Phoenix Technologies Reports Fiscal 2010 Second Quarter Financial Results

Contact:

Phoenix Technologies Ltd.

Robert Andersen

Interim Chief Financial Officer

Tel: 408-570-1000

The Piacente Group, Inc.

Investor Relations

Brandi Floberg

Tel. 1-212-481-2050

[email protected]

PHOENIX TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

March 31,

September 30,

2010

2009

Assets

Current assets:

Cash and cash equivalents  

$  25,324

$         35,062

Accounts receivable, net of allowances  

4,381

6,505

Other assets - current

1,247

2,196

Assets held for sale

6,456

-

Total current assets

37,408

43,763

Property and equipment, net

3,046

4,881

Purchased technology and Intangible assets, net

2,615

7,608

Goodwill

17,414

22,205

Other assets - noncurrent

882

3,082

Total assets

$  61,365

$         81,539

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$    1,058

$           1,440

Accrued compensation and related liabilities

3,044

3,433

Deferred revenue - current

14,504

20,770

Income taxes payable

1,047

4,136

Accrued restructuring charges - current

349

146

Other liabilities - current

2,813

2,989

Liabilities related to assets held for sale

2,479

-

Total current liabilities

25,294

32,914

Accrued restructuring charges - noncurrent

38

85

Deferred revenue - noncurrent

1,090

898

Income taxes payable - noncurrent

9,196

16,348

Other liabilities - noncurrent

2,881

2,738

Total liabilities

38,499

52,983

Stockholders' equity:

Preferred stock

-

-

Common stock

36

36

Additional paid-in capital

258,487

257,975

Accumulated deficit

(142,868)

(137,058)

Accumulated other comprehensive loss

(663)

(344)

Less: Cost of treasury stock

(92,126)

(92,053)

Total stockholders' equity

22,866

28,556

Total liabilities and stockholders' equity

$  61,365

$         81,539

See notes to  unaudited condensed consolidated financial statements

PHOENIX TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

Three months ended March 31,

Six months ended March 31,

2010

2009

2010

2009

Revenues:

License fees

$           12,563

$  12,628

$       25,451

$  27,112

Subscription fees

7

67

8

129

Service fees

2,074

2,447

4,018

4,881

Total revenues

14,644

15,142

29,477

32,122

Cost of revenues:

License fees

38

198

158

286

Subscription fees

11

101

20

160

Service fees

1,907

1,992

3,497

4,030

Amortization of purchased intangible assets

332

747

663

1,698

Impairment of purchased intangible assets

-

10,483

-

10,483

Total cost of revenues

2,288

13,521

4,338

16,657

Gross margin

12,356

1,621

25,139

15,465

Operating expenses:

Research and development

7,697

10,313

16,121

20,781

Sales and marketing

3,268

5,218

7,973

10,141

General and administrative

2,533

4,987

7,222

10,607

Restructuring and asset impairment

755

957

1,236

1,050

Impairment of goodwill

-

23,872

-

23,872

         Total operating expenses

14,253

45,347

32,552

66,451

Operating loss

(1,897)

(43,726)

(7,413)

(50,986)

Interest and other income (expenses), net

(41)

335

107

605

Loss from continuing operations before income taxes

(1,938)

(43,391)

(7,306)

(50,381)

Income tax (benefit) expense

490

221

(6,058)

1,620

Loss from continuing operations

(2,428)

(43,612)

(1,248)

(52,001)

Loss from discontinued operations, net of tax

(4,444)

(11,536)

(4,562)

(12,490)

Net loss

$            (6,872)

$ (55,148)

$       (5,810)

$ (64,491)

Basic and diluted loss per share from:

Continuing operations

$              (0.07)

$     (1.53)

$         (0.04)

$     (1.83)

Discontinued operations

$              (0.13)

$     (0.40)

$         (0.13)

$     (0.44)

Net loss

$              (0.20)

$     (1.93)

$         (0.17)

$     (2.27)

Shares used in loss per share calculation:

Basic and diluted

35,035

28,560

35,027

28,465

See notes to unaudited condensed consolidated financial statements

PHOENIX TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three months ended

March 31,

December 31,

March 31,

Six months ended March 31,

2010

2009

2009

2010

2009

Cash flows from operating activities:

Net income (loss)

$  (6,872)

$          1,062

$ (55,148)

$        (5,810)

$ (64,491)

Reconciliation to net cash used in operating activities:

Depreciation and amortization

1,004

1,009

1,417

2,013

3,035

Stock-based compensation

(1,211)

