building upon its core technology base, the Company is able to tailor its system software products to conform to the specific requirements of its OEM customers, allowing its customers to integrate new technologies and introduce their products to market more effectively.
COMPETITION
In marketing its BIOS, NoteBIOS, PICO and ISG products, Phoenix competes primarily with three other independent suppliers of BIOS technology: American Megatrends, Inc., Award Software International Inc. and SystemSoft Corporation. It also competes for system software business with in-house research and development departments of PC manufacturers that have significantly greater financial and technical resources than those of Phoenix. These companies include Acer Incorporated, Compaq Computer Corporation, Dell Computer Corporation, International Business Machines Corporation and Toshiba Corporation. In the Virtual Chips' synthesizable core business, Phoenix competes with major EDA suppliers such as Mentor Graphics and Synopsys who are attempting to broaden their design tool business to include synthesizable cores; and small design houses, such as Sand Microelectronics, Inc., who provide synthesizable cores, often as part of a design consulting contract. The bases for competition for the PC system software are primarily product performance and availability, engineering experience and expertise, product support and price. Phoenix believes it competes favorably on these bases.
Revenue attributable to the Company's PC Systems Division products accounted for 80%, 78% and 82% of the Company's revenue in fiscal 1997, 1996 and 1995, respectively. Revenue attributable to the Special Products Division products accounted for 20%, 22% and 18% of total revenue for fiscal 1997, 1996 and 1995, respectively.
INVESTMENTS
In fiscal 1994, the Company sold all the assets of its Printer Software
Division to Xionics Document Technologies, Inc. ("Xionics") in return for a
promissory note and shares of Xionics stock. During fiscal 1995 and fiscal
1996, the Company made an additional loan to Xionics, exchanged a portion of the
note for additional shares and reflected certain adjustments to the purchase
price in the note balance. In September 1996, the Company participated in
Xionics' initial public offering (NASDAQ: XION) of shares and sold 500,000
shares. In fiscal 1997, the Company sold 250,000 shares of Xionics stock for a
gain of $3.2 million. At September 30, 1997, the Company owned approximately
1.2 million shares, representing approximately 10% of total outstanding Xionics
common stock. The Company anticipates continuing to sell shares at the rate of
approximately 100,000 shares per quarter.
In fiscal 1994, the Company sold 80% of its Publishing Division to Softbank Corporation of Japan ("Softbank"). At that time, Softbank and the Company established a new entity, Phoenix Publishing Systems, Inc. ("PPSI"), whose name was later changed to Softbank Content Group ("SCG"), and each contributed their respective interests in the Publishing Division to SCG in exchange for 80% and 20%, respectively, of the equity of SCG. In September 1997, Phoenix exercised its right to require Softbank to repurchase the SCG shares for $7.5 million.
EMPLOYEES
As of September 30, 1997, the Company employed 572 persons worldwide, of whom 420 are in research and development, 96 are in sales and marketing, and 56 are in general and administration.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on trade secret, trademark and copyright laws and contractual agreements to protect its proprietary rights. The Company protects the source code of its products as trade secrets and as unpublished copyrighted works. The Company licenses the source code for its products to its customers for limited uses. The Company licenses its software products to its customers. Wide dissemination of the Company's software products makes protection of the Company's proprietary rights difficult, particularly outside the United States. Although it is possible for competitors or users to make illegal copies of the Company's products, the Company believes the rate of technology change and the continual addition of new product features lessen the impact of illegal copying. At September 30, 1997, the Company had been issued three patents and had 15 patent applications in process.
Although the Company believes that its products do not infringe on any copyright or other proprietary rights of third parties, there are currently significant legal uncertainties relating to the application of copyright and patent law in the field of software. The Company has no assurance that third parties will not obtain, or do not have, patents covering features of the Company's products, in which event the Company or its customers might be required to obtain licenses to use such features. If a patent holder refuses to grant a license on reasonable terms or at all, the Company may be required to alter certain products or stop marketing them. In recent years, there has been a marked increase in the number of patents applied for and issued with respect to software products.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in an 86,602 square foot building in San Jose, California which the Company leases pursuant to a lease expiring in November 2003. In fiscal 1997, the Company
The Company also leases smaller office facilities in other locations including: Norwood, Massachusetts; Beaverton, Oregon; Houston, Texas; Taipei, Taiwan; Tokyo, Japan; Seoul, Korea; Munich, Germany; Surrey, England; and Archamps, France.
The Company considers its leased properties to be in good condition, well maintained, and generally suitable and adequate for its present and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, becomes involved in litigation claims and disputes in the ordinary course of business. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ National Market System under the symbol PTEC. The following table presents the quarterly high and low bid quotations in the over the counter market, as quoted by NASDAQ. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW
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YEAR ENDED SEPTEMBER 30, 1997:
First quarter $19.63 $14.63
Second quarter 19.75 14.75
Third quarter 15.63 11.00
Fourth quarter 16.69 12.75
YEAR ENDED SEPTEMBER 30, 1996:
First quarter $16.13 $ 9.88
Second quarter 15.75 12.88
Third quarter 20.38 13.00
Fourth quarter 19.50 12.75
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The Company had 381 shareholders of record as of September 30, 1997. The Company has never paid cash dividends on its common stock. The Company currently intends to retain all earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's line of credit agreement restricts the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED UNAUDITED QUARTERLY DATA
FISCAL 1997, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 30
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Revenue $20,576 $19,000 $20,508 $22,045
Gross margin 17,487 15,656 16,188 16,749
Income from operations 3,413 2,265 2,331 2,757
Net income 3,217 2,162 2,792 7,484
Net income per share .18 .12 .16 .42
FISCAL 1996, QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DEC 31 MAR 31 JUN 30 SEP 30
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Revenue $14,807 $17,935 $18,645 $20,749
Gross margin 11,762 13,849 14,933 16,850
Income from operations 2,503 3,329 2,876 1,968
Income from continuing operations 2,092 2,519 2,338 2,098
Net income 2,092 2,519 2,338 5,850
Income from continuing operations
per share 0.13 0.15 0.13 0.11
Net income per share 0.13 0.15 0.13 0.32
SELECTED PERCENTAGE DATA
FY97 FY96 FY95
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Revenue:
License fees 84% 87% 87%
Services 16 13 13
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Total revenue 100 100 100
Cost of revenue:
License fees 7 10 7
Services 13 10 12
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Total cost of revenue 20 20 19
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Gross margin 80 80 81
Operating expenses:
Research and development 32 29 22
Sales and marketing 21 22 29
General and administrative 14 13 13
Other operating expenses - 1 -
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Total operating expenses 67 65 64
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Income from operations 13 15 17
Interest income, net 4 3 3
Other income, net 11 - 1
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Income before income taxes 28 18 21
Provision for income taxes 9 5 3
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Income from continuing operations 19 13 18
Gain on discontinued operations - 5 -
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Net income 19% 18% 18%
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YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
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Revenue:
Software $ 82,129 $ 72,136 $49,941 $40,589 $29,651
Publishing - - - 45,584 36,662
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Total revenue 82,129 72,136 49,941 86,173 66,313
Income from continuing operations 15,655 9,047 8,815 19,230* 3,565
Net income 15,655 12,799 8,815 6,794 2,599
Income per common share:
Income from continuing operations $ 0.87 $ 0.52 $ 0.56 $ 1.32 $ 0.26
Net income 0.87 0.73 0.56 0.47 0.19
Cash and short-term investments $ 47,537 $ 57,039 $32,944 $33,889 $ 8,122
Working capital 68,967 63,536 36,796 28,586 15,301
Current ratio 5.4:1 5.2:1 4.1:1 2.2:1 1.8:1
Total assets 126,768 113,549 62,390 63,235 51,616
Long-term debt - - - - -
Stockholders' equity 103,727 89,577 50,418 39,446 31,481
Return on equity 16% 18% 20% 19% 9%
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* INCLUDES $23,538 GAIN ON SALE OF PUBLISHING DIVISION AND $9,095 OF OTHER OPERATING EXPENSES.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's primary business is to provide system software and engineering services to OEMs and integrators of PCs and information appliances (special purpose computers).
In August 1996, the Company acquired Virtual Chips, Inc. ("Virtual Chips") in exchange for 1,241,842 shares of newly issued common stock. The transaction was accounted for as a pooling of interests and financial information for the quarters in fiscal 1996 has been restated to reflect Virtual Chips' results of operations. The financial statements for fiscal 1995 have not been restated as the results of operations of Virutal Chips were not material in relation to those of the Company. Shares used in the computation of net income per share have been restated for all periods presented to give effect to the shares issued and options assumed by the Company in the transaction. Virtual Chips is a leading supplier of synthesizable cores for the computer industry. Synthesizable cores are pre-packaged circuit descriptions used as building blocks for system-level application specific integrated circuits ("ASICs"). ASICs are used in computers and peripheral devices to connect them using PCI, USB and other emerging industry standard protocols.
REVENUE
Revenue increased $10.0 million (14%) to $82.1 million in fiscal 1997 from $72.1 million in fiscal 1996. Revenue increased $22.2 million (44%) in fiscal 1996 from $49.9 million in fiscal 1995. License revenue increased 10% from fiscal 1996 to 1997, and 44% from fiscal 1995 to 1996. The increase resulted primarily from an increase
Revenue in fiscal 1997 increased over fiscal 1996 in all regions. In fiscal 1997 and 1996, one customer accounted for 12% and 10% of revenues, respectively. No customers accounted for 10% or more of revenue in fiscal 1995.
