SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27988
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MICROWARE SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
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IOWA 42-1073196
(State or other jurisdiction (I.R.S. Employer incorporation
of organization) or Identification Number)
1900 N.W. 114TH ST.
DES MOINES, IOWA 50325-7077
(Address of principal (Zip Code)
executive offices)
(515) 223-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
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 ninety days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K.
The approximate value of the voting stock held by non-affiliates of the
registrant as of June 12, 1997 was $37,986,886.
Number of shares outstanding as of June 12, 1997: 14,322,659.
Documents Incorporated by reference: Definitive Proxy Statement to be filed
for the 1997 Annual Meeting of Shareholders (Part III).
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MICROWARE SYSTEMS CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 4A. Executive Officers of the Registrant 19
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 20
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 34
Part III
Item 10. Directors and Executive Officers of the
Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial
Owners and Management 34
Item 13. Certain Relationships and Related Transactions 34
Part IV
Item 14. Exhibits, Financial Statements, Schedule, and
Reports on Form 8-K 35
Signatures 37
Index to Exhibits 39
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Part I
CAUTIONARY NOTE:
IN ADDITION TO HISTORICAL FINANCIAL INFORMATION, THIS DISCUSSION OF THE
COMPANY'S BUSINESS AND OTHER ITEMS IN THIS ANNUAL REPORT ON FORM 10-K INCLUDE
FORWARD-LOOKING STATEMENTS ABOUT MICROWARE'S BUSINESS. THESE STATEMENTS
SHOULD BE EVALUATED IN THE CONTEXT OF THE RISKS AND UNCERTAINTIES INHERENT IN
MICROWARE'S BUSINESS, INCLUDING THE VARIABILITY OF THE COMPANY'S QUARTERLY
OPERATING RESULTS; THE SUCCESSFUL DEVELOPMENT OF THE DIGITAL TELEVISION,
WIRELESS COMMUNICATIONS AND OTHER EMERGING MARKETS AT WHICH THE COMPANY'S
PRODUCTS ARE TARGETED; THE COMPANY'S ABILITY TO SUCCESSFULLY MANAGE GROWTH AND
KEEP PACE WITH ITS COMPETITION AND WITH RAPID TECHNOLOGICAL CHANGE; THE RISK
OF MATERIAL LITIGATION RELATED TO THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
AND LICENSES; AND OTHER FACTORS MENTIONED THROUGHOUT THIS FORM 10-K AND IN THE
COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
Item 1. Business
Microware Systems Corporation is a corporation which was organized under
the laws of the state of Iowa in 1977. Its principal executive offices are
located at 1900 N.W. 114th Street, Des Moines, Iowa 50325-7077 (telephone
number 515-223-8000; Internet: [email protected] or
http://www.microware.com). References in this Annual Report on Form 10-K to
"Microware" or "the Company" are to Microware Systems Corporation and its
subsidiaries.
General Development of Business
Microware develops, markets and supports sophisticated real time
operating system software and development tools for advanced consumer and
business products and other embedded computers. Microware's product line is
built around its OS-9 real time operating system, which was first introduced
in 1980 and has been continually refined to incorporate advances in
technology. OS-9 is a real time operating system targeted at "embedded
systems" - computers dedicated to specialized tasks embedded within
application-specific industrial or computer products.
Microware's business is focused on developing and marketing OS-9 for use
in high volume embedded systems for consumer and business uses - "smart
products" such as digital televisions, hand-held communications and computing
devices such as advanced wireless telephones and pagers, and Internet
appliances and other network computers. Microware believes that these markets
are a potentially large growth area within the embedded systems market, and
that its technological advantages and relationships with strategic customers
make Microware well-positioned to establish OS-9 as a solution within these
emerging markets. However, because these are emerging markets which are not
well established, this strategy exposes Microware's business to significant
risks and uncertainties, as discussed throughout this Report.
Products and Services
Microware offers a broad range of software products based on the OS-9
real time operating system that can be configured to suit a range of
applications in a variety of industries. Substantially all of the Company's
revenues are derived from OS-9 and related tools.
Because the Company's current revenues and future growth are dependent
upon the continued acceptance of OS-9 technology in its current markets and
the successful application of OS-9 technology in new markets, impairment of
the OS-9 software in any market for any reason could have a material adverse
effect on the Company's current business or future revenues.
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Microware's products are designed for use with leading microprocessors,
including the Motorola 68xxx, Intel x86/Pentium, Motorola/IBM PowerPC, Hitachi
SH, ARM, and other processor families. The Company also provides
engineering and training services to support its customers' development
efforts. The Company's products and services include the following:
Operating System Products:
Microware's operating system products are based on the OS-9 Developers'
Pak, which includes the OS-9 kernel, a range of I/O and file managers, various
networking protocols, and device drivers. OS-9 is combined with more
specialized software modules to create operating system products targeted at
specific advanced consumer and business products markets.
