SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____ to ____.
Commission file number 0-27988
MICROWARE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1073916
(State of incorporation) (I.R.S. Employer Identification No.)
1900 N.W. 114TH ST. DES MOINES, IOWA 50325
(Address of principal executive office)
(515) 223-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK: 13,575,952 SHARES OUTSTANDING AS OF AUGUST 9, 1996
<PAGE>
MICROWARE SYSTEMS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying financial information is unaudited but, in the opinion
of management, reflects all adjustments (which include only normally
recurring adjustments) necessary for a fair presentation of the results
for the periods shown. The audited financial statements and notes
thereto for the year ended March 31, 1996 are included in the Form 10-K
Annual Report previously filed with the Securities and Exchange
Commission.
The results for the quarter ended June 30, 1996, are not necessarily
indicative of the results to be expected for the entire year.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1995 1996
--------- ---------
( $ in thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Products $3,242 $3,964
Services 1,526 2,846
--------- ---------
4,768 6,810
--------- ---------
Cost of revenues:
Products 453 568
Services 438 770
--------- ---------
891 1,338
--------- ---------
Gross Profit 3,877 5,472
Operating expenses:
Research & development 1,283 1,694
Sales & marketing 1,759 2,355
General & administrative 975 768
--------- ---------
Total operating expenses 4,017 4,817
--------- ---------
Operating profit (loss) (140) 655
--------- ---------
Other income and (expense):
Foreign currency gain (loss), net 0 12
Interest expense (37) (4)
Interest income 8 324
--------- ---------
Total Other (29) 332
--------- ---------
(Loss) income before tax (169) 987
Income tax expense 30 240
--------- ---------
Net (Loss) income ($199) $747
========== =========
(Loss) earnings per share ($0.02) $0.05
========== =========
Weighted average number of Common and
Common Equivalent Shares outstanding 9,540 15,555
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
(unaudited)
--------- ---------
( $ in thousands, except
per share amounts)
ASSETS
<S> <C> <C>
Current assets:
Cash and short-term investments $12,337 $26,372
Trade receivables, net of allowance
for doubtful accounts of
$366 and $366, respectively 4,946 6,291
Income taxes receivable 211 0
Inventories 39 77
Prepaid expenses and other current assets 226 433
Deferred tax assets 518 562
--------- ---------
Total current assets 18,277 33,735
Property and equipment:
Land and improvements 144 144
Building 2,017 2,017
Furniture, fixtures & equipment 3,316 3,655
R&D equipment 2,900 3,081
Leasehold improvements 102 102
Construction in progress 25 2,289
--------- ---------
8,504 11,288
Less accumulated depreciation
and amortization 4,502 4,704
--------- ---------
Net property and equipment 4,002 6,584
Other assets:
Intangible assets, net 1,228 1,469
Deposits and other 1,431 916
--------- ---------
2,659 2,385
--------- ---------
$24,938 $42,704
========== =========
LIABILITIES
Current liabilities:
Notes payable to banks $873 $366
Current portion of long term debt 39 40
Accounts payable 1,665 1,446
Accrued expenses 1,361 1,078
Deferred revenue 888 1,055
Income taxes payable 151 327
--------- ---------
Total current liabilities 4,977 4,312
Long-term debt,less current 1,188 1,178
Deferred income taxes 230 229
--------- ---------
Total liabilties 6,395 5,719
--------- ---------
Stockholders' equity
Series A preferred stock, $14.71 par
value; 340,000 shares issued and
outstanding 5,001 0
Series I preferred stock, no par
value; 500,000 shares authorized;
none outstanding 0 0
Common stock, voting, no par value;
50,000,000 shares authorized;
8,909,320 and 13,801,052 shares
issued, 8,684,220 and 13,575,952
shares outstanding 13,094 35,832
Retained earnings 1,660 2,407
Cummulative adjustment for foreign
currency translation (435) (477)
--------- ---------
19,320 37,762
Less cost of common stock acquired
for the treasury, 250,100 and
250,100 shares 777 777
--------- ---------
Total stockholders' equity 18,543 36,985
--------- ---------
$24,938 $42,704
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1995 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ($199) $747
Adjustments to reconcile net (loss)
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 150 306
Deferred income taxes (298) (73)
Change in assets and liabilities:
Trade receivables, net 159 (1,359)
Inventories (54) (39)
Other current assets 31 (209)
Income taxes receivable 298 242
Other assets (14) 206
Accounts payable (221) (14)
Accrued expenses (659) (279)
Deferred revenue 888 171
Income taxes payable 117 172
--------- ---------
Net cash provided by (used in)
operating activities 198 (329)
--------- ---------
Cash flows from investing activities:
Capital expenditures (85) (676)
Purchase of land 0 (2,163)
--------- ---------
Net cash used in investing activities (85) (2,839)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable
to banks and long-term debt (556) (509)
Proceeds from issuance of Common Stock 0 18,605
Cost of issuance of Common Stock 0 (869)
--------- ---------
Net cash (used in) provided by
financing activities (556) 17,227
Effect of foreign currency exchange rate
changes on cash (74) (24)
--------- ---------
Net (decrease) increase in cash and
short-term investments (517) 14,035
Cash and short-term investments at
beginning of period 1,516 12,337
--------- ---------
Cash and short-term investments at
end of period $999 $26,372
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $37 $28
========== =========
Cash paid for taxes $32 $72
========== =========
</TABLE>
Supplemental disclosure of noncash financing activities:
In connection with the Company's initial public offering effective
April 2, 1996, the 340,000 shares of Series A Preferred Stock were
each converted into 4 shares of Common Stock.