GROSS MARGIN
Gross margin as a percent of revenue was 80%, 80% and 81% for fiscal 1997, 1996 and 1995, respectively. License fee gross margin was 91%, 88% and 92% for fiscal 1997, 1996 and 1995, respectively. The increase in license fee gross margin from fiscal 1996 to fiscal 1997 was a result of lower third-party royalties from the phase-out of a consumer application product, offset by an increase in the amortization of capitalized computer software costs. The decrease from fiscal 1995 to fiscal 1996 is primarily due to increases in royalty expense and amortization of capitalized computer software costs. Service gross margin was 23%, 25% and 8% in fiscal 1997, 1996 and 1995, respectively. The decrease from fiscal 1996 to fiscal 1997 results principally from a reorganization of U.S. engineering effective April 1st. Development and field engineering were separated to facilitate improved focus in each group. The increase from fiscal 1995 to fiscal 1996 in service gross margin is attributable to productivity improvements in service engineering.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $26.3 million, $20.6 million and $11.0 million in fiscal 1997, 1996 and 1995, respectively. The increase in research and development expenses from fiscal 1996 to fiscal 1997 is primarily due to an increase in the Company's engineering staff to continue development of system-level software and the creation of a new product line to develop and market software to connect computers and peripheral devices. For the past year, the Company's investment in research and development also has trended higher in order to implement the Intel alliance and to expand the Company's products beyond the PC motherboard. The increase as a percent of revenue from fiscal 1995 to fiscal 1996 is primarily due to the creation of a new product line to develop and market software to connect computers and peripheral devices and the acquisition of Virtual Chips, Inc.
The Company capitalized approximately $5.0 million, $2.1 million and $1.3 million of internally developed software costs in fiscal 1997, 1996 and 1995, respectively. These amounts were offset by amortization of capitalized software costs of $4.6 million, $3.2 million and $1.2 million in fiscal 1997, 1996 and 1995, respectively. The Company believes that continued investment in new and evolving technologies is essential to meet rapidly changing industry requirements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $17.4 million, $15.5 million and $14.4 million in fiscal 1997, 1996 and 1995, respectively. The increases in fiscal 1997 and fiscal 1996 are primarily due to growth in sales and marketing headcount associated with higher revenues. The decrease as a percent of revenue in fiscal 1996 resulted primarily from the discontinuance of advertising expenses related to products marketed through the retail channel.
General and administrative expenses were $11.6 million, $9.7 million and $6.7 million in fiscal 1997, 1996 and 1995, respectively. The increases in fiscal 1997 and 1996 are primarily from increases in salaries and related benefits associated with continued headcount growth. Fiscal 1997 also includes non-recurring charges related to the consolidation of facilities in northern and southern California.
COSTS OF ACQUISITION
Costs of acquisition of $0.9 million in fiscal 1996 include the costs associated with the acquisition of Virtual Chips, Inc. in fiscal 1996.
INTEREST INCOME, NET
Net interest income was $2.9 million, $2.2 million and $1.7 million in fiscal 1997, 1996 and 1995, respectively. The increase in net interest income over the years is primarily due to the increase in the average cash balances available for investment in the respective periods.
OTHER INCOME, NET
On September 30, 1997, Phoenix exercised its right to require Softbank Corporation of Japan to repurchase the Softbank Content Group shares owned by the Company for $7.5 million and recorded a gain on investment of $6.2 million. During fiscal 1997, the Company sold 250,000 shares of common stock of Xionics Document Technologies, Inc. ("Xionics") and recorded a gain on investment of $3.2 million.
DISCONTINUED OPERATIONS
In September 1996, the Company sold 500,000 shares of common stock of Xionics in its initial public offering. In addition, the Company received payment on a promissory note. The gain on the repayment of the note and sale of the stock in the amount of $3.8 million was recorded as a gain from discontinued operations, net of income taxes of $2.3 million, to the extent such amounts were previously written off in previous fiscal years by a charge to discontinued operations. The remaining amount of $294,000 in fiscal year 1996, which represents investment gains, was recorded in continuing operations as other income on the Company's income statement. As of September 30, 1997, the Company held 1,205,000 shares of Xionics stock which are carried in marketable securities at fair value.
PROVISION FOR INCOME TAXES
The Company recorded income tax provisions of $7.4 million, $3.9 million and $1.5 million in fiscal 1997, 1996 and 1995, respectively. The Company's effective tax rate was 32%, 30% and 14% in fiscal 1997, 1996 and 1995, respectively. The higher tax rate in fiscal 1997 is primarily due to a decrease in the tax benefit from losses in the prior years, partially offset by the reinstatement of the federal research and development tax credit. The Company's effective tax rate has been lower than the statutory rate primarily due to various federal and state tax credits and tax benefit of prior year losses. The provisions for fiscal 1997 and 1995 include income tax benefits in the fourth quarters of $0.4 million and $1.3 million resulting from a reduction in the Company's valuation allowance related to its deferred tax assets. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires recognition of deferred tax assets when the probability of recovery is more likely than not.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which is required to be adopted by the Company on September 30, 1998 with quarterly disclosure. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary
In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," and Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related Information," which will be required to be adopted by the Company in fiscal 1999. In October 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," which will be required to be adopted by the Company on September 30, 1999. Adoption of these statements is not expected to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.
FLUCTUATIONS IN OPERATING RESULTS
The tables in Part II, Item 6 of this Form 10-K include selected unaudited quarterly consolidated results of operations for fiscal 1997 and 1996. This information was derived from the Company's unaudited consolidated financial statements that, in the opinion of management, reflect all recurring adjustments necessary to fairly present this information, when read in conjunction with the Company's Consolidated Financial Statements. The results of operations for any period are not necessarily indicative of the results to be expected for any future period.
Phoenix's future operating results may vary substantially from period to period. The timing and amount of its license fees are subject to a number of factors that make estimating revenues and operating results prior to the end of a quarter uncertain. While Phoenix receives recurring revenue on royalty-based license agreements and some agreements contain minimum quarterly royalty commitments, a significant amount of license fees in any quarter is dependent on signing agreements and delivering the licensed software in that quarter. Generally, Phoenix has experienced a pattern of recording 50% or more of its quarterly revenues in the third month of the quarter. Phoenix has historically monitored its revenue bookings through regular, periodic worldwide forecast reviews during the quarter. However, while these reviews keep management informed of areas where additional selling effort may be needed in order to meet the internal plans and market expectations, there can be no assurances that this process will result in revenue expectations being met. Operating expenses for any year are normally based on the attainment of planned revenue levels for that year and are incurred ratably throughout the period. As a result, if revenues are less than planned in any period while expense levels remain relatively fixed, Phoenix's operating results would be adversely affected for that period. In addition, the incurring of unplanned expenses could adversely affect operating results for the period in which such expenses were incurred.
BUSINESS RISKS
The additional following factors should be considered carefully when evaluating Phoenix and its business.
PRODUCT DEVELOPMENT
Phoenix's long-term success will depend on its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis that meet the needs of its current customers in their present markets and of current and future customers in new and emerging markets. There can be no assurance that Phoenix will be successful in developing new products or in enhancing existing products or that new or enhanced products will meet market requirements. Delays in introducing new products can adversely impact acceptance and revenue generated from the sale of such products. Phoenix has, from time to time, experienced such delays. Phoenix's software products and their enhancements contain complex code which may contain undetected errors or bugs when first introduced, despite testing. There can be no assurance that new products or enhancements will not contain errors or bugs that will adversely affect commercial acceptance of such products or enhancements.
Phoenix relies on a combination of patent, trade secret, copyright, trademark laws and contractual provisions to protect its proprietary rights in its software products. There can be no assurance that these protections will be adequate or that competitors will not independently develop technologies that are substantially equivalent or superior to Phoenix's technology. In addition, copyright and trade secret protection for Phoenix's products may be unavailable or unreliable in certain foreign countries. The Company has been issued 3 patents with respect to its current product offerings and has a number of patent applications pending with respect to certain of the products it markets. Phoenix maintains an active internal program designed to identify internally developed inventions worthy of being patented. There can be no assurance that any of the applications pending will be approved and patents issued or that Phoenix's engineers will be able to develop technologies capable of being patented. As the number of software patents increases, Phoenix believes that software developers may become increasingly subject to infringement claims. There can be no assurance that a third party will not assert that its patents or other proprietary rights are violated by products offered by Phoenix. Any such claims, whether or not meritorious, can be time consuming and expensive to defend, and could have an adverse effect on Phoenix's business, results of operations and financial condition. Infringement of valid patents or copyrights or misappropriation of valid trade secrets could also have an adverse effect on Phoenix's business, results of operations and financial condition. In addition, such claims if alleged against certain Phoenix customers, may give rise to indemnity or other obligations on the part of Phoenix.
DEPENDENCE ON THIRD-PARTY PROVIDERS OF TECHNOLOGY
Phoenix's products use certain products and technologies of various third party software developers, including both complete products offered as extensions of Phoenix's product lines and technology used in the enhancement of internally developed products. These products are licensed under contractual agreements, which in some cases are for limited time periods and in some cases provide for termination under certain circumstances. There can be no assurance that the technology plans and directions for the third party products will remain compatible with Phoenix's needs, that these third-party providers will commit adequate development resources to maintain or enhance these products and technologies, or that the license agreements with limited duration will be renewed upon expiration. In such circumstances, Phoenix may not be able to obtain or develop substitute products or technology, which could adversely affect Phoenix's business, results of operation and financial condition.
