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
September 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: 13,655,802 SHARES OUTSTANDING AS OF September 30, 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 September 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 SIX MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
------------------- -------------------
1995 1996 1995 1996
------- ------- ------- -------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Product $4,375 $3,957 $7,617 $7,921
Services 2,013 3,340 3,539 6,186
------- ------- ------- -------
6,388 7,297 11,156 14,107
------- ------- ------- -------
Cost of revenues:
Product 845 679 1,298 1,247
Services 595 950 1,033 1,720
------- ------- ------- -------
1,440 1,629 2,331 2,967
------- ------- ------- -------
Gross profit 4,948 5,668 8,825 11,140
Operating expenses:
Research & development 1,304 1,728 2,587 3,422
Sales & marketing 1,811 2,418 3,570 4,773
General & administrative 1,133 849 2,108 1,617
------- ------- ------- -------
Total operating expenses 4,248 4,995 8,265 9,812
------- ------- ------- -------
Operating profit 700 673 560 1,328
------- ------- ------- -------
Other income and (expense):
Foreign currency gain, net 83 10 83 22
Interest expense (34) (32) (71) (36)
Interest income 84 358 92 682
------- ------- ------- -------
Total other 133 336 104 668
------- ------- ------- -------
Earnings before income tax expense 833 1,009 664 1,996
Income tax expense 55 242 85 482
------- ------- ------- -------
Net earnings $778 $767 $579 $1,514
======== ======= ======== =======
Net earnings per share $0.06 $0.05 $0.05 $0.10
======== ======= ======== =======
Weighted average common and common
equivalent shares outstanding 13,416 16,287 12,668 15,900
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, Sept. 30,
1996 1996
(unaudited)
--------- ---------
( $ in thousands, except
per share amounts)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,337 $7,847
Short-term investments - 20,199
Trade receivables, net of allowance
for doubtful accounts of
$366 and $362, respectively 4,946 7,098
Income taxes receivable 211 -
Inventories 39 59
Prepaid royalties - 848
Prepaid expenses and other current assets 226 392
Deferred tax assets 518 906
--------- ---------
Total current assets 18,277 37,349
--------- ---------
Property and equipment:
Land and improvements 144 144
Building 2,017 2,017
Furniture, fixtures & equipment 3,316 3,836
R&D equipment 2,900 3,291
Leasehold improvements 102 104
Construction in progress 25 2,500
--------- ---------
8,504 11,892
Less accumulated depreciation
and amortization 4,502 4,957
--------- ---------
Net property and equipment 4,002 6,935
--------- ---------
Other assets:
Intangible assets, net 1,228 1,487
Deposits and other 1,431 920
--------- ---------
2,659 2,407
--------- ---------
$24,938 $46,691
========== =========
LIABILITIES
Current liabilities:
Notes payable to banks $873 $360
Current portion of long term debt 39 40
Accounts payable 1,665 914
Accrued expenses 1,361 1,768
Deferred revenues 888 915
Income taxes payable 151 345
--------- ---------
Total current liabilities 4,977 4,342
Long-term debt, less current 1,188 3,861
Deferred income taxes 230 226
--------- ---------
Total liabilities 6,395 8,429
--------- ---------
SHAREHOLDERS' EQUITY
Series A preferred stock, $14.71 par
value; 340,000 shares authorized,
issued and outstanding 5,001 -
Series I preferred stock, no par
value; 500,000 shares authorized;
none issued or outstanding - -
Common stock, voting, no par value;
50,000,000 shares authorized;
10,439,552 and 13,880,902 shares
issued, 10,214,452 and 13,655,802
shares outstanding 13,094 36,373
Retained earnings 1,660 3,174
Cumulative adjustment for foreign
currency translation (435) (508)
--------- ---------
19,320 39,039
Less cost of common shares acquired
for the treasury, 225,100 and
225,100 shares 777 777
--------- ---------
Total shareholders' equity 18,543 38,262
--------- ---------
$24,938 $46,691
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPT. 30,
---------------------------
1995 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $579 $1,514
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 502 739