DAVID combines OS-9 with a graphics API and support for various digital
audio/video transmission and networking protocols to provide a full operating
environment for the developers of interactive digital television decoders.
DAVIDLite is a streamlined implementation of DAVID targeted at digital
broadcast and satellite decoder manufacturers.
Wireless OS-9 combines OS-9 with a graphics API, power management
software, and other specialized functionality for the manufacturers of
wireless devices.
Microware has also ported a number of third party technologies to its
operating systems which are available as extensions to the standard OS-9
packages, including the following:
- Java support
- Internet browsers
- PCCard support
- IrDA infrared communications support
- Data encryption.
Microware's operating system products are available through OEM license
agreements which generally provide licensees (i) the right to use a specific
configuration of OS-9 modules for internal product development in
consideration of payment of an initial license fee; and (ii) the right to
distribute copies of OS-9 and related software embedded in the licensee's
product in consideration of the licensee's payment of a per copy royalty for
every copy of OS-9 distributed.
Tools Products:
Development Tools are developed and sold by Microware to OS-9 licensees
for developing OS-9 applications. Most tools run on Microsoft Windows and
popular UNIX workstations, as well as on OS-9. The tools are designed to
reduce the cost and increase the speed of the development of OS-9
applications. The operating system and development tools are well integrated
and are updated on a coordinated schedule. Customers therefore avoid potential
incompatibility among competing vendors. These development tools include:
- Ultra C and Ultra C++ Compilers, which provide high-level language
support for real time applications;
- Source Level Debugger, which identifies the source of program
application errors during software testing;
- OS-9 Utility Set, which provides over 100 utilities to enhance
application development and execution;
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- FasTrak, which integrates the above tools with supporting functions
into a comprehensive automation, management and development environment;
- OS-9 Developer's Kit, which allows programmers to develop embedded OS-9
applications;
- OS-9 Board Support Paks, which provide developers' versions of OS-9
configured for industry-standard hardware configurations; and
- DAVID Developer's Kit, which contains additional utilities for
developing digital multimedia applications for digital television.
Microware is also working with Metrowerks Corporation, a leading provider
of development tools for desktop computer application developers, to develop a
version of Metrowerks' Codewarrior integrated development environment for OS-
9.
Development Tools are generally licensed under "shrink-wrap" terms on a
per-seat basis.
Software Maintenance and Upgrade Services:
Licenses of Microware's operating system and tools products are typically
bundled with maintenance support contracts that provide updates of the
licensed software and routine technical support.
Professional Services:
Professional services cover a wide range of activities including
consulting, custom engineering, technical support and training. A high level
of customer service and support is essential because many of the Company's
customers depend on the Company's products to support the development and
operation of complex applications. Custom engineering revenues are typically
generated from discrete software engineering projects adapting OS-9 to
specific customer requirements. The Company also selectively engages in custom
development in order to extend its product line. Professional services are
generally provided based on the number of engineering hours devoted to a given
project.
Markets, Applications and Customers
Microware's strategy is to leverage its advanced technology, strategic
customer relationships, commitment to quality, and expertise based on years of
experience in the embedded systems market to establish OS-9 as a standard
operating environment for high volume smart products. To achieve this goal,
Microware focuses its marketing and product development efforts on those
emerging smart products markets it believes have the greatest potential to
increase Microware's future revenue: (i) digital television, (ii) wireless
hand-held communications devices, and (iii) Internet appliances and other
network-based computing devices. In product development, the Company tailors
OS-9 packages for each specific market, typically by adding new modules
providing specialized functionality for that market. For example, Microware
provides motion picture file manager support for digital television products,
power management software for hand-held, battery-operated wireless devices,
and Java support for Internet access devices. In sales and marketing, this
means developing strategic customer relationships with market leaders, such as
Motorola in the wireless products market or IBM in the network computer
market, and working closely with the providers of complementary technologies.
While the Company believes this vertical market strategy holds great
potential for long-term revenue growth, it also involves some risk. Focusing
on large account customers in select vertical markets diverts the Company's
engineering, sales, and marketing resources from the traditional general
purpose embedded systems market. The Company's increasing focus on licensing
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and service revenue from large customers and the proportionate decline in
revenues from traditional industrial and scientific licensees makes the
Company's earnings variable on both a quarterly and annual basis.
Substantial expenditures are necessary to establish and maintain the Company's
position in these markets, which may or may not develop as expected by the
Company. Because most of these expenses are fixed costs related to increased
headcount, they are not amenable to rapid adjustments based on revenues and
may impact profitability in the short term. While the Company believes it has
achieved notable success in obtaining new design wins with promising new
advanced consumer and business products, there can be no assurance that the
Company's vertical market strategy will be successful, that the markets
targeted by the Company will grow as expected, or that the Company will be
able to generate significant revenues or earnings from its efforts.
These emerging markets are at early stages and are not well-defined.