IMPORTANCE OF MICROSOFT AND INTEL
For a number of years, Phoenix has worked closely with Microsoft Corporation and Intel Corporation in developing standards for the PC Industry. In addition, Phoenix supplies its system level software technology to Intel. Phoenix remains optimistic regarding its relationships with these two industry leaders. There can, however, be no assurance that either Microsoft or Intel will not develop alternative product strategies which could conflict with Phoenix's product plans and marketing strategies and, accordingly, adversely impact Phoenix's business and results of operations. Presently, there is little overlap or conflict in Phoenix's product offerings and strategies and those of Intel. Windows NT and Windows CE, Microsoft's newer operating systems, incorporate some functionality that has traditionally resided in the BIOS. Both Intel and Microsoft, in their endeavors to add value, incorporate features or functions provided by Phoenix in silicon or the operating system, respectively. Therefore, Phoenix must continually create new features and functions to sustain as well as increase its added value to OEMs. There can be no assurances that Phoenix will be successful in these efforts.
ATTRACTION AND RETENTION OF KEY PERSONNEL
Phoenix believes it employs more BIOS engineers than any other company in the PC industry. Virtual Chips' products are based on new and emerging technologies which are different from BIOS technologies. Phoenix's ability to achieve its revenue and operating performance objectives will depend in large part on its ability to attract and retain technically qualified engineers. The available pool of engineering talent is limited for both operations. Accordingly, failure to attract, retain and grow its research and development teams could adversely affect Phoenix's business and operating results.
The loss of any key customer and the inability of the Company to replace revenues provided by a key customer could have a material adverse effect on the Company's business and financial condition. The Company's customer base consists principally of large OEMs in the PC market and as a result, the Company maintains individually significant receivable balances from major OEMs. If these OEMs fail to meet their guaranteed minimum royalty payments and other payment obligations, the Company's operating results could be adversely affected. As of September 30, 1997, the three largest receivable balances collectively represented approximately 44% of total accounts receivable.
COMPETITION
The market for Phoenix's products is very competitive. Phoenix competes primarily with three other independent suppliers with respect to its system- level software products: Award Software International Inc., SystemSoft Corporation and American Megatrends, Inc. It also competes for BIOS business with in-house research and development departments of PC manufacturers that have significantly greater financial and technical resources than those of Phoenix. These companies include Acer Inc., Compaq Computer, Dell Computer, International Business Machines and Toshiba. In the synthesizable core business, Phoenix competes with businesses such as Mentor Graphics Corporation, Synposys Corporation and Cadence Systems who have resources far greater than those of Phoenix and with other companies such as Sand Microelectronics, Inc. There can be no assurance that Phoenix will continue to compete successfully with its current competitors or that it will be able to compete successfully with new competitors.
INTERNATIONAL SALES AND ACTIVITIES
Revenue derived from Phoenix's international operations comprises a majority of total revenues. There can be no assurances that Phoenix will not experience significant fluctuations in international revenues. While the major portion of Phoenix's license fee or royalty contracts are U.S. dollar denominated, Phoenix is entering into an increasing number of contracts denominated in local currencies. Phoenix has sales and engineering offices in England, France, Germany, Japan, Korea and Taiwan and uses software engineering firms in Israel and India. Phoenix's operations and financial results could be adversely affected by factors associated with international operations such as changes in foreign currency exchange rates, uncertainties relative to regional economic circumstances, political instability in emerging markets, and difficulties in staffing and managing foreign operations, as well as by other risks associated with international activities.
VOLATILE MARKET FOR PHOENIX STOCK
The market for Phoenix's stock is highly volatile. The trading price of Phoenix common stock has been, and will continue to be, subject to fluctuations in response to operating and financial results, announcements of technological innovations, new products or customer contracts by Phoenix and its competitors, changes in Phoenix's or its competitors' product mix or product direction, changes in Phoenix's revenue mix and revenue growth rates, changes in expectations of growth for the PC industry, as well as other events or factors which Phoenix may not be able to influence or control. Statements or changes in opinions, ratings or earnings estimates made by brokerage firms and industry analysts relating to the market in which Phoenix does business, companies with which Phoenix competes or relating to Phoenix specifically could have an immediate and adverse effect on the market price of Phoenix's stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market price for many high-technology companies and that often have been unrelated to the operating performance of these companies.
CERTAIN ANTI-TAKEOVER EFFECT
Phoenix's Certificate of Incorporation, Bylaws and Stockholder Rights Plan and the Delaware General Corporation Law include provisions that may be deemed to have anti-takeover effects and may delay, defer or
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's primary sources of liquidity included cash, cash equivalents and short-term investments of $47.5 million, and available borrowings under a bank credit facility of $10.0 million. There were no borrowings outstanding under the bank credit facility at September 30, 1997. The Company believes that its existing sources of liquidity will be sufficient to satisfy the Company's cash requirements for at least the next twelve months.
Pursuant to a share repurchase program whereby the Board of Directors authorized the repurchase of up to 1,000,000 shares of its outstanding common stock, the Company repurchased and retired approximately 386,000 shares at a cost of approximately $5.0 million in fiscal 1997.
CHANGES IN FINANCIAL CONDITION
Net cash generated from operating activities during fiscal 1997 was $7.8 million, resulting primarily from cash provided by net income, adjusted for non- cash items. Net cash used in investing activities was $10.2 million which consisted primarily of purchases of short-term investments of $55.8 million, purchases of property and equipment of $6.6 million, and additions to computer software costs of $6.2 million for use in the Company's operations and was partially offset by maturities of short-term investments of $56.2 million and proceeds from sale of marketable securities of $3.2 million. Cash used for financing activities during fiscal 1997 was $0.8 million resulting from purchases of $5.0 million of treasury stock, partially offset by $4.2 million from the exercise of common stock options and issuance of stock under the Company's employee stock purchase plan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors of the Company will be contained in the Company's definitive proxy statement to be filed pursuant to Regulation 14A in connection with the 1998 annual meeting of its stockholders (the "Proxy Statement") and is incorporated herein by this reference.
The executive officers of the Company, each of whom serve at the discretion of the Board of Directors, as of the date of this Form 10-K are as follows:
Name Age Position
---- --- --------
Jack Kay 51 President and Chief Executive Officer
David Frodsham 41 Vice President and General Manager,
PC Systems Division
Stuart J. Nichols 37 Vice President, General Counsel and
Secretary
Robert J. Riopel 55 Vice President, Finance,
Chief Financial Officer and Treasurer
Craig Slayter 47 Vice President and General Manager,
Worldwide Field Operations
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Mr. Kay joined the Company as Vice President of Worldwide Sales in May 1990. In January, 1992, he was appointed Senior Vice President and Chief Operating Officer. In June, 1994, he was promoted to President and Chief Operating Officer. Effective October 1, 1995, he was promoted to President and Chief Executive Officer.
Mr. Frodsham was President of Distributed Information Processing Ltd., a British company that was acquired by Phoenix in 1994. At that time, he became General Manager, Europe until his appointment as Vice President and General Manager, PC Systems Division in July 1997.
Mr. Nichols joined the Company in May 1997 as Vice President, General Counsel and Secretary. For two years before joining the Company, Mr. Nichols was General Counsel for Samsung Semiconductor, Inc., a subsidiary of Samsung Electronics Co., Ltd. From 1989 to 1995, Mr. Nichols served as Corporate Counsel for Varian Associates, Inc.
Mr. Riopel joined the Company as Vice President, Finance, Chief Financial Officer, and Treasurer in February 1995. For two years before joining the Company, Mr. Riopel was Senior Vice President, Finance and Administration and Chief Financial Officer for OpenVision Technologies, Inc., a developer of system management software for client-server systems. From 1989 to 1993, Mr. Riopel served as Vice President, Finance for the international division of Silicon Graphics, Inc.
Mr. Slayter has been employed in various management positions since he joined the Company in July 1987. Mr. Slayter served as General Manager, Asia- Pacific Division, from April 1988 through September 1994. He was promoted to Vice President, Asia Pacific Operations in October 1994. Since April 1996, Mr. Slayter has served as the Vice President and General Manager of the Special Products Division. In September 1997, Mr. Slayter was promoted to the position of Vice President and General Manager, Worldwide Field Operations.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company during, and with respect to, its most recent fiscal year and written representations that no other reports were required, if any, the filing requirements of Section 16(a) applicable to its officers, directors and 10% Stockholders were satisfied.
The information required by this section is incorporated by reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Phoenix Technologies
Ltd. and its subsidiaries are filed as part of this report on Form 10-K:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets as of September 30, 1997 and 1996. . . . . . . 23
Consolidated Statements of Income for the years ended September 30, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 27
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
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All other schedules are omitted because they are not required, are not applicable or the information is included in the financial statements or notes thereto. The financial statements and financial statement schedules follow the signature page hereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of fiscal 1997.
(c) EXHIBITS
3.2 By-laws of the Registrant as amended through February 6, 1995 (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 333-03065 (the "1996 ESPP S-8")).
3.6 Certificate of Ownership (incorporated herein by reference to Exhibit
3.6 to the 1988 Form 10-K).
3.8 Rights Agreement dated as of October 31, 1989 between the Registrant
and The First National Bank of Boston (incorporated herein by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
October 31, 1989 (the "1989 8-K")).
3.12 Restated Certificate of Incorporation of the Registrant dated as of
December 12, 1997.
4.1 Rights Agreement dated as of October 31, 1989 between the Company and
The First National Bank of Boston - filed as Exhibit 4.1 to the October
31, 1989 Form 8-K, and incorporated herein by this reference.