Deferred income taxes (298) (421)
Change in assets and liabilities:
Trade receivables, net (1,273) (2,169)
Inventories (19) (20)
Prepaid royalties - (848)
Other current assets (163) (168)
Income taxes receivable 298 242
Other assets 42 (557)
Accounts payable (237) (744)
Accrued expenses 2 418
Deferred revenues 653 29
Income taxes payable 4 189
--------- ---------
Net cash provided by (used in)
operating activities 90 (1,796)
--------- ---------
Cash flows from investing activities:
Capital expenditures (403) (1,308)
Purchase of land - (2,163)
Purchases of short-term investments - (25,699)
Maturities of short-term investments - 5,500
--------- ---------
Net cash used in investing activities (403) (23,670)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable
to banks and long-term debt 2,164 3,125
Principal payments on notes payable
to banks and long-term debt (2,721) (950)
Proceeds from issuance of common stock 12,100 19,238
Cost of issuance of common stock (48) (394)
--------- ---------
Net cash provided by
financing activities 11,495 21,019
Effect of foreign currency exchange
rate changes on cash (190) (43)
--------- ---------
Net increase (decrease) in cash
and cash equivalents 10,992 (4,490)
Cash and cash equivalents
at beginning of period 1,516 12,337
--------- ---------
Cash and cash equivalents
at end of period $12,508 $7,847
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $75 $85
========== =========
Cash paid for taxes $6 $92
========== =========
</TABLE>
Supplemental disclosure of non-cash 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 SIX MONTHS ENDED SEPTEMBER 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 September 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>
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 Company's Form 10-K
Annual Report for the fiscal year ended March 31, 1996.
RESULTS OF OPERATIONS
Second Quarter of Fiscal 1997 Compared to
- -----------------------------------------
the Second Quarter of Fiscal 1996
---------------------------------
Revenues
Total revenues increased 14.2 percent or $909,000 from $6.4 million in
the second quarter of Fiscal 1996 to $7.3 million in the second quarter
of Fiscal 1997. Product revenues decreased 9.6 percent or $418,000 from
$4.4 million in the second quarter of Fiscal 1996 to $4.0 million in the
second quarter of Fiscal 1997. Product revenues decreased from the
second quarter of Fiscal 1996 to the second quarter of Fiscal 1997
primarily due to a decrease in initial DAVID development license fees
and a slower deployment of customer set-top-boxes in various digital and
interactive television trials for which the Company is entitled to
receive run-time royalties. Services revenues increased 65.9 percent or
$1.3 million from $2.0 million in the second quarter of Fiscal 1996 to
$3.3 million in the second quarter of Fiscal 1997. Services revenues
increased from the second quarter of Fiscal 1996 to the second quarter
of Fiscal 1997 primarily as a result of the Company engaging in the
following three processor ports: ARM; Hitachi SH-3 and Integrated Device
Technology - MIPS. In addition, services revenues increased as a result
of the Company performing product development and localization work for
key wireless, Internet and DAVID customers. Management anticipates that
the ratio of services revenues to total revenues will remain relatively
constant for the remainder of Fiscal 1997.
Cost of Revenues
Total cost of revenues increased 13.1 percent or $189,000 from $1.4
million in the second quarter of Fiscal 1996 to $1.6 million in the
second quarter of Fiscal 1997. Cost of product revenues decreased
$166,000 from $845,000 in the second quarter of Fiscal 1996 to $679,000
in the second quarter of Fiscal 1997 primarily due to the reduction in
overall product revenues between quarters. Cost of services revenues
increased from $595,000 to $950,000, but decreased as a percentage of
services revenues from 29.6 percent to 28.4 percent for the second
quarters ended in Fiscal 1996 and 1997, respectively. The decrease in
cost of services revenues as a percentage of services revenues is
attributable to higher margins on custom contract work.