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30,1996 AND 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with the rules and regulations of the Securities and
Exchange Commission, the preceding unaudited financial statements omit
or condense certain information and footnote disclosure normally
required for complete financial statements prepared in accordance with
generally accepted accounting principles. In the opinion of management,
all adjustments (which include reclassifications and normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows at June 30, 1996 and for all periods
presented, have been made.
2. NET EARNINGS PER SHARE
Net earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding. Dilutive
common equivalent shares are calculated using the treasury stock method
and consist of common stock issuable upon the exercise of options and
warrants.
<PAGE>
MICROWARE SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Except for the historical information contained herein, the following
discussion may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in
this section, as well as in the sections included in the Form 10-K
Annual Report previously filed with the Securities Exchange Commission.
The Company completed an initial public offering, effective April 2,
1996 (the "IPO"), selling 2,000,000 shares of Common Stock newly issued
by the Company and 750,000 shares offered by selling shareholders. The
net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock were approximately $17,700,000 after deducting underwriting
discounts and commissions and offering expenses. The price of
Microware's Common Stock may fluctuate widely in the future due to
actual or anticipated variations in the Company's operating results,
announcements of technical innovations or new products or services by
the Company or its competitors, changes in earnings estimates by
securities analysts and other factors, including changes in conditions
of the software and other technology industries in general.
The Company is currently planning to consolidate its Des Moines
operations into a new corporate headquarters facility near its current
headquarters. On May 9, 1996, the Company purchased approximately 17.5
acres of land for approximately $2.1 million in cash, on which the
Company currently expects to construct a new office building
accommodating approximately 88,000 square feet of office space at a cost
estimate of $9 million (including associated land). The Company entered
into a Development Agreement with the City of Clive, Iowa, pursuant to
which the City will refund to Microware over the next 10 years 100
percent of the property taxes attributable to Microware's improvement of
the property. The City has also approved the rezoning and development
plans for Microware's project. The Company expects to finalize its
plans and begin construction of the new facility during the current
fiscal year. There can be no assurance that the Company will
successfully complete the project within the budget, that the Company
will be able to sell its existing headquarters facility at a price in
excess of its current investment, that the Company will later be able to
sell any portions of its newly purchased land at a price in excess of
the purchase price, or that the relocation will not disrupt the
Company's operations or affect the Company's operating results over the
near term.
RESULTS OF OPERATIONS
First Quarter of Fiscal 1997 Compared to the First Quarter of Fiscal
1996
Revenues
Total Revenues for the first quarter of fiscal 1997 increased by 42.8%,
or $2 million, as compared to the same quarter in fiscal 1996. Products
and services revenues increased 22.2% and 86.5%, respectively, comparing
those same periods. The increase in overall company revenues primarily
was the result of an increase in custom contract engineering revenues
and support activity reported in services revenue. The increase in
custom contract engineering revenue includes activities related to the
porting of OS-9 to advanced microprocessors, wireless personal
communication devices, Internet/intranet appliances, along with related
engineering advisory services.
Cost of Revenues
Total cost of revenues increased by 50.1%, or $447,000, from 18.7% of
sales in the first quarter of fiscal 1996, to 19.6% in the same period
in fiscal 1997. Comparing the same periods, products cost of revenues
increased $115,000 from $453,000 to $568,000, reflecting the higher
direct and indirect costs for documentation, production quality, manuals
and media for software products, as well as those costs associated with
packaging, shipping and delivery of the products to the customer.