1,747

2,423

536

5,554

Loss from disposal of fixed assets

68

51

4

119

4

Impairment of purchased intangible assets

319

-

11,943

319

11,943

Impairment of goodwill

3,754

-

33,213

3,754

33,213

Change in operating assets and liabilities:

Accounts receivable

(92)

2,019

(2,588)

1,927

(1,238)

Other assets

(18)

2,679

638

2,661

(146)

Accounts payable

(935)

601

(1,290)

(334)

(722)

Accrued compensation and related liabilities

635

(634)

637

1

(1,890)

Deferred revenue

(514)

(4,415)

1,261

(4,929)

1,306

Income taxes

396

(10,840)

(152)

(10,444)

447

Accrued restructuring charges

320

72

95

392

(161)

Other accrued liabilities

743

(253)

(447)

490

(888)

Net cash used in operating activities

(2,403)

(6,902)

(7,994)

(9,305)

(14,034)

Cash flows from investing activities:

Purchases of property and equipment and other intangible assets

(23)

(235)

(163)

(258)

(1,467)

Acquisition of businesses, net of cash acquired

-

-

-

-

(204)

Net cash used in investing activities

(23)

(235)

(163)

(258)

(1,671)

Cash flows from financing activities:

Proceeds from stock purchases under stock option and stock purchase plans

5

-

-

5

804

Repurchase of common stock

(81)

(21)

(52)

(102)

(87)

Principal payments under capital lease obligations

(146)

(135)

-

(281)

-

Net cash provided by (used in) financing activities

(222)

(156)

(52)

(378)

717

Effect of changes in exchange rates

103

100

(391)

203

(114)

Net decrease in cash and cash equivalents

(2,545)

(7,193)

(8,600)

(9,738)

(15,102)

Cash and cash equivalents at beginning of period

27,869

35,062

31,219

35,062

37,721

Cash and cash equivalents at end of period

$ 25,324

$        27,869

$  22,619

$        25,324

$  22,619

See notes to  unaudited condensed consolidated financial statements

PHOENIX TECHNOLOGIES LTD.

RECONCILIATION OF GAAP TO NON-GAAP NET INCOME (LOSS) AND

NET EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS

(in thousands, except per share data)

(unaudited)

Three months ended

March 31,

December 31,

March 31,

Six months ended March 31,

2010

2009

2009

2010

2009

GAAP net income (loss)

$  (6,872)

$          1,062

$ (55,148)

$ (5,810)

$ (64,491)

Less:  Loss from discontinued operations

(1)

(4,444)

(118)

(11,536)

(4,562)

(12,490)

GAAP net income (loss) from continuing operations

(2,428)

1,180

(43,612)

(1,248)

(52,001)

Equity-based compensation expense (benefit)

(2)

(1,243)

1,715

2,371

472

5,430

Restructuring and asset impairment

(3)

755

481

957

1,236

1,050

Amortization of purchased intangible assets

(4)

332

331

747

663

1,698

Impairment of intangible assets

(5)

-

-

10,483

-

10,483

Impairment of goodwill

(5)

-

-

23,872

-

23,872

Non-GAAP net income (loss) from continuing operations

$  (2,584)

$          3,707

$   (5,182)

$  1,123

$   (9,468)

Non-GAAP earnings (loss) per share from continuing operations:

Basic

$    (0.07)

$            0.11

$     (0.18)

$    0.03

$     (0.33)

Diluted

$    (0.07)

$            0.11

$     (0.18)

$    0.03

$     (0.33)

Shares used in earnings (loss) per share calculation:

Basic

35,035

35,019

28,560

35,027

28,465

Diluted

35,035

35,019

28,560

35,037

28,465

These adjustments reconcile the Company's GAAP net income (loss) from continuing operations to the reported non-GAAP net income (loss) from continuing operations. The Company believes that presentation of net income (loss) and net earnings (loss) per share from continuing operations excluding equity-based compensation,  restructuring and asset impairment charges, amortization of purchased intangible assets and impairment of intangible assets and goodwill provides meaningful supplemental information to investors, as well as management, that is indicative of the Company's core operating results and facilitates comparison of operating results across reporting periods as well as comparison with other companies. The Company uses these non-GAAP measures when evaluating its financial results as well as for internal planning and budgeting purposes. Equity-based compensation is excluded because management believes it is useful to investors to understand how the expenses associated with the grant of stock options are reflected in net income (loss).  Restructuring and related asset impairment charges are excluded since they may not be considered directly related to our ongoing business operations.  Amortization of purchased intangible assets, principally purchased technology, are excluded since it generally cannot be changed by management after an acquisition has occurred.  Impairment of intangible assets and goodwill are excluded since management believes that these charges are not directly related to the underlying performance of the Company's core business operations and eliminating these will assist investors to compare current versus past operational performance.  These non-GAAP measures should not be viewed as a substitute for the Company's GAAP results, and may be different than non-GAAP measures used by other companies.