Research and Development
Research and development expenses increased 32.5 percent or $424,000 from
$1.3 million in the second quarter of Fiscal 1996 to $1.7 million in the
second quarter of Fiscal 1997. This increase primarily resulted from an
increase of 18 employees, along with associated costs, in the Company's
technical staff from the second quarter in Fiscal 1996 to the second
quarter in Fiscal 1997. Additional technical staff was added primarily
to support additional Internet, wireless and Digital TV product offerings.
Sales and Marketing
Sales and marketing expense increased 33.5 percent or $607,000 from $1.8
million in the second quarter of Fiscal 1996 to $2.4 million in the
second quarter of Fiscal 1997. The overall increase is primarily
attributable to costs associated with the opening of a branch office in
Munich, Germany, a sales office in Osaka, Japan, new sales personnel in
Paris, France and organizational changes in responsibilities from general
management to duties more directly related to revenue production.
General and Administrative Expense
General and administrative expense decreased 25.1 percent or $284,000
from $1.1 million in the second quarter of Fiscal 1996 to $849,000 in
the second quarter of Fiscal 1997. The primary reason for the overall
decrease is organizational changes in management responsibilities from
general management to more direct duties associated with revenue
production.
Six Months Year-to-Date of Fiscal 1997 Compared to
- --------------------------------------------------
the Six Months Year-to-Date of Fiscal 1996
------------------------------------------
Revenues
Total revenues increased 26.4 percent or $2.9 million from $11.2 million
for the six month period ended September 30 ,1995 to $14.1 million for
the six month period ended September 30 ,1996. Product revenues
increased 4.0 percent or $304,000 from $7.6 million in the six month
period ended September 30, 1995 to $7.9 million in the six month period
ended September 30, 1996. The increase in product revenues from the
six month period ended September 30 ,1995 to the six month period ended
September 30, 1996 results primarily from an increase in initial
development license fees from the Company's wireless and Internet
products. Services revenues increased 74.8 percent or $2.6 million from
$3.5 million in the six month period ended September 30, 1995 to $6.2
million in the six month period ended September 30, 1996. Services
revenues increased from the six month period ended September 30 ,1995 to
the six month period ended September 30 ,1996 primarily as a result of
the Company engaging in the following three processor ports: ARM; Hitachi
SH-3 and Integrated Device Technology - MIPS. In addition, services
revenues increased as a result of the Company performing product
development and localization services for key wireless, Internet and
DAVID customers. Management anticipates that the ratio of services
revenues to total revenues will remain relatively constant for the
remainder of Fiscal 1997.
Cost of Revenues
Total cost of revenues increased 27.3 percent or $636,000 from $2.3
million in the six month period ended September 30,1995 to $3.0 million
in the six month period ended September 30, 1996. As a percentage of
total revenues, total cost of revenues remained relatively constant at
20.9 and 21.0 percent for the six months ended September 30, 1995 and
1996, respectively. As a percentage of product revenues, cost of product
revenues decreased slightly from 17.0 percent in the six month period
ended September 30, 1995 to 15.7 percent in the six month period ended
September 30, 1996. The slight decrease is primarily attributable to
efficiencies gained in packaging, shipping and production. As a
percentage of services revenues, cost of services revenues decreased from
29.2 percent in the six month period ended September 30, 1995 to 27.8
percent in the six month period ended September 30, 1996. The decrease in
cost of services revenues as a percentage of services revenues is
attributable to higher margins on custom contract work.
Research and Development
Research and development expenses increased 32.3 percent or $835,000 from
$2.6 million in the six month period ended September 30, 1995 to $3.4
million in the six month period ended September 30, 1996. This increase
primarily resulted from an increase of 20 employees, along with
associated costs, in the Company's technical staff from the six month
period ended September 30, 1995 to the six month period ended September
30, 1996. Additional technical staff was added primarily to support
additional Internet, wireless and Digital TV product offerings.
Sales and Marketing
Sales and marketing expense increased 33.7 percent or $1.2 million from
$3.6 million in the six month period ended September 30, 1995 to $4.8
million in the six month period ended September 30, 1996. The overall
increase is primarily attributable to costs associated with the opening
of a branch office in Munich, Germany, a sales office in Osaka, Japan,
new sales personnel in Paris, France and organizational changes in
responsibilities from general management duties to duties more directly
related to revenue production.