Significant uncertainty exists regarding the economic viability of these new
services and products, and consequently demand for such products and services
is uncertain. Moreover, these markets are very competitive and technically
demanding. Developing software solutions for smart products requires
substantially more engineering effort than a traditional real time system for
industrial or scientific uses. It involves developing a system with all the
real time multitasking ability and robustness of a factory system, with much
of the application functionality of a desktop computer, while using a very
small amount of memory and supporting a wide array of microprocessor
architectures. There can be no assurance that these markets will develop as
planned, that Microware will be able to successfully establish its products as
standards within these markets, that Microware will continue to derive
substantial revenues from these markets, or that Microware's revenues will
exceed its investment in these markets.
In its effort to establish its products in these emerging markets, the
Company is relying on a relatively small group of strategic customers. These
companies include leading telecommunications, computer and consumer
electronics companies which have licensed various Microware products for
incorporation into a variety of devices. Microware's success is a function of
these customers' ability to successfully develop and market new products based
on OS-9. There can be no assurance that any strategic customer will
successfully be able to market such products.
Traditional Embedded Systems Business
The traditional real time embedded system software market remains an
important component of Microware's business. Licenses to manufacturers of
process control, scientific and medical instrumentation, and other relatively
low-volume products are a significant source of revenue. Emerging markets for
the Company's traditional embedded systems business include intelligent
transportation systems, private network computer systems, gaming devices,
office automation and medical instrumentation. The Company derives a
substantial amount of its revenues from license fees, support and custom
contract engineering work for its traditional embedded systems business
customers. The Company believes that the market for its operating system
software in the general embedded systems market is large and diversified, and
continues to develop, market, support and license its products to and for
customers in the traditional embedded systems market. Microware believes that
it has a significant share of the third party embedded operating system
market.
Digital Television Business
In 1993 Microware leveraged its early multimedia experience with the CD-i
system to develop a new operating system configuration targeted at the
emerging digital television business -- DAVID. Digital television represents
a new market opportunity for the Company, driven by the worldwide deployment
of new telecommunications networks - ranging from currently available digital
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broadcast satellite ("DBS") networks to the broadband networks under
development by certain regional telephone companies. In the immediate term,
these networks will provide higher quality digital video and audio, increased
channel capacity, and more user options for one-way conditional access
programming such as premium channels and pay-per-view. In the long term, as
broadband networks develop, a wide array of interactive services are expected,
such as Internet access, video on demand, home shopping, gaming, information
retrieval, and video mail. DAVID is designed to operate the digital decoders
that turn standard televisions into smart clients on these networks with
interactive processing, graphics, video and audio functionality. This decoder
can be an external device ("set-top box") or embedded within the television.
DAVID has emerged as a standard operating system for digital decoders,
having been licensed by over 20 set-top box manufacturers and used in trial
deployments around the world. A critical element of the DAVID software is its
modular architecture, which allows components to be added and removed
dynamically over a network while the operating system is running. DAVID's
scaleable architecture and efficient system software enable operators to add
digital features to already-deployed DAVID set-top boxes at an acceptable
incremental cost.
Manufacturers can license and deploy streamlined configurations of DAVID
today which can be upgraded as network infrastructures develop and the desired
levels of interactivity and related functionality increase. Microware believes
this is especially important for manufacturers and network operators who wish
to improve network capacity and service incrementally as the underlying
technologies develop and consumer demand grows.
DAVIDLite is a streamlined configuration of DAVID targeted at digital-
video broadcast products for existing cable systems, new multichannel
multipoint distribution systems ("MMDS") and DBS networks. Content and
hardware developed using DAVIDLite will be fully compatible with DAVID-based
broadband systems. DAVIDLite has been licensed by Zenith Electronics
Corporation, among others, for use in set-top boxes it is providing to
Americast, a consortium of Ameritech, SBC, Bell South, GTE, and Disney.
To date, most of the Company's digital television revenues have been from
DAVID and DAVIDLite license agreements and custom contract engineering with
digital decoder manufacturers. The Company's current activities relating to
its new media markets remain focused upon licensing DAVID and DAVIDLite for
digital television uses. There can be no assurance that the Company will be
able to sustain development license revenues at their current levels, that the
Company will receive substantial run-time license revenues from any digital
television industry participant, or that the Company will be able to establish
and maintain DAVID as an industry standard.
Despite the announced intentions of many companies, and the Company's
belief that DAVID is well positioned as a standard for the digital television
market, the Company believes the digital television market is at a very early
stage and is not well defined. Many prominent deployments have been delayed,
and there can be no assurance that the digital television market will develop
in any predictable or immediate way. These delays may erode DAVID's time-to-
market advantage to the benefit of the Company's competitors. There is
significant uncertainty about the economics of delivering such services,
including the willingness of consumers to pay for digital television and the
profitability of these services. Furthermore, many of the announced intentions
involve architectures, operating systems and hardware which are proprietary to
the parties involved and which could compete or conflict with each other and
with the Company's digital television strategy. It is therefore difficult to
make reliable estimates of the size of the digital television market or the
Company's likely market share.