10.4 Employment agreement dated June 9, 1994 between the Registrant and Jack
Kay - filed as Exhibit 10.9 to the Company's Quarterly Report on Form
10-Q filed on August 15, 1994 and incorporated herein by this reference.
10.9 Letter Amendment dated as of December 30, 1993 to Line of Credit
Agreement dated November 25, 1991 between the Registrant and Silicon
Valley Bank filed as exhibit 10.17 to the Company's Form 10-Q filed on
February 14, 1994 and incorporated herein by this reference.
10.10 Purchase Agreement dated March 15, 1994 between the Company and
Softbank Corporation filed as exhibit 10.18 to the Company's Form 10-Q
filed May 16, 1994 and incorporated herein by this reference.
10.13 Amendment No. 1 to Purchase Agreement by and between Phoenix
Technologies Ltd. and Softbank Corporation dated as of March 15, 1994
- filed as Exhibit 2.02 to the Company's Current Report on Form 8-K
dated September 30, 1994 and incorporated herein by this reference.
10.14 Asset Purchase Agreement made as of September 30, 1994 by and between
the Registrant and Xionics International Holdings, Inc. - filed as
Exhibit 2.01 to the Company's Current Report on Form 8-K dated November
8, 1994 and incorporated herein by this reference.
10.15 1994 Equity Incentive Plan, as amended through February 28, 1996 -
filed as Exhibit 10.17 to the Company's Report on Form 10-K for the
fiscal year ended September 30, 1995 (the "1995 10-K") and
incorporated herein by this reference.
10.16 Amended and Restated Employee Stock Purchase Plan, as amended by
through February 28, 1996 - filed as Exhibit 4.10 to the 1996 ESPP S-8
and incorporated herein by this reference.
10.21 Amended and Restated Lease Agreement dated March 15, 1995 between The
Prudential Insurance Company of America and the Company with respect to
certain facilities located at 846 University Avenue, Norwood, MA -
filed as Exhibit 10.23 to the 1995 10-K and incorporated herein by this
reference.
10.22 Agreement dated December 18, 1995 between Intel Corporation and the
Company filed as Exhibit 10.24 to the Company's Report on Form 10-Q for
the quarter ended December 31, 1995 as amended by a Form 10-Q/A-1 (the
"December 1995 10-Q") and incorporated herein by this reference.
Portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
10.23 Common Stock and Warrant Purchase Agreement dated as of December 18,
1995 by and between the Company and Intel Corporation - filed as
Exhibit 10.25 to the December 1995 10-Q and incorporated herein by this
reference.
18
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10.24 Warrant to Purchase Shares of Common Stock of the Company dated
February 15, 1996 - filed as Exhibit 2 to the Schedule 13D of Intel
Corporation dated February 23, 1996 with respect to the purchase by
Intel of shares of the Company's common stock and of a warrant to
purchase shares of the Company's common stock (the "Intel Schedule
13D") and incorporated herein by this reference.
10.25 Investor Rights Agreement, dated December 18, 1995, between the Company
and Intel Corporation - filed as Exhibit 3.2 to the Intel Schedule 13D
and incorporated herein by this reference.
10.26 Standard Industrial Lease - Full Net between The Equitable Life
Assurance Society of the United States as Landlord and Phoenix
Technologies Ltd. as Tenant dated as of May 15, 1996 for that certain
property located at 411 E. Plumeria Drive, San Jose, California - filed
as Exhibit 10.20 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by this reference.
10.28 Industrial Lease (Single Tenant; Net) dated as of October 1, 1996 by
and between The Irvine Company and Phoenix Technologies Ltd. For that
certain property located at 135 Technology Drive, Irvine, California
filed as Exhibit 10.28 to the 1996 Form 10-K and incorporated herein
by this reference.
10.29 Equity Incentive Plan, as amended through December 12, 1996
incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-20447).
10.30 Loan Agreement dated as of February 28, 1997 by and between Silicon
Valley Bank and Phoenix Technologies Ltd filed as Exhibit 10.30 to the
Company's Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by this reference.
11.1 Statement re computation of earnings per share (primary earnings per
share).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors (Ernst & Young LLP).
23.2 Consent of Independent Accountants (Coopers & Lybrand, L.L.P.).
27 Financial Data Schedule.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Jack Kay
----------------------------------
Jack Kay
President and Chief Executive Officer
Date: December 15, 1997
------------------
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Jack Kay /s/ Robert J. Riopel
--------------------------------- ---------------------------------
Jack Kay Robert J. Riopel
Director and Principal Principal Finance and
Executive Officer Accounting Officer
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Charles Federman /s/ Lawrence G. Finch
--------------------------------- ---------------------------------
Charles Federman Lawrence G. Finch
Director Director
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Ronald D. Fisher /s/ Lance E. Hansche
--------------------------------- ---------------------------------
Ronald D. Fisher Lance E. Hansche
Director Director
Date: December 15, 1997 Date: December 15, 1997
----------------- -----------------
/s/ Anthony P. Morris
---------------------------------
Anthony P. Morris
Director
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Date: December 15, 1997
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the consolidated balance sheets of Phoenix Technologies Ltd.
as of September 30, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in Part IV, Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The consolidated
financial statements and schedule of Phoenix Technologies Ltd. for the year
ended September 30, 1995 were audited by other auditors whose report dated
October 27, 1995, expressed an unqualified opinion on those statements and
schedule.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phoenix Technologies Ltd. as of September 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements as a whole, presents fairly in all material respects the information set forth therein.
San Jose, California
October 21, 1997
The Board of Directors and Stockholders
Phoenix Technologies Ltd.
We have audited the consolidated financial statements and the financial statement schedule of Phoenix Technologies Ltd. as of September 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phoenix Technologies Ltd. as of September 30, 1995, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule for the year ended September 30, 1995 referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
San Jose, California
October 27, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $22,169 $25,752
Short-term investments 25,368 31,287
Accounts receivable, net of allowances of
$608 in 1997 and $467 in 1996 21,129 16,225
Deferred income taxes 2,754 2,719
Prepaids and other current assets 13,069 2,809
-------- --------
Total current assets 84,489 78,792
Other marketable securities 26,524 21,831
Property and equipment, net 9,607 5,099
Computer software costs, net 4,880 3,694
Other assets 1,268 4,133
-------- --------
Total assets $126,768 $113,549
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,707 $ 2,589
Payroll and related liabilities 3,434 3,279
Accrued license fees and royalties 747 1,299
Other accrued liabilities 2,452 2,799
Income taxes payable 6,047 3,955
Discontinued operations 135 1,335
-------- --------
Total current liabilities 15,522 15,256
Deferred income taxes 7,159 8,561
Other liabilities 360 155
Commitments - -
Stockholders' equity:
Preferred stock, $.10 par value, 500 shares
authorized, none issued - -
Common stock, $.001 par value, 40,000 shares
authorized, 16,895 and 16,636 shares issued
and outstanding at September 30, 1997 and 1996 17 17
Additional paid-in capital 71,131 68,509
Retained earnings 20,366 8,113
Unrealized gain on available-for-sale securities 12,570 13,098
Accumulated translation adjustment (357) (160)
-------- --------
Total stockholders' equity 103,727 89,577
-------- --------
Total liabilities and stockholders' equity $126,768 $113,549
-------- --------
-------- --------
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
------------------------------------------------------------------------------
Revenue:
License fees $68,903 $62,497 $43,448
Services 13,226 9,639 6,493
------- ------- -------
Total revenue 82,129 72,136 49,941
Cost of revenue:
License fees 5,893 7,482 3,633
Services 10,156 7,260 5,949
------- ------- -------
Total cost of revenue 16,049 14,742 9,582
------- ------- -------
Gross margin 66,080 57,394 40,359
Operating expenses:
Research and development 26,349 20,628 11,038
Sales and marketing 17,400 15,522 14,355
General and administrative 11,565 9,679 6,696
Costs of acquisition - 889 -
------- ------- -------
Total operating expenses 55,314 46,718 32,089
------- ------- -------
Income from operations 10,766 10,676 8,270
Interest income, net 2,908 2,177 1,725
Other income, net 9,348 73 303
------- ------- -------
Income before income taxes 23,022 12,926 10,298
Provision for income taxes 7,367 3,879 1,483
------- ------- -------
Income from continuing operations 15,655 9,047 8,815
Gain on discontinued operations
(after income taxes of $2,300) - 3,752 -
------- ------- -------
Net income $15,655 $12,799 $ 8,815
------- ------- -------
------- ------- -------
Income per share:
Income from continuing operations $ 0.87 $ 0.52 $ 0.56
Income from discontinued operations - 0.21 -
------- ------- -------
------- ------- -------
Net income per share $ 0.87 $ 0.73 $ 0.56
------- ------- -------
------- ------- -------
Shares used in computation 18,023 17,456 15,763
------- ------- -------
------- ------- -------
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THREE YEARS ENDED SEPTEMBER 30, 1997
UNREALIZED
RETAINED GAIN ON
ADDITIONAL EARNINGS AVAILABLE- ACCUMULATED TOTAL
COMMON STOCK PAID-IN (ACCUMULATED FOR-SALE TRANSLATION STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT CAPITAL DEFICIT) SECURITIES ADJUSTMENT EQUITY
---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 12,697 $13 $49,276 $(9,843) $ - $ - $ 39,446
Stock purchases under stock
option and stock purchase plans 892 1 3,317 - - - 3,318
Tax benefit on exercise of stock
options - - 1,893 - - - 1,893
Cancellation of treasury shares (30) - 350 (350) - - -
Repurchases of common stock 369 - (1,126) (1,854) - - (2,980)
Net income - - - 8,815 - - 8,815
Accumulated translation adjustment - - - - - (74) (74)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1995 13,928 14 53,710 (3,232) - (74) 50,418
Effect of pooling of interests 658 1 6 (39) - - (32)
Conversion of notes receivable 206 - 706 - - - 706
Deferred compensation, net - - 49 - - - 49