(1)  During the second quarter of fiscal 2010, the Company classified revenues and expenses related to its eSupport business operations as discontinued operations.  Accordingly, Phoenix’s financial statements have been reclassified for all periods presented to reflect the current discontinued operations treatment.   For the three months ended March 31, 2010, loss from discontinued operations of $4.4 million include expenses of $5.1 million (including the impairment  related charges for goodwill, intangible and tangible assets and costs to sell of $4.3 million), offset by revenues of $0.7 million.  For the three months ended December 31, 2009, loss from discontinued operations of $118,000 include expenses of $0.8 million, offset by revenues of $0.7 million.  For the three months ended March 31, 2009, loss from discontinued operations of $11.5 million include expenses of $12.2 million (including the impairment  related charges for goodwill and intangible assets of $10.8 million), offset by revenues of $0.7 million.   For the six months ended March 31, 2010, loss from discontinued operations of $4.6 million include expenses of $6.0 million (including the impairment  related charges for goodwill, intangible  and tangible assets and costs to sell of $4.3 million), offset by revenues of $1.4 million.  For the six months ended March 31, 2009, loss from discontinued operations of $12.5 million include expenses of $13.6 million (including the impairment related charges for goodwill and intangible assets of $10.8 million), offset by revenues of $1.1 million.  

(2)  This represents equity-based compensation expense related to the grant of stock options beginning October 1, 2005.  For the three months ended March 31, 2010, equity-based compensation benefit was $(1.2) million, allocated as follows:  $68,000 to cost of revenues, $0.5 million to research and development, $0.2 million to sales and marketing and $(2.0) million to general and administrative.  For the three months ended December 31, 2009, equity-based compensation expense was $1.7 million, allocated as follows:  $72,000 to cost of revenues, $0.4 million to research and development, $0.2 million to sales and marketing and $1.0 million to general and administrative.  For the three months ended March 31, 2009, equity-based compensation was $2.4 million, allocated as follows:  $90,000 to cost of revenues, $0.7 million to research and development, $0.3 million to sales and marketing and $1.3 million to general and administrative.   For the six months ended March 31, 2010,  equity-based compensation was $0.5 million, allocated as follows: $0.2 million to cost of revenues, $0.9 million to research and development, $0.4 million to sales and marketing and $(1.0) million to general and administrative.    For the six months ended March 31, 2009,  equity-based compensation was $5.4 million, allocated as follows: $0.3 million to cost of revenues, $1.6 million to research and development, $0.7 million to sales and marketing and $2.8 million to general and administrative.   Management believes that it is useful to investors to understand how the expenses associated with the grant of stock options are reflected in net income (loss).

The quarter ended March 31, 2008 was the first quarter during which the Company reported equity-based compensation expense in respect of stock options granted to the Company’s four most senior executives as approved by the Company’s stockholders on January 2, 2008.  In addition, in November 2009, the compensation committee of the Board approved an additional grant of 400,000 shares of the Company's common stock to two of these senior executive officers.  These stock option grants are collectively referred to as Performance Options.  During the current quarter ended March 31, 2010, the Company terminated the employment of two of its most senior executive officers and accordingly reversed previously recognized stock-based compensation cost of $2.6 million for certain awards based on market conditions, as the requisite service period was not rendered for some of the tranches associated with these awards.  Since the reversal of expense exceeded the compensation expense of $1.4 million recorded on all other stock options, this resulted in net stock-based compensation benefit of $1.2 million for the current quarter ended March 31, 2010.  Of the $1.7 million of equity-based compensation for the three months ended December 31, 2009, $0.5 million resulted from the grant of the Performance Options.  Of the $2.4 million of equity-based compensation for the three months ended March 31, 2009, $1.0 million resulted from the grant of the Performance Options.  Of the $0.5 million of equity-based compensation for the six months ended March 31, 2010, $0.2 million resulted from the grant of the Performance Options.  Of the $5.4 million of equity-based compensation for the six months ended March 31, 2009, $2.5 million resulted from the grant of the Performance Options.