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Wireless Products Business
In 1996 Microware released a new configuration of its operating system
targeted at the manufacturers of wireless hand-held communications devices.
Wireless OS-9 combines OS-9 with the MAUI graphics API and new software
modules created for key wireless functions such as power management, which is
critical to allow personal communications devices to obtain longer battery
life.
Microware believes there is an emerging market for new categories of
wireless communications devices combining the small size and low cost of
traditional pagers with the more advanced interactivity and computing power of
personal digital assistants -- new types of pagers and wireless telephones
which include small screen displays and keyboards and use the Internet to
enable transmission and receipt of electronic mail and in some cases World
Wide Web browsing. The Company believes OS-9 is well suited to operate such
devices.
Microware's wireless strategy is to provide a wide variety of products
and services for licensing to leading wireless equipment manufacturers. The
core of this strategy is the development of strategic customer relationships
with leading manufacturers of wireless devices.
Under a July 1995 software development and license agreement, Microware
is providing OS-9 as the operating system for various wireless devices under
development by Motorola, Inc. In July 1995, Motorola also purchased 1,526,232
shares of Microware Common Stock and warrants to purchase up to 1,803,728
additional shares which warrants expire at various dates from July 31, 1998
through July 31, 2001. Pursuant to the Stock and Warrant Purchase Agreement, a
designee of Motorola, Motorola's President and Chief Operating Officer, Robert
L. Growney, serves on Microware's Board of Directors.
During the fiscal year ended March 31, 1997, Microware also licensed
Wireless OS-9 to Ericsson, Inc. for use in new wireless products, and to
Northern Telecom, Ltd. ("Nortel") for its new range of mobile Java terminals.
Nortel also distributes GSM and PCS digital phones manufactured by an
affiliate under license from Microware.
During the past fiscal year, the Company's revenues from its wireless
activities primarily consisted of license fees, non-refundable prepaid
royalties and custom contract engineering fees received from wireless
customers. The Company's future operating results will depend significantly
on the development of its products and personal wireless communication
devices. To date some of the wireless device projects for which OS-9 has been
licensed and customized have been delayed due to factors beyond Microware's
control. Such delays may continue in the future. While the wireless
communications market is established, the Company's strategy depends on the
incorporation of the Company's software into new products, such as two-way
pagers and smart wireless telephones, for which demand is uncertain. There
can be no assurance that such products will be successfully developed or
commercialized or that the Company will derive significant revenues or
earnings from such products.
Investment in Unwired Planet
In October 1996, Microware made a $5.0 million equity investment in
Unwired Planet, Inc., a privately held company based in Redwood Shores,
California. Unwired Planet develops, markets, and supports Internet browser
products targeted at the manufacturers of wireless telephones and pagers.
Prior to the investment, Microware and Unwired Planet ported Unwired Planet's
browser technology to OS-9. Microware believes its strategic investment in
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Unwired Planet will further the Company's efforts to establish OS-9 as a
standard operating system for wireless devices.
Internet Appliance Business
In all aspects of its business, Microware is expanding its Internet
product offerings to enable OEMs to offer consumers and business Internet
access through smart devices. The core of this effort is Microware's support
for the Java programming language and application environment developed by the
JavaSoft business unit of Sun Microsystems, Inc. Java has achieved wide market
acceptance as a programming language which allows developers to write
applications which will be interoperable across any Java-compatible operating
system/processor platform.
In May of 1997, Microware entered into an Addendum to its February 1996
license agreement with JavaSoft which extends the license to cover an array of
additional Java packages targeted at memory-constrained consumer and business
devices such as those under development by many of Microware's customers.
Microware believes access to these more specialized Java technologies will
make OS-9 a more competitive solution for the manufacturers of Internet-
enabled smart products.
Microware has also licensed Internet browser products, including Spyglass
Mosaic and the HotJava browser. Microware has expended substantial resources
during the past fiscal year to license and develop Java and browser support
for OS-9, but there can be no assurance that its revenues from those products
will recoup that investment. Microware also has joint marketing relationships
with certain providers of browser technology for digital television and
wireless devices, such as Unwired Planet.
During the fiscal year ended March 31, 1997, Microware entered into a
number of agreements with customers related to the development of Internet-
enabled smart products. Microware licensed OS-9 to Uniden America Corporation
for use in its AXIS telephone, a cordless telephone combined with a small
computer terminal which allows users to send and receive electronic mail.
Microware also developed most of the application software in the AXIS phone,
which is currently available in retail outlets. Microware has jointly
developed with IBM a version of OS-9 for a variety of network computing
technologies under development by IBM. Corel Corporation has also licensed
OS-9 for use with its network computer and PDA products, and is porting its
Corel Office JV technology (version of the Corel office suite written in Java)
to OS-9. Microware also has a license to distribute Corel Office JV and other
related technologies bundled with OS-9.