Sale of common stock and warrant,
net of costs 961 1 10,441 - - - 10,442
Stock purchases under stock
option and stock purchase plans 1,035 1 3,651 - - - 3,652
Tax benefit on exercise of stock
options - - 536 - - - 536
Repurchases of common stock (152) - (590) (1,415) - - (2,005)
Unrealized gain on available for
sale securities - - - - 13,098 - 13,098
Net income - - - 12,799 - - 12,799
Accumulated translation adjustment - - - - - (86) (86)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1996 16,636 17 68,509 8,113 13,098 (160) 89,577
Deferred compensation, net - - 66 - - - 66
Stock purchases under stock
option and stock purchase plans 645 - 3,630 - - - 3,630
Tax benefit on exercise of stock
options - - 538 - - - 538
Repurchases of common stock (386) - (1,612) (3,402) - - (5,014)
Unrealized gain on available for
sale securities - - - - (528) - (528)
Net income - - - 15,655 - - 15,655
Accumulated translation adjustment - - - - - (197) (197)
------- --- ------- ------- ------- ----- --------
Balance, September 30, 1997 16,895 $17 $71,131 $20,366 $12,570 $(357) $103,727
------- --- ------- ------- ------- ----- --------
------- --- ------- ------- ------- ----- --------
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 15,655 $ 12,799 $ 8,815
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 7,504 5,051 3,050
Provision for relocation (42) (525) (876)
Gain on recovery of assets previously written off - (6,051) -
Realized gain on sale of other marketable securities (3,217) (294) -
Sale of minority interest in PPSI (6,247) - -
Compensation costs related to stock issuance 66 49 -
Equity investment - 170 (170)
Deferred income taxes (1,098) 410 (1,300)
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (4,969) (4,305) 4,020
Prepaids and other assets (715) (53) (351)
Accounts payable 116 955 (1,798)
Payroll and related liabilities 188 788 74
Other accrued liabilities (395) 147 (2,494)
Income taxes payable 2,152 1,234 (1,335)
Discontinued operations (1,200) 611 (4,479)
------- ------- -------
Total adjustments (7,857) (1,813) (5,659)
------- ------- -------
Net cash provided by operations 7,798 10,986 3,156
------- ------- -------
Cash flows from investing activities:
Maturity of short-term and long-term investments 56,156 21,261 23,086
Purchases of short-term and long-term investments (55,813) (45,401) (25,863)
Proceeds from sale of other marketable securities 3,217 - -
Proceeds from recovery on assets previously written off - 6,774 -
Purchases of property and equipment (6,561) (4,328) (1,596)
Additions to computer software costs (6,212) (2,680) (1,674)
Other investing activities (969) (32) -
------- ------- -------
Net cash used in investing activities (10,182) (24,406) (6,047)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrant - 10,442 -
Proceeds from issuance of convertible debt securities - 706 -
Proceeds from stock purchases under stock option and stock purchase plans 4,168 4,188 3,317
Repurchases of common stock (5,014) (2,005) (2,980)
Repayment of short-term borrowings - - (1,241)
------- ------- -------
Net cash provided by (used in) financing activities (846) 13,331 (904)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (353) 44 73
------- ------- -------
Net decrease in cash and cash equivalents (3,583) (45) (3,722)
Cash and cash equivalents at beginning of fiscal year 25,752 25,797 29,519
------- ------- -------
Cash and cash equivalents at end of fiscal year $22,169 $25,752 $25,797
------- ------- -------
------- ------- -------
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1. DESCRIPTION OF OPERATIONS
The Company designs, develops, markets and supports standards-based
system software and synthesizable cores for personal computers and other
microprocessor-based products. The Company sells to OEMs and integrators of
PCs, information appliances and peripheral devices. Phoenix provides
training, consulting, maintenance and engineering services to its customers.
The Company operates seven development and support centers in four countries.
Most sales are made through the Company's direct sales force, but sales
through technically certified distributors is increasing as a percent of
revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the financial statements. Certain amounts in the prior years' financial statements have been reclassified to conform to the fiscal 1997 presentation.
USE OF ESTIMATES. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Such estimates include the allowance for doubtful accounts, sales returns and customer credits, net realizable value of capitalized computer software costs, and the valuation allowance on deferred tax assets.
REVENUE RECOGNITION. The Company's revenue is derived from license fees and engineering services sold primarily to OEMs. Revenue from software license fees is recognized when the software has been delivered, providing that no significant vendor obligations remain outstanding, customer acceptance is reasonably assured and collectibility is deemed probable. Revenue recognized from software licenses with initial or minimum guaranteed payments is limited to amounts due within 90 days. Additional software license fees are recognized as per unit royalties exceed the initial or minimum guaranteed payments. Insignificant vendor obligations, if any, remaining after contract execution and shipment are accounted for by accruing the costs related to the remaining obligations.
Customers entering into license agreements with the Company for customized products are typically charged engineering fees that vary according to the amount of engineering work performed. Engineering fees are recognized as revenue on a time and materials basis or when contractual milestones are met. Maintenance revenues are recognizable ratably over the contract period.
Allowances for estimated returns and customer credits are recorded in the same period as the related revenues.
In fiscal 1997 and fiscal 1996, one customer accounted for 12% and 10% of revenues, respectively. No customers accounted for 10% or more of revenues in fiscal 1995.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity of less than three months are considered cash equivalents.
SHORT-TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES. Short-term investment securities consist of U.S. government and agency obligations, bankers' acceptances, corporate debt securities and commercial paper with original maturities generally ranging from three months to one year. Short-term investments are classified as held-to-maturity as the Company has the intent and the ability to hold them until maturity. Such investments are
Other marketable securities consist of the shares of Xionics Document Technologies, Inc. ("Xionics") and U.S. government agency obligations, owned by the Company. The shares of Xionics common stock are recorded at fair value based on quoted market prices and classified as available-for-sale. The unrealized gain on the Xionics investment, less deferred income taxes, has been recorded as a separate component of stockholders' equity. The carrying value of the Xionics shares and the related deferred income taxes and unrealized gain are adjusted to the current market value in each period.
The U.S. government agency obligations have maturities greater than one year, and the Company has the intent and ability to hold them until maturity. These securities are recorded at amortized cost. At September 30, 1997 and 1996, the fair value of such securities approximated amortized cost and gross unrealized holding gains were not material.
CREDIT RISK. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit qualified financial institutions. The Company extends credit on open accounts to its customers and does not require collateral. The Company performs ongoing credit evaluations of all customers and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. At September 30, 1997, three customers accounted for 17%, 15% and 12% of accounts receivable, respectively. At September 30, 1996, two customers accounted for 12% and 11% of accounts receivable, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and depreciated using the straight-line method over their estimated useful lives, typically three to five years. Leasehold improvements are recorded at cost and amortized over the lesser of their useful lives or the remaining term of the related lease.
COMPUTER SOFTWARE COSTS. Computer software costs consist of internally developed and purchased software. Costs incurred in the research and development of new software products and enhancements to existing products are expensed as incurred until technological feasibility has been established, at which time, such costs are capitalized. Capitalized computer software costs are amortized over the economic life of the product, generally three years, using the straight-line method or a ratio of current revenues to total anticipated revenues.
The Company evaluates the net realizable value and amortization periods of computer software costs on an ongoing basis relying on a number of factors including operating results, business plans, budgets and economic projections. In addition, the Company's evaluation considers non-financial data such as market trends and customer relationships, buying patterns and product development cycles.
INCOME TAXES. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment.
NET INCOME PER SHARE. Net income per share is computed using the weighted average number of common and dilutive common stock equivalents outstanding. Dilutive common stock equivalents consist of outstanding stock options and warrants, which are included in the computation using the treasury stock method. Shares used in the computation of net income per share have been restated for the years ended September 30, 1996 and 1995 to give effect to the shares issued and options assumed by the Company in the acquisition of Virtual Chips.
NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which is required to be adopted by the Company on September 30, 1998 with quarterly disclosure. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate such amounts for all prior periods. Under the new requirements, primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share. If SFAS 128 had been effective for fiscal 1997 and 1996, it would have resulted in a basic net income per share of $0.93 and $0.81 and diluted earnings per share of $0.87 and $0.73, respectively.
In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," and Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related Information," which will be required to be adopted by the Company in fiscal 1999. In October 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," which will be required to be adopted by the Company on September 30, 1999. Adoption of these statements is not expected to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.