(3)  The Company has incurred restructuring and related asset impairment expenses, primarily due to the workforce related charges such as payments for severance and benefits, asset impairments, estimated costs of exiting and terminating facility lease commitments and other exit costs related to formal restructuring plans approved by the Board of Directors/management in fiscal years 2006, 2007 and 2009 and in October 2009 and January 2010.  For the three months ended March 31, 2010, restructuring and related asset impairment costs totaled $0.8 million, which relates mainly to the severance and other employee related costs incurred in relation to the restructuring plan announced during the current quarter as well as certain true-up adjustments recorded in relation to the restructuring activities announced during the prior periods.   As part of the current quarter restructuring activities in January 2010, management approved a restructuring plan for the purpose of reducing future operating expenses by eliminating 37 employee positions.  For the three months ended December 31, 2009, restructuring and related asset impairment costs totaled $0.5 million, which relates mainly to the severance, other employee related costs, asset impairments and other exit costs incurred in relation to the restructuring plan announced during that quarter as well as certain true-up adjustments recorded in relation to the restructuring activities announced during the prior periods.  As part of these restructuring activities, the Company closed its  facility in Nanjing, China.  For the three months ended March 31, 2009, restructuring costs totaled $1.0 million, which relates mainly to the severance and other employee related costs incurred in relation to the two restructuring plans announced during the quarter ended March 31, 2009.  As part of these restructuring activities, the Company reduced its global workforce by 96 employees and closed its facility in Tel Aviv, Israel.  For the six months ended March 31, 2010, restructuring costs totaled $1.2 million, which relates mainly to the severance, other employee related costs, asset impairments and other exit costs incurred in relation to the two restructuring plans announced during the current fiscal year as well as certain true-up adjustments recorded in relation to the restructuring activities announced during the prior periods.  For the six months ended March 31, 2009, restructuring costs totaled $1.1 million, which relates mainly to the severance and other employee related cost incurred in relation to the two restructuring plans announced during the quarter ended March 31, 2009 as well as certain true-up adjustments recorded in relation to the restructuring activities announced during the prior periods.

(4)  This represents amortization of purchased intangible assets, principally purchased technology.  For the three months ended March 31, 2010, amortization charges were $0.3 million, which include $0.2 million related to the amortization of the acquired assets from the acquisitions completed in the second half of fiscal year 2008  (excluding eSupport, which is classified under discontinued operations) and $0.1 million related to the amortization of certain other acquired intangible assets.  For the three months ended December 31, 2009, amortization charges were $0.3 million, which include $0.2 million related to the amortization of the acquired assets from the acquisitions completed in the second half of fiscal year 2008 (excluding eSupport) and $0.1 million related to the amortization of certain other acquired intangible assets.  For the three months ended March 31, 2009, amortization of purchased intangible assets was $0.7 million, which include $0.4 million related to the amortization of the acquired assets from the acquisitions completed in the second half of fiscal year 2008 (excluding eSupport) and $0.3 million related to the amortization of certain other acquired intangible assets.  For the six months ended March 31, 2010, amortization of purchased intangible assets was $0.7 million, which include $0.4 million related to the amortization of the acquired assets from the acquisitions completed in the second half of fiscal year 2008 (excluding eSupport) and $0.3 million related to the amortization of certain other acquired intangible assets.  For the six months ended March 31, 2009, amortization of purchased intangible assets was $1.7 million, which include $1.4 million related to the amortization of the acquired assets from the acquisitions completed in the second half of fiscal year 2008 (excluding eSupport) and $0.3 million related to the amortization of certain other acquired intangible assets.

(5) This represents impairment charges recorded in respect of goodwill and other intangible assets. For the three months and six months ended March 31, 2009, impairment of intangible assets was $10.5 million and impairment of goodwill was $23.9 million, which included the impairments of the acquired assets from the acquisitions completed in the second half of fiscal year 2008 (except eSupport ,charges in  respect of which are classified under discontinued operations).  There were no impairment charges recorded on intangible assets or goodwill related to the Company's continuing operations in any other periods presented. Impairment related charges typically occur when the financial performance of the business utilizing the affected assets falls below certain thresholds or certain assets are designated as held for sale.  Impairment charges  recorded by the Company in respect of goodwill and other tangible and intangible assets associated with eSupport disposal group are classified under discontinued operations (see note 1 above).  Goodwill and intangible assets related impairment charges are generally unpredictable and several factors could result in further impairment of the remaining goodwill and intangible assets in the future periods.