Services cost of revenues increased by 76.0%, or $332,000, but decreased
by 1.7% of services revenues from 28.7% to 27.0% between the first three
months of fiscal 1996 and fiscal 1997. The decrease in the cost of
services revenues as a percentage of related sales was benefited by two
custom engineering contracts signed in the quarter for which a
substantial amount of work sold had been performed and expensed as
research and development in prior quarters.
Research and Development
Research and development expense increased by 33.9%, or $411,000, in the
first three months of fiscal 1997, as compared to the same period in
fiscal 1996. This increase primarily resulted from an increase of 22
people, along with associated costs, in the company's technical staff
from the first quarter of fiscal 1996 to the first quarter of fiscal
1997.
Sales and Marketing
Sales and marketing expense increased by 32.3%, or $596,000, but
decreased as a percentage of sales from 36.9% to 34.5% in the first
three months of fiscal 1997, as compared to the same period in the prior
year. This increase was primarily due to costs associated with the
opening of an Osaka, Japan sales office; termination costs for an
employee at the Company's French subsidiary; organizational changes in
responsibilities from general management duties to sales and marketing
more directly related to revenue production; and higher commission
amounts accruing due to the increase in revenues.
General and Administrative Expense
General and administrative expense decreased 21.2%, or $207,000, from
$975,000 in the first quarter of fiscal 1996, to $763,000 in the first
quarter of fiscal 1997. The primary reason for the reduction in expense
accrues to organizational changes in management responsibilities from
general management to more direct duties associated with revenue
production.
Interest Income
Interest income increased $316,000, from $8,000 in the first three
months of fiscal 1996 to $324,000 in the same period of fiscal 1997.
The increase in interest income principally was due to the investment of
$29.8 million in net cash proceeds from a combination of the issuance of
Common Stock and warrants to Motorola, Inc. ($12.1 million) and the
sale of 2,000,000 new shares of Common Stock in the IPO ($17.7 million).
The Company's investment policy requires that treasury bills or
other similar government securities be the primary investment
vehicle.
Income Tax Expense
In the first quarter of fiscal 1996, $30,000 was recorded as income tax
expense on a loss before tax of $169,000. In the first three months of
fiscal 1997, the Company recorded $240,000 in income tax expense on
$987,000 in income before tax. The effective tax rate is based upon
various annualized estimates including the country location of income
and associated utilization of net operating loss carry forwards and
other tax beneficial transactions.
Liquidity and Capital Resources
At June 30, 1996, the Company had net working capital in excess of $29
million and approximately $26 million in cash and short-term
investments. This, in combination with the company's $1 million line of
credit (which bears interest at the bank's base rate) and the cash flow
from operations, are anticipated to be sufficient to meet the Company's
financial needs through the foreseeable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material litigation and is not
aware of any pending or threatened litigation that would have a material
adverse effect on the Company or its business.
ITEM 2. CHANGES IN SECURITIES.
(a.) Effective upon the completion of the Company's IPO, which
occurred on the closing of the IPO on April 9, 1996, all shares of
previously issued Series A Preferred Stock converted to Common Stock
pursuant to the Company's Articles of Incorporation and the March 31,
1994 Stock Purchase Agreement between the Company and the holders of the
Series A Preferred Stock. Contemporaneously with the closing of the
IPO, the Company filed Amended and Restated Articles of Incorporation
eliminating the Series A Preferred Stock as a separate class of stock.
(b.) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibits 27 - Financial Data Schedule (EDGAR version
only).
(b.) On April 29, 1996, the Company filed a Report on Form 8-K
incorporating a cautionary statement for purposes of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
No other items.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto authorized.
MICROWARE SYSTEMS CORPORATION
Date: August 9, 1996 /s/ GEORGE J. BARRY
-----------------------
George J. Barry
Chief Financial Officer,
Executive Vice President-
Financial & Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 6/30/96 and the Statement of Consolidated
Earnings for the quarter ended 6/30/96 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 26372
<SECURITIES> 0
<RECEIVABLES> 6657
<ALLOWANCES> 366
<INVENTORY> 77
<CURRENT-ASSETS> 33735
<PP&E> 11288
<DEPRECIATION> 4704
<TOTAL-ASSETS> 42704
<CURRENT-LIABILITIES> 4312
<BONDS> 0
0
0
<COMMON> 35832
<OTHER-SE> 1153
<TOTAL-LIABILITY-AND-EQUITY> 42704
<SALES> 3964
<TOTAL-REVENUES> 6810
<CGS> 568
<TOTAL-COSTS> 1338
<OTHER-EXPENSES> 4817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 987
<INCOME-TAX> 240
<INCOME-CONTINUING> 747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 747
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