CASH FLOW INFORMATION. Supplemental cash flow information is as follows:
(IN THOUSANDS) 1997 1996 1995 ------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Income taxes paid during the year, net of refunds $6,373 $2,905 $1,125 Supplemental schedule of non-cash activities: Conversion of debt securities to common stock $ - $ 706 $ - |
3. SHORT TERM INVESTMENTS AND OTHER MARKETABLE SECURITIES
The short-term investments and other marketable securities were as follows:
OTHER
SHORT-TERM MARKETABLE
INVESTMENTS SECURITIES
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1997 1996 1997 1996
------------------------------------------------------------------------------
U.S. government and agency obligations $17,388 $30,290 $ 5,574 $ -
Xionics common stock - - 20,950 21,831
Commercial paper 3,957 - - -
Bankers' acceptances 1,985 997 - -
Corporate securities 2,038 - - -
------- ------- ------- -------
$25,368 $31,287 $26,524 $21,831
------- ------- ------- -------
------- ------- ------- -------
|
Property and equipment consist of the following:
(IN THOUSANDS) 1997 1996
--------------------------------------------------------------------
Equipment $ 8,763 $10,618
Leasehold improvements 3,778 1,365
Furniture and fixtures 2,183 2,496
------- -------
14,724 14,479
Less accumulated depreciation and amortization 5,117 9,380
------- -------
$ 9,607 $ 5,099
------- -------
------- -------
|
Depreciation and amortization expense related to property and equipment totaled $1,795,000, 1,825,000 and $1,278,000 for fiscal 1997, 1996 and 1995, respectively.
5. COMPUTER SOFTWARE COSTS
Computer software with costs of $6,212,000, $2,680,000 and $1,674,000 was purchased or capitalized during fiscal 1997, 1996 and 1995, respectively.
Amortization charged to cost of revenue was $5,026,000, $3,224,000 and $1,244,000 during fiscal 1997, 1996 and 1995, respectively. Accumulated amortization of capitalized computer software costs was $1,988,000 and $2,356,000 at September 30, 1997 and 1996, respectively.
6. UNSECURED LINE OF CREDIT
At September 30, 1997, there were no outstanding borrowings on the Company's $10,000,000 unsecured bank line of credit. Borrowings on the line bear interest at the bank's prime rate of interest plus 1%. The line of credit agreement contains various covenants which require the Company to operate at a profit and meet certain financial ratios, and it restricts the payment of cash dividends. The line of credit expires in February 1998.
7. INCOME TAXES
The components of the provision for income taxes from continuing operations are as follows:
(IN THOUSANDS) 1997 1996 1995
----------------------------------------------------------------------------
Current:
Federal $ 860 $ 829 $ 294
State 1,151 707 96
Foreign 6,454 4,213 1,093
Deferred:
Federal (915) (1,462) -
State (183) (408) -
------ ------- ------
Provision for Income Taxes $7,367 $ 3,879 $1,483
------ ------- ------
------ ------- ------
|
(IN THOUSANDS) 1997 1996 1995
----------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 8,058 $ 4,524 $ 3,501
State taxes, net of federal tax benefit 629 195 66
Foreign taxes not previously benefited - - 659
Tax benefit of prior year losses - (1,328) (2,784)
Research and development tax credits (1,180) (269) -
Nondeductible merger costs - 311 -
Other (140) 446 41
------- ------- -------
Provision for income taxes $ 7,367 $ 3,879 $ 1,483
------- ------- -------
------- ------- -------
|
The components of net deferred tax assets and liabilities are as follows:
(IN THOUSANDS) 1997 1996
-----------------------------------------------------------------------------
Deferred Tax Assets:
Foreign tax credits $1,710 $1,308
Research and development tax credits 1,787 1,325
Minimum tax carryforward 667 864
Reserves and accruals 1,053 795
Depreciation 1,465 1,516
Other 1,308 1,611
------- -------
Total 7,990 7,419
Less valuation allowance 2,814 3,185
------- -------
Net deferred tax assets 5,176 4,234
Deferred tax liabilities:
Capitalized software, net 1,187 1,343
Unrealized gain on available-for-sale securities 8,394 8,733
------- -------
Total deferred tax liabilities 9,581 10,076
------- -------
Net deferred tax assets (liabilities) $(4,405) $(5,842)
------- -------
------- -------
|
Due to the uncertainty surrounding the timing of the realization of the benefit of its tax attributes in future tax returns, the Company has recorded a valuation allowance against otherwise recognizable net deferred tax assets.
At September 30, 1997, the Company had available for federal income tax purposes foreign tax credits of $514,000, which expire in 2002 and research and development tax credits of $1,787,000, which expire in the years 2001 through 2012.
8. COMMITMENTS
The Company leases office facilities under operating leases. Total rent expense was $3,141,000, $2,410,000 and $1,673,000 in fiscal 1997, 1996 and 1995, respectively.
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
---------------------------------------------------------------------
1998 $ 3,628
1999 3,090
2000 2,741
2001 2,794
2002 2,283
2003 and thereafter 3,527
---------
Total minimum lease payments $ 18,063
---------
---------
|
PREFERRED STOCK. As of September 30, 1997 and 1996, no preferred stock was issued or outstanding.
STOCKHOLDER RIGHTS PLAN. The Company has a stockholder rights plan which provides existing stockholders with the right to purchase one one-hundredth preferred share for each share of common stock held in the event of certain changes in the Company's ownership. These rights may serve as a deterrent to certain abusive takeover tactics which are not in the best interests of stockholders. This plan expires in fiscal 1999.
STOCK REPURCHASE PLAN. Pursuant to a share repurchase program whereby the Board of Directors authorized the repurchase of up to 1,000,000 shares of its outstanding common stock, the Company repurchased and retired approximately 386,000 shares at a cost of approximately $5.0 million in fiscal 1997.
STOCK OPTION PLANS. The Company has various incentive stock option plans for employees, officers, consultants and independent contractors. Incentive stock options may not be granted at a price less than 100% (110% in certain cases) of the fair market value of the shares on the date of grant. Nonqualified options may not be granted at a price less than 85% of the fair value of the shares on the date of grant. To date, all grants have been made at fair market value or greater. Options vest over a period determined by the Board of Directors, generally four years, and have a term not exceeding ten years.
Option activity under the plans, including the options assumed in the Virtual Chips acquisition, was as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------------------------------------------------------------
Shares under option, September 30, 1994 3,604,316 $4.32
Options granted 477,000 $8.50
Options exercised (821,721) $3.64
Options canceled (292,674) $5.82
---------
Shares under option, September 30, 1995 2,966,921 $5.03
Options granted 1,334,377 $12.01
Options exercised (812,049) $3.69
Options canceled (161,207) $8.01
---------
Shares under option, September 30, 1996 3,328,042 $8.01
Options granted 1,236,540 $14.07
Options exercised (555,684) $4.44
Options canceled (216,446) $12.81
---------
Shares under option, September 30, 1997 3,792,452 $10.25
---------
---------
|
The following table summarizes information about stock options outstanding at September 30, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number Weighted Number
Range Outstanding Average Weighted Exercisable Weighted
of at Remaining Average at Average
Exercise Prices Sept. 30, 1997 Contractual Life Exercise Price Sept. 30,1997 Exercise Price
---------------------------------------------------------------------------------------------------------
$ 0.3100-$ 0.3100 67,700 8.37 $ 0.3100 67,700 $ 0.3100
$ 2.3800-$ 3.8750 459,327 3.83 $ 2.7167 459,140 $ 2.7162
$ 4.0000-$ 8.5000 1,086,560 6.46 $ 5.6506 823,600 $ 5.5883
$ 8.6300-$13.5000 978,852 9.03 $12.3353 155,164 $11.8091
$13.8125-$17.0000 817,033 9.23 $15.0961 131,876 $15.1589
$17.1250-$19.8750 382,980 8.90 $18.4119 80,829 $18.5344
--------- ---- -------- --------- --------
$ 0.3100-$19.8750 3,792,452 7.68 $10.2489 1,718,309 $ 6.5181
--------- ---- -------- --------- --------
--------- ---- -------- --------- --------
|
SALE OF COMMON STOCK AND WARRANT. In February 1996, the Company sold 894,971 newly issued, unregistered shares of its common stock and a warrant to purchase 1,073,965 additional shares of the Company's common stock to Intel Corporation for $10.4 million. The purchase rights under the warrant vest annually, beginning in December 1996, in increments of 214,793 shares for each of the first three years and 429,586 shares for the fourth year. The warrant becomes fully exercisable in the event of an acquisition of the Company or termination of a technology agreement between the two parties. The price at which the warrant may be exercised is $12.88 per share at September 30, 1997, increasing in annual increments to $15.22 per share. The warrant expires in April 2001.
STOCK PURCHASE PLAN. The Phoenix Technologies Ltd. 1991 Employee Stock Purchase Plan ("ESPP") allows eligible employees to purchase shares at six month intervals, through payroll deductions, at 85% of the fair market value of the Company's common stock at the beginning or end of the six-month period, whichever is less. The maximum amount each employee may contribute during an offering period is 10% of gross base pay. As of September 30, 1997, 508,789 shares had been issued under the ESPP and 141,211 shares remained reserved for future issuance.
DISCLOSURES OF STOCK-BASED COMPENSATION PLANS. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options granted subsequent to September 30, 1995 under the fair value method of that statement. The fair value of options granted in fiscal 1997 and 1996 reported below has been estimated as of the date of the grant using a Black-Scholes multiple option pricing model with the following assumptions:
Employee Stock Options Employee Stock Purchase Plan
Year ended September 30, Year ended September 30,
1997 1996 1997 1996
------------------- -------------------
Expected life (in Years) 0.90 0.90 0.50 0.50
Risk-free interest rate 6-7% 5-7% 5-6% 5-6%
Volatility 0.63 0.69 0.63 0.69
Dividend yield None None None None
|
The weighted average estimated fair value of employee stock options granted during fiscal 1997 and 1996 was $6.08 and $7.34 per share respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during fiscal 1997 and 1996 was $4.75 and $5.44, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the
Year ended September 30,
1997 1996
---------------------------
Net income:
As reported $15,655 $12,799
Pro forma $11,725 $11,793
Net income per share:
As reported $ 0.87 $ 0.73
Pro forma $ 0.67 $ 0.69
|
Because SFAS No. 123 is applicable only to options granted subsequent to September 30, 1995, the pro forma effect will not be fully reflected until fiscal year 2000.