While Microware believes there is demand among embedded systems designers
for licensing leading Internet technology in conjunction with real time
operating system software such as OS-9 and DAVID, there are substantial risks
and uncertainties associated with the Company's Internet efforts. Most of the
Company's new Internet product enhancements are licensed from third parties
under restrictive license agreements requiring the payment of royalties.
There can be no assurance that the terms of those licenses will be adequate to
enable Microware to provide its customers with satisfactory terms and
conditions for those products, or that additional products desired by
customers will be available for licensing in the future. Porting those third
party products to OS-9 requires substantial engineering efforts, not all of
which may be compensated for by customers. Significant uncertainty remains
about the commercial viability of the Internet, and there can be no assurance
that the current level of demand for Internet products among embedded systems
designers will continue.
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Technology
OS-9 Operating System
OS-9 is a full-featured, multitasking, real time operating system that
goes beyond the base features that are generally provided by the simple task-
switching software traditionally used in embedded systems. OS-9 currently is
configured for the Motorola 68xxx, Intel X86/Pentium, Motorola/IBM PowerPC,
Hitachi SH, ARM, and certain other microprocessor and microcontroller
families.
The OS-9 kernel provides prioritized round-robin timeslicing for any
number of tasks, real time preemptive task switching and comprehensive memory
management for multiple memory classes. OS-9 has a modular architecture which
allows system component modules to be added and removed dynamically, even
while the operating system is running. OS-9 provides an application execution
environment and I/O subsystem similar to UNIX.
A key advantage of OS-9 is its highly reliable memory protection.
Embedded systems used in consumer products and mission critical applications
must detect and handle system errors in a controlled and predetermined way.
The file system design is ruggedized to inhibit data loss in the event of
power failure or catastrophic system faults. This is particularly important
for new generations of mass-market, intelligent products.
Expansion Modules
The OS-9 family contains an extensive library of specialized I/O
subsystem plug-in modules for OS-9 which may be licensed as required by the
functional requirements of specific customer hardware configurations. These
add-on modules include networking support (Internet support, interoperability
protocols, infrastructural compatibility such as ATM and ISDN), multimedia
functionality (graphical user interface protocols, MPEG support, graphics file
managers), advanced communications protocols (serial packet support,
interprocess communications), memory storage support, and power management
protocols. Microware also offers pre-packaged versions of the OS-9 kernel
bundled with selected expansion modules for specific applications including:
OS-9 System Developer Kits; Board Support Packages for popular VME, ISA and
other bus-oriented computer systems; DAVID for digital television; Wireless
OS-9 for wireless devices; and CD-RTOS for CD-i players.
Microware is also adding diverse third party support to complement its
proprietary expansion modules. Third party support currently available or
under development includes Java(tm) support and HotJava(tm) browser, the
Spyglass Web Technology Kit, PCCard support (SystemSoft Corp.), IrDA infrared
protocol support (Counterpoint Systems Foundry, Inc.), Corel Office JV, and
communications security (RSA Data Security, Inc.).
Development Tools
The Company produces several development tools and packages. Ultra C
allows designers of complex real-time systems to precisely control code
generation and optimization on a local basis for either speed or code size,
and is designed to be quickly re-configured for any modern 32-bit or 64-bit
microprocessor. A C++ version of Ultra C was introduced during 1995.
FasTrak utilizes contemporary point-&-click and drag-&-drop user
interface techniques to integrate OS-9 development tools into an integrated
software development environment. Automation features handle routine software
development activities and support administrative functions, such as group
project management and quality assurance.
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Software Development Quality Assurance
The reliability of Microware's technology is reflected in and supported
by the Company's software development methodologies. Microware believes that
it is the first real time embedded systems software developer in the world to
be certified under the International Standards Organization's ISO 9000 quality
standard. Microware's ISO 9001 certification by Underwriter's Laboratories
helps ensure that the processes by which new products are developed are well
defined and internally monitored for quality. The ISO certification is audited
at least annually, and the failure to maintain the certification could have an
adverse effect on the Company's business.
Marketing, Sales and Distribution
Microware markets and licenses its products principally through its
direct sales force. In North America, the Company sells its core products
through a direct sales force of 11 personnel located throughout the United
States. The Company's direct sales force is supported by 5 field application
engineers located throughout the United States and 7 sales and marketing
personnel located in Des Moines, Iowa. The Company also has a number of other
independent authorized distributors.
In Japan, France and the United Kingdom, the Company's products are sold
through the Company's sales and service subsidiaries, consisting of 19, 9 and
11 sales representatives, respectively. In October 1996, the Company
terminated its previous independent German distributor and opened a branch
office of Microware Systems Corporation in Munich, which is currently staffed
by 5 employees. International sales accounted for approximately 68%, 67%, and
50% of revenues in fiscal years 1995, 1996, and 1997, respectively. See
"Business - Wireless Products Business" and note 11 of the Notes to the
Consolidated Financial Statements.