General and Administrative Expense
General and administrative expense decreased 23.3 percent or $491,000
from $2.1 million in the six month period ended September 30, 1995 to
$1.6 million in the six month period ended September 30, 1996. The
primary reason for the overall decrease is organizational changes in
management responsibilities from general management to more direct
duties associated with revenue production.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had working capital in excess of $33.0
million, and approximately $28.0 million in cash, cash equivalents and
short term investments. Subsequent to the end of the second quarter of
Fiscal 1997, on October 16, 1996, the Company made a $5 million equity
investment in Unwired Planet, Inc., a privately-held Delaware corporation
based in Redwood Shores, California. The source of funds used for the
acquisition was the Company's working capital. Management believes that
the Company's working capital and borrowing capacity are sufficient to
meet the Company's financial needs through Fiscal 1998.
Risk Factors
- ------------
The Company typically charges a one-time fee for a development license
and a run-time royalty fee for each copy of the Company's operating
system embedded in the customer's product. A key component of the
Company's strategy is to increase revenue through run-time royalty fees.
Any increase in the percentage of revenues attributable to run-time
royalties will depend on the Company's successful negotiation of run-
time royalty agreements and on the successful commercialization by the
Company's customers of the underlying products. In addition, the
Company has experienced significant period-to-period fluctuations in
revenues and operating results and anticipates that such fluctuations
will continue. These fluctuations have been caused by a number of
factors, including but not limited to, customer buying patterns, product
development cycles, delays in completion of custom contract work and the
timing of sales of the Company's products.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company was held on
September 10, 1996. More than 95 percent of the shareholders of Common
Stock in the Company were represented at the meeting. Two issues were
presented for consideration at the meeting: (i) the election of Class I
Directors to serve until the 1999 Annual Meeting of Shareholders, and
(ii) ratification of the Board of Directors' selection of KPMG Peat
Marwick LLP as independent auditors for the Company for its fiscal year
ending March 31, 1997. The results were as follows:
1. Election of Class I Directors.
Shares entitled to vote Votes at Meeting
----------------------- ----------------
13,575,952 13,030,343
Name For Withhold Authority
---- ---------- ------------------
Kenneth B. Kaplan 13,027,477 2,866
Daniel P. Howell 13,027,627 2,716
No abstentions were received in connection with the election of Class I
Directors.
2. Ratification of Selection of KPMG Peat Marwick LLP as Independent
Public Accountants.
Shares entitled to vote Votes at Meeting
----------------------- ----------------
13,575,952 13,030,343
For Against Abstain
---------- ------- -------
13,023,409 4,963 1,971
No broker non-votes were received in connection with the 1996 Annual
Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibits 27 - Financial Data Schedule (EDGAR version
only).
(b.) Reports on Form 8-K: Subsequent to the end of the period,
on October 31, 1996, the Company filed a Report on Form
8-k to report its equity investment in Unwired Planet,
Inc., a privately-held Delaware corporation based in
Redwood Shores, California.
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: November 13, 1996
-----------------------
Kent R. Kelderman
Acting Chief Financial Officer,
Executive Vice President - Finance
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 9/30/96 and the Statement of Consolidated
Earnings for the six months ended 9/30/96 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7847
<SECURITIES> 20199
<RECEIVABLES> 7460
<ALLOWANCES> 362
<INVENTORY> 59
<CURRENT-ASSETS> 37349
<PP&E> 11892
<DEPRECIATION> 4957
<TOTAL-ASSETS> 46691
<CURRENT-LIABILITIES> 4342
<BONDS> 0
0
0
<COMMON> 36373
<OTHER-SE> 1889
<TOTAL-LIABILITY-AND-EQUITY> 46691
<SALES> 7921
<TOTAL-REVENUES> 14107
<CGS> 1247
<TOTAL-COSTS> 2967
<OTHER-EXPENSES> 9812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 1996
<INCOME-TAX> 482
<INCOME-CONTINUING> 1514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1514
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