10. VIRTUAL CHIPS ACQUISITION
In August 1996, the Company acquired all of the outstanding capital of Virtual Chips in exchange for 1,241,842 shares of the Company's common stock. Virtual Chips is a leading supplier of synthesizable cores for the computer industry. The Company also assumed Virtual Chips outstanding stock options, which were converted to options to purchase approximately 147,959 shares of the Company's common stock. The merger was accounted for as a pooling of interests and, accordingly, the consolidated financial statements of the Company for fiscal 1996 were restated to include the operations of Virtual Chips. The financial statements for fiscal 1995 were not restated as the results of operations of Virtual Chips were not material in relation to those of the Company. However, shares used to compute net income per share were restated for fiscal 1996 and 1995 to give effect to the shares issued and options assumed by the Company in the transaction. Costs of acquisition in fiscal 1996 of $889,000 are the costs associated with the acquisition of Virtual Chips, Inc. in August 1996.
11. DISCONTINUED OPERATIONS AND DIVESTITURES
PRINTER SOFTWARE DIVISION. In fiscal 1994, the Company sold all the assets of its Printer Software Division to Xionics in return for a promissory note and shares of Xionics common stock. Interest at 8% per annum was received quarterly; no payments of principal were due before January 1997. During fiscal 1995 and 1996, the Company made an additional loan to Xionics, exchanged a portion of the note for additional common shares and reflected certain adjustments to the purchase price in the note balance. In September 1996, Xionics completed an initial public offering of its common stock and repaid the net amount due to the Company. The Company sold 500,000 of its Xionics shares in the offering. The amounts received were recorded as a gain on disposal of discontinued operations, net of income taxes, to the extent such amounts were previously written off by a charge to discontinued operations. The balance of the amount received of $294,000 represents investment income and was recorded as other income. In fiscal 1997 the Company sold 250,000 additional shares of Xionics common stock for a realized gain of $3,217,000 which was recorded as other income. At September 30, 1997, the Company held 1,205,381 shares of Xionics stock with a market value of $17.38 per share, which represents approximately 10% of total outstanding Xionics common stock.
PUBLISHING DIVISION. In fiscal 1994, the Company sold 80% of its Publishing Division to Softbank Corporation of Japan ("Softbank"). At that time, Softbank and the Company established a new entity, Phoenix Publishing Systems, Inc., later renamed Softbank Content Group ("SCG"), and each contributed their respective interests in the Publishing Division to SCG in exchange for 80% and 20%, respectively, of the equity of SCG. On September 30, 1997, Phoenix exercised its right to require Softbank to repurchase the SCG shares owned by the Company for $7,500,000 and recorded a gain of $6,247,000 which is included in other income. At September 30,
OTHER INVESTMENTS. Other assets at September 30, 1996 and 1995 include equity and other investments in Softbank, Inc., a joint venture company in the amount of $2,388,000. The investment was subsequently exchanged for a non-interest bearing $2,310,000 note receivable from Softbank Holdings, Inc., which is included in other current assets at September 30, 1997. The note was subsequently collected in October 1997.
12. INTERNATIONAL INFORMATION
The Company licenses its products worldwide. Export revenues were made principally to the following geographic areas:
(IN THOUSANDS) 1997 1996 1995
---------------------------------------------------------
Asia/Pacific $28,066 $27,716 $16,246
Europe 9,374 7,328 3,258
------- ------- -------
$37,440 $35,044 $19,504
------- ------- -------
------- ------- -------
|
A summary of foreign operations, principally represented by locations in the Asia/Pacific region, is presented below.
(IN THOUSANDS) 1997 1996 1995 --------------------------------------------------------- Revenues $14,327 $4,248 $4,108 Operating income 3,498 2,120 1,136 Income before income taxes 3,526 2,107 1,304 Identifiable assets 8,186 4,849 6,777 |
13. RETIREMENT PLANS
The Company has a retirement plan which is qualified under Section 401(k) of the Internal Revenue Code. This plan covers substantially all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. In addition, Company contributions to the plan may be made at the discretion of the Board of Directors. In January 1996, the Company began making a matching contribution of 25% of each participant's contribution, up to a match of $1,000 per year per participant. The matching contributions vest over a four year period which starts with the participant's employment start date with the Company. The Company's contributions for fiscal 1997 and 1996 were $264,000 and $158,000, respectively.
Balance at Charged to Charged
Allowance for Beginning Costs and to Other Balance at
Doubtful Accounts of Year Expenses Accounts Deductions(1) Recoveries End of Year
----------------- ---------- ----------- -------- ------------- ---------- -----------
Year Ended September 30, 1997 $467,000 $148,000 $ -- $ 7,000 $ -- $608,000
Year Ended September 30, 1996 430,000 94,000 -- 88,000 31,000 467,000
Year Ended September 30, 1995 657,000 60,000 329,000 785,000 169,000 430,000
|
(1) Deductions primarily represent the write-off of uncollectable accounts receivable.
Pursuant to Section 245 of the
General Corporation Law of the State of Delaware
The undersigned, Stuart Nichols, Vice President, General Counsel and Secretary of Phoenix Technologies Ltd., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows:
(1) The Certificate of Incorporation of this Corporation, originally filed in the Office of the Secretary of State of Delaware on October 31, 1986, and recorded in the office of the Recorder of New Castle County, State of Delaware, on November 3, 1986, is hereby restated in its entirety to read as follows:
FIRST. The name of the Corporation is Phoenix Technologies Ltd.
SECOND. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted is as follows:
To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
(a) The total number of shares of capital stock which the Corporation shall have authority to issue is 40,500,000, of which 40,000,000 shall be shares of common stock, each of which shall have a par value of $.001 (the "Common Stock"), and 500,000 shall be shares of preferred stock, each of which shall have a par value of $.10 (the "Preferred Stock").
(b) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is hereby authorized, within the limitations and restrictions stated in this Restated Certificate of Incorporation, to determine or alter the rights, preferences, powers, privileges and the restrictions, qualifications and limitations granted to or imposed upon any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the
(c) Series A Junior Participating Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. There shall be designated a "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting the Series A Preferred Stock shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, and any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, quarterly dividends payable in cash on March 31, June 30, September 30 and December 31 in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of Series A Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or in the Corporation's bylaws, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(ii) During any period when the holders of Series A Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Preferred Stock, voting as a separate series, shall be entitled to elect the additional Director so provided for, and (b) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to holder such office terminates pursuant to the provisions of this Section 3(C).
(iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series A Preferred Stock entitled to vote in an election of such Director.
(iv) If, during an interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall cause a special meeting of the holders of Series A Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy.
(v) At such time as the arrearage is fully cured, and all
dividends accumulated and unpaid on any shares of Series A Preferred Stock
outstanding are paid, and, in addition, thereto, at least one regular
dividend has been paid subsequent to curing such arrearage, the term of
office of any Director elected pursuant to this Section 3(C), or his
successor, shall automatically terminate, and the authorized number of
Directors shall automatically decrease by two, the rights of the holders of
the shares of Series A Preferred Stock to vote as provided in this Section
3(C) shall cease, subject to renewal from time to time upon the same terms
and conditions, and the holders of shares of the Series A Preferred Stock
shall have only the limited voting rights elsewhere herein set forth.
(D) Except as set forth herein, or as otherwise provided in law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law.
(A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock, shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.
(B) Neither the consolidation, merger or other business combination of the Corporation with or into any other corporation nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6.
(C) In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock that were outstanding immediately prior to such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. CONSOLIDATION, MERGER, ETC. Notwithstanding anything to the contrary contained herein, in case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into any amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying
Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable.
Section 9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Preferred Stock issued either before or after the issuance of the Series A Preferred Stock, unless the terms of any such series shall provide otherwise.
Section 10. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds (2/3) of the outstanding shares of Series A Preferred Stock, voting together as a single class.
Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share which entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware.
A. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the bylaws of the Corporation (except so far as the bylaws of the Corporation adopted by the stockholders shall otherwise provide). Any bylaws made by the directors under the powers conferred hereby may be altered, amended or repealed by the directors or by the stockholders. Notwithstanding the foregoing and any other provision of law, this Restated Certificate of Incorporation or the bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, Sections 3, 10 and 11 of Article I of the bylaws shall not be altered, amended or repealed after the consummation of the first public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, without the affirmative vote of the holders of at least two-thirds (2/3) of the votes which all stockholders would be entitled to cast at any annual election of directors or class of directors except to renumber the Section designations thereof. Notwithstanding any other provision of law, this Restated Certificate of Incorporation or the bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds (2/3) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to alter, amend or repeal this paragraph of this Article.
C. The books of the Corporation may be kept at such place within or without the State of Delaware as the bylaws of the Corporation may provide or as may be designated from time to time by the Board of Directors.
SEVENTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.
EIGHTH. No holder of shares of the Common Stock shall be entitled as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class whatsoever of the Corporation, or of securities convertible into stock of any class, whether now or hereafter authorized, or whether issued for cash or other consideration or by way of dividend.
NINTH. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of Delaware is amended after the filing hereof to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of Delaware, as so amended.
A. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding") by reason of the fact that he or she, or a person of whom he
B. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (A) of this Article is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standards of conduct set forth in the General Corporation Law of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of
C. NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expense incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Restated Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
D. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware.