The Company's technical support staff assists customers with problems and
questions in the installation and use of the Company's products. Technical
support is provided by Microware's staff of support engineers in North
America, Europe and Japan. Distributors and original equipment manufacturers
generally offer first level customer support to their end-user customers and
rely on the Company for additional support. The Company also selectively
engages in custom development activities related to extension of its product
line.
The Company generates new business opportunities in its target markets
through direct marketing, advertising, press releases, trade shows, user group
meetings, telemarketing, direct mail and through its strategic alliances.
Microware is also active in various industry standard bodies, including ANSI,
IMA, DAVIC, and DSMCC. In addition, Microware believes that its ISO 9001
certification gives the Company a marketing advantage, especially in
international markets.
Competition
The embedded software industry is highly competitive and is characterized
by rapidly advancing technologies. To maintain or improve its position, the
Company must continue to enhance its current product offerings and introduce
new product features and extensions in a timely fashion.
The Company's core and wireless communications products compete with
proprietary software developed internally by embedded system product
manufacturers, as well as with many third party vendors of development tools
for embedded systems, including many privately held companies and several
publicly held companies. Several microprocessor manufacturers, including Intel
and Motorola, distribute software that at times competes with the Company's
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products. The Company expects that additional competitors, including other
large software vendors, will emerge. Some of the Company's current
competitors, and many of the Company's potential competitors, have
substantially greater technical, sales, marketing and financial resources than
the Company. Other than proprietary software developed internally by embedded
systems manufacturers, the Company's core and wireless products compete
primarily with products by Integrated Systems, Inc. ("ISI"), Mentor Graphics
Corp. (through its acquisition of Microtec Research, Inc.), Microsoft
Corporation ("Microsoft"), and Wind River Systems, Inc. ("Wind River").
In the digital television market, the Company's digital television
decoder products compete with software developed internally by set-top box
manufacturers, including Scientific-Atlanta's PowerTV and Thomson Consumer
Electronics' TV Open and with products from ISI and Wind River. Many of the
Company's digital television competitors have substantially greater technical,
sales, marketing and financial resources than the Company.
In the Internet appliance market, especially the Internet digital
television market, the Company has experienced competition from ISI and Wind
River as well as from a number newer competitors providing operating system
microkernel software bundled with Internet access technology and, in many
cases, Internet services and hardware. These competitors include WebTV
Networks, Inc., which recently entered into an agreement to be purchased by
Microsoft.
During 1996, Microsoft released a new product based on its Windows
operating system, called "Windows CE", targeted at hand-held computing
devices. This and other efforts by Microsoft to gain market share in the
embedded operating system business could have a significant effect on the
market and could adversely affect the Company's business.
The Company expects that as the digital television, wireless personal
communications, Internet appliance, and other emerging embedded systems
markets evolve, additional competitors will seek to enter these markets.
The Company believes that its ability to effectively compete in its core,
wireless and digital television markets depends on factors both within and
outside its control, including timing and success of new products developed by
the Company and its competitors, product performance and price, the Company's
ability to provide custom development and integration services, distribution
and customer support, product reputation, customers' willingness to replace
internally developed software solutions and customers' assessment of the
Company's financial resources and its technical and service expertise. The
Company believes that it competes effectively in its markets on the basis of
product features and reliability, price performance characteristics,
reputation, worldwide infrastructure, support services, sales and marketing
strength and financial stability. There can be no assurance that the Company
will be able to compete successfully with respect to these and other factors.
In particular, competitive pressures, including pricing pressures for the
Company's run-time licenses and new product introductions from existing and
new competitors could adversely affect the Company's business and results from
operations.
Research and Development
The Company has made substantial investments in product development. The
Company believes that its future success will depend in large part on its
ability to enhance its existing products, to develop new products and to
maintain its technological competitiveness. As of March 31, 1997, the Company
employed 123 product development engineers. Of these, 107 engineers were based
in Des Moines, Iowa and 16 were based in Tokyo, Japan.
12
<PAGE>
During fiscal 1995, 1996, and 1997 research and development expenses
amounted to $5.6 million, $5.0 million, and $7.2 million respectively,
excluding capitalized software development costs. For the above periods,
research and development expenses represented 29.9%, 21.2%, and 27.4% of the
Company's total revenues, respectively. For the same periods, software
development costs capitalized totaled $204,000, $150,000, and $81,000,
respectively. The Company believes that its current level of research and
development expenses is adequate to meet its competitive needs. The Company
anticipates that it will continue to commit substantial resources to product
development in the future.
The markets for the Company's products are characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company's success depends upon its ability to offer
its products across a spectrum of microprocessor families used in the embedded
systems market, to continue to enhance its existing product lines, to develop
and introduce in a timely manner new products that take advantage of
technological advances and to respond promptly to customers' requirements. In
the past fiscal year, the Company expended substantial research and
development resources on extensions of its existing product offerings and the
development of new product offerings to support its vertical market strategy.
These investments are expected to continue in the future. The Company's
ability to recoup these investments are highly dependent on the success of the
Company's vertical market strategy. There can be no assurance that the
Company's current level of research and development spending and scope will be
adequate, that the Company will be successful in developing and marketing
enhancements to its existing products or new products on a timely basis, or
that its new products will adequately address the changing needs of the
marketplace. Failure by the Company in any of these areas could materially and
adversely affect the Company's business and results of operations. From time
to time, the Company or its competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to defer purchasing existing Company products.
The Company has in the past experienced delays in software development,
and there can be no assurance that the Company will not experience delays in
connection with its current or future product development activities. Prior
delays have been the result of the reallocation of engineering resources to
other higher priority projects, other resource limitations, problems with
independent contractors, changes in market requirements and unanticipated
difficulties in engineering. There can be no assurance that future delays in
the introduction of new products will not occur. Delays and difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's results of operations. Software
products as complex as those offered by the Company may contain undetected
errors or version compatibility issues, particularly when introduced or as new
versions are released. In addition, the Company has occasionally purchased
from third parties certain product enhancements, and may employ outside
product developers in the future. There can be no assurance that such
enhancements or developments will be successfully completed on a timely basis.
Proprietary Rights
The Company's success is dependent upon its proprietary technology and
products. The Company regards its software as proprietary and, to date, the
Company has relied principally upon copyrights, trademarks, trade secrets and
contractual restrictions to protect its proprietary technology. The Company
currently has one United States patent relating to certain functionality of
its operating systems in digital television network environments expiring in
February 2015, and four U.S. patent applications pending. The Company
13
<PAGE>
generally enters into confidentiality agreements with its employees and
confidentiality and license agreements with its distributors, customers and
potential customers, and limits access to and distribution of the source code
to its software and other confidential proprietary information. End-user
licenses of the Company's software are sometimes in the form of shrink-wrap
license agreements, which typically are not signed by licensees and therefore
may be unenforceable under the laws of many jurisdictions. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. Accordingly, despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy certain portions of the Company's technology or to obtain and
use information that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company will be adequate to prevent
misappropriation of its technology or to provide an adequate remedy in the
event of a breach by others.
Certain technology used in the Company's products, including Java
support, browser technology, PC Card support, and IrDA support, is licensed
from third parties. These licenses generally require the Company to pay
royalties and to fulfill confidentiality obligations. In the future, it may be
necessary or desirable for the Company to seek additional licenses of
intellectual property rights held by third parties. There can be no assurance
that such licenses will be available or, if such licenses are available, that
the terms thereof will not have a material adverse effect on the Company's
business, financial condition and results of operations.
There has been substantial industry litigation regarding intellectual
property rights of technology companies. Although the Company is not aware of
any infringement by its products of any patents or proprietary rights of
others, patent and copyright protection for software is still a developing
area of law and increased visibility of the Company and its products could
provoke claims of infringement from third parties. The Company generally
agrees to indemnify its customers for liability incurred in connection with
the infringement of a third party's intellectual property rights, including
patents. In the future, litigation may be necessary to enforce and protect
trade secrets and other intellectual property rights owned by the Company. The
Company may also be subject to litigation to defend the Company against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could be
costly and cause diversion of management's attention, either of which could
have a material adverse effect on the Company's results of operations and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third
parties or prevent the Company from manufacturing or selling its products, any
one of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that any necessary licenses will be available on reasonable terms,
or at all.
Production
The Company prepares master software media, user manuals and packaging
for each product. The Company's media duplication, as well as its product
packaging, is performed by the Company at its facilities throughout the world,
while printing of user manuals and related materials is performed by the
Company or by outside sources in both the United States and Japan. The Company
grants duplication rights to certain of its original equipment manufacturers.
To date, the Company has not experienced any material difficulties or delays
in production of its software products or documentation.
The Company is currently transferring its production to a CD-ROM based
14
<PAGE>
system in which all software and related documentation is provided to the
customer on a single disc.
Backlog
The Company generally ships its products within a few days after
acceptance of a customer purchase order and, therefore, has insignificant
product backlog. The low product backlog makes it difficult to predict with
accuracy quarterly revenues and quarterly earnings prior to the end of a
quarterly reporting period. Contract engineering services backlog, consisting
of orders for specific engineering services and maintenance support to be
performed within the following 12 months, was approximately $2,206,000 as of
March 31, 1997 and $4,274,000 as of March 31, 1996.
Employees
As of March 31, 1997, the Company employed 259 people, including 88 in
marketing, sales and support services, 123 in engineering and product
development and 48 in operations, finance and administration. Of these
employees, 190 are located in the United States, and 69 are employed by the
Company's international operations. None of the Company's
employees is represented by a labor union or is the subject of a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its employee relations are good.
Notice Regarding Trademarks
Microware, OS-9, and DAVID are registered trademarks of Microware Systems
Corporation. The Microware logo, MAUI, UpLink, ITEM, FasTrak, Ultra C, and
Ultra C++ are trademarks of Microware Systems Corporation. Java and HotJava
are trademarks of Sun Microsystems, Inc. All other marks are trademarks or
registered trademarks of their respective holders.
15
<PAGE>
Item 2. Properties
The Company owns its main operating facility located in Des Moines, Iowa,
subject to mortgage debt. This space is used for research and development,
sales and marketing, operations and administration and consists of
approximately 28,000 square feet. Annual mortgage payments for the Company's
main operating facility total approximately $144,000. Effective October 10,
1995, the Company entered into a one-year lease agreement for additional
office space of approximately 12,500 square feet in Des Moines, Iowa to
support the overall growth of the Company. Currently this space is leased on
a month to month basis, pending completion of the Company's new headquarters
building which is scheduled to be finished in August, 1997. Annual rent for
this office space is approximately $183,000. The Company also leases under
cancelable terms approximately 7,400 square feet in Tokyo, Japan for an annual
rental payment of approximately $380,000. The Company also leases 15 domestic
and international sales and support offices for an aggregate annual rental
payment of approximately $356,000. The Company believes that additional space
will be available as needed.
The Company is currently constructing a new corporate headquarters
facility to consolidate its Des Moines, Iowa operations. The Company expects
construction to be completed by August 1997 and the move to be completed by
September 1997. The estimated overall cost of the project is approximately
$10,000,000 (including associated land costs) and is being financed by a
$10,000,000 construction loan secured by short-term investments, land and
building. Additionally, the Company has entered into a Development Agreement
with the City of Clive, Iowa, pursuant to which the City will refund to
Microware over 10 years 100 percent of the property taxes attributable to
Microware's improvement of the property. There can be no assurance that the
Company will successfully complete the project within budget, that the Company
will be able to sell its existing headquarters facility at a price in excess
of its current investment or that the move will not disrupt the Company's
operations or adversely affect the Company's operating results over the near
term.
The following table shows the location and approximate square footage of
the Company's leased facilities as of March 31, 1997.
LOCATION APPROXIMATE SQUARE FOOTAGE
-------- --------------------------
West Des Moines, Iowa 12,500
Urbandale, Iowa 7,000
Campbell, California 3,100
Newton, Massachusetts 1,120
Oak Brook, Illinois 150
Itasca, Illinois 600
Norcross, Georgia 400
Austin, Texas 200
Richardson, Texas 200
Plano, Texas 400
Tokyo, Japan 7,400
Osaka, Japan 1,100
Burnham, England 4,000
Meyreuil, France 5,000
Paris, France 2,500
Hoehenkirchen, Germany 2,500
Amsterdam, The Netherlands 230
16
<PAGE>
Item 3. Legal Proceedings
The Company is not a party to, and none of its properties are the subject
of, any material litigation, and the Company is not aware of any proceedings
contemplated by governmental authorities that would have a material
adverse effect on the Company or its business.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
18
<PAGE>
Item 4A. Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
------ --- ----------
Kenneth B. Kaplan 44 President and Chief Executive Officer
M. Denis Connaghan 47 Executive Vice President and Chief
Operating Officer
Kent R. Kelderman 37 Executive Vice President, Treasurer, and
Chief Financial Officer
Michael J. Burgher 44 Executive Vice President and Chief
Technical Officer
Mr. Kaplan has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since it was founded in 1977. Mr.
Kaplan was one of the principal designers of the OS-9 real time operating
system. Mr. Kaplan is a member of the board of directors of the Interactive
Multimedia Association and is a Trustee of Drake University and Buena Vista
University. Mr. Kaplan attended Drake University.
Mr. Connaghan joined the Company in May 1997 as Executive Vice President
and Chief Operating Officer. Mr, Connaghan has also been appointed to fill a
vacant Class II Director position effective as of the July 14, 1997 meeting of
the Board of Directors. Prior to joining the Company, from 1994 through 1996,
Mr. Connaghan was Chief Executive Officer of Delphi Information Systems, Inc.,
a provider of information systems to the distribution segment of property and
casualty insurance based in Rolling Meadows, Illinois. From 1991 to 1994, Mr.
Connaghan served as a vice president of IBAX Healthcare Systems of Longwood,
Florida, a joint venture of IBM Corporation and Baxter International providing
computerized solutions for healthcare providers. Prior to that, Mr. Connaghan
held various executive positions with Pansophic Systems, Inc. of Lisle,
Illinois. Mr. Connaghan attended the New South Wales Institute of Technology
and holds an MBA from the University of Chicago.
Mr. Kelderman joined the Company in 1994 as Corporate Controller and was
appointed Executive Vice President, Treasurer, and Chief Financial Officer in
December 1996. From 1988 to 1994, he served as plant controller for American
Packaging Corporation. Mr. Kelderman is a certified management accountant and
holds a B.A. degree in Business Administration from Dordt College.
Mr. Burgher joined the Company in 1987, was elected Vice President in
1992 and became an Executive Vice President in September 1995. Mr. Burgher is
currently the Company's