ELEVENTH. This Article is inserted for the management of the business and for the conduct of the affairs of the Corporation, and it is expressly provided that it is intended to be a furtherance and not in limitation or exclusion of the powers conferred by the statutes of the State of Delaware.
A. NUMBER OF DIRECTORS. Subject to the rights of the holders of Preferred Stock of the Corporation then outstanding to elect additional directors under specified circumstances, the number of directors of the Corporation shall not be less than three nor more than 13. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time pursuant to a resolution adopted by a majority of the entire Board of Directors.
B. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class 1, Class 2 and Class 3. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the authorized number of directors by three, then, if such fraction is one-third, the extra director shall be a member of Class 1 and, if such fraction is two-thirds, one of the extra directors shall be a member of Class 1 and one of the extra directors shall be a member of Class 2, unless otherwise provided for from time to time by resolution adopted by a majority of the entire Board of Directors.
C. TERMS OF OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class 1 shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year 1990; each initial director in Class 2 shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year 1988; and each initial director in Class 3 shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year 1989.
D. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a
E. QUORUM; ACTION OF MEETING. A majority of the directors at any time in office shall constitute a quorum for the transaction of business and, if at any meeting of the Board of Directors there shall be less than such a quorum, a majority of those present may adjourn the meeting from time to time. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law, by the bylaws of the Corporation or by this Restated Certificate of Incorporation.
F. REMOVAL. Subject to the rights of the holders of any Preferred Stock then outstanding, any director or the entire Board of Directors may be removed from office at any time with or without cause by the affirmative vote of the holders of at least two-thirds of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors voting together as a single class.
G. TENURE. Notwithstanding any provisions to the contrary contained herein, each director shall serve until a successor is elected and qualified or until his death, resignation or removal.
H. VACANCIES. Subject to the rights of the holders of any Preferred Stock then outstanding, any vacancies in the Board of Directors occurring for any reason and any newly created directorships resulting from any increase in the number of directors may be filled only by the Board of Directors acting by the affirmative vote of at least a majority of the directors then in office, although less than a quorum. Each director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified or until his earlier death, resignation or removal.
I. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided in the bylaws of the Corporation and the appointment of judges of election shall be made in the manner provided in the bylaws of the Corporation.
J. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law, this Restated Certificate of Incorporation or the bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds (2/3) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article;
TWELFTH. Notwithstanding any provisions of the bylaws of the Corporation, after the consummation of the first public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, stockholders of the Corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provision of law, this Restated Certificate of Incorporation or the bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds (2/3) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article.
A. Except as provided in paragraph B of this Article, after the consummation of the first public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, a Business Combination in which an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder has a direct or indirect interest shall require authorization by the affirmative vote of the holders of at least two-thirds (2/3) of the Voting Shares.
B. The provisions of paragraph A of this Article shall not be applicable to any Business Combination
(i) which is approved by a majority of the Continuing Directors,
(ii) which is solely between the Corporation and a wholly-owned subsidiary of the Corporation, or
(iii) in which no Interested Stockholder or Affiliate or Associate of an Interested Stockholder has any interest except proportionately as a stockholder of the Corporation.
C. For purposes of this Article:
(i) "Business Combination" shall mean any:
(a) merger or consolidation involving the Corporation or a Subsidiary,
(b) sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of related transactions) of all or any Substantial Part of the property and assets of the Corporation or a Subsidiary,
(c) liquidation (complete or partial) or dissolution of the Corporation or a Subsidiary,
(e) sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of related transactions) of all or a Substantial Part of the property and assets of any other corporation or other entity to the Corporation or any Subsidiary,
(f) acquisition of securities by the Corporation or a Subsidiary, or
(g) agreement, contract or other arrangement providing for any of the transactions described in clauses (a) - (f) above.
(ii) "Person" shall mean any individual, corporation, partnership, trust, or other entity. When two or more persons act as a syndicate or other group for the purpose of acquiring, holding, or disposing of Voting Shares, such syndicate or other group shall be deemed a person for purposes of this subparagraph.
(iii) "Interested Stockholder" shall mean, in respect of any Business Combination, any person (other than the Corporation or a Subsidiary, or any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any fiduciary of any such plan when acting in such capacity) who or which, as of the record date for the determination of stockholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such Business Combination, or at the time a resolution approving such Business Combination is approved by the Continuing Directors, or at the time the definitive agreement (including any amendment thereof) providing for such transaction is entered into:
(a) is the beneficial owner of more than 15% of the Voting Shares,
(b) at any time within the two-year period immediately prior to such time was the beneficial owner of more than 15% of the then outstanding Voting Shares, or
(c) is at any time an assignee of or has otherwise succeeded to the beneficial ownership of any Voting Shares which were at any time within two years prior to such time beneficially owned by any Interested Stockholder (provided such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended).
(a) with respect to which such person or any Affiliate or Associate of such person has or shares, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, voting or investment power,
(b) which such person or an Affiliate or Associate of such person has a right to acquire (whether such right is exercisable immediately or only after the passage of time) beneficial ownership of, pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or
(c) which such person or any Affiliate or Associate of such person would be deemed to beneficially own pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on June 15, 1987.
(v) The outstanding Voting Shares shall include shares deemed owned through application of subparagraph (iv) above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion or exchange rights, warrants or options, or otherwise.
(vi) "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 under the Securities Exchange Act of 1933, as in effect on June 15, 1987.
(vii) "Subsidiary" shall mean a corporation of which a majority of any class of equity or voting security is owned, directly or indirectly, by the Corporation.
(viii) "Continuing Director" shall mean (i) any director who was a duly elected and acting member of the Board of Directors on May 2, 1988 or prior to the time that the Interested Stockholder involved in a Business Combination first became an Interested Stockholder, other than the Interested Stockholder or an Affiliate or Associate of such Interested Stockholder, or (ii) any person who subsequently becomes a member of the Board of Directors who is not an Interested Stockholder, or an Affiliate or Associate of an Interested Stockholder, if such person's nomination for election or reelection is recommended or approved by a majority of the Continuing Directors.
(ix) "Substantial Part" shall mean property having a fair market value equal to more than 10% of the fair market value of the total assets of the corporation in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made.
(x) "Voting Shares" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors.
E. Nothing contained in this Article shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provision of this Restated Certificate of Incorporation, if there is any Interested Stockholder there shall be required to amend, alter, change or repeal, directly or indirectly, any provision of this Section after the consummation of the first public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, the affirmative vote of the holders of at least two-thirds (2/3) of the Voting Shares; provided, however, that this requirement shall not apply to any amendment, alteration, change or repeal recommended to the stockholders by a majority of the Continuing Directors.
FOURTEENTH. The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation and all rights conferred upon a stockholder herein are granted subject to this reservation.
(2) The foregoing Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of this Corporation in accordance with
Section 245 of the General Corporation Law of the State of Delaware.
(3) The foregoing Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of this Corporation's Certificate of Incorporation as heretofore amended, supplemented or restated, and there is no discrepancy between the provisions of this Corporation's Certificate of Incorporation as heretofore amended, supplemented or restated and the provisions of the foregoing Restated Certificate of Incorporation.
Executed and attested to on December 12, 1997.
/s/ STUART NICHOLS ------------------------------------------- Stuart Nichols Vice President, General Counsel |
Attest:
/s/ STUART NICHOLS --------------------- Stuart Nichols Secretary |
EXHIBIT 11.1
Year ended september 30,
1997 1996 1995
----------- ----------- -----------
Income from continuing operations $15,655,000 $ 9,047,000 $ 8,815,000
Gain from discontinued operations -- 3,752,000 --
----------- ----------- -----------
Net income $15,655,000 $12,799,000 $ 8,815,000
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of
common shares outstanding 16,881,000 15,991,000 14,273,000
Weighted average number
of common equivalent shares 1,142,000 1,465,000 1,490,000
----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 18,023,000 17,456,000 15,763,000
----------- ----------- -----------
----------- ----------- -----------
Primary earnings per share:
Continuing operations $0.87 $0.52 $0.56
Discontinued operations -- 0.21 --
----- ----- -----
Net income $0.87 $0.73 $0.56
----- ----- -----
----- ----- -----
|
Fully diluted earnings per share are not materially different from reported primary earnings per share.
EXHIBIT 21.1
SUBSIDIARY STATE OF INCORPORATION
Phoenix Technologies (Taiwan) Ltd. Delaware Phoenix Technologies Kabushiki Kaisha Japan Phoenix Technologies SARL France Phoenix Technologies GmbH Germany Phoenix Technologies FSL Ltd. Barbados |
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements of Phoenix Technologies Ltd. (Form S-8 File Numbers 33-58027, 33-67858, 33-30939, 33-44211, 33-81984, 333-37063 and 333-20447; Form S-3 File Number 333-16309) of our report dated October 21, 1997, with respect to the consolidated financial statements and schedule of Phoenix Technologies Ltd. included in the Annual Report (Form 10-K) for the year ended September 30, 1997.
San Jose, California
December 15, 1997
Exhibit 23.2
We consent to the incorporation by reference in the registration statements of Phoenix Technologies Ltd. On Form S-8 (File Numbers 33-58027, 33-67858, 33-30939, 33-44211, 33-81984, 333-37063 and 333-20447) and Form S-3 (File Number 333-16309) of our reports dated October 27, 1995, on our audits of the consolidated financial statements and financial statement schedule of Phoenix Technologies Ltd. as of September 30, 1995 and for the year ended September 30, 1995, which reports are included in this Annual Report (Form 10-K).
San Jose, California
December 15, 1997
ARTICLE 5
MULTIPLIER: 1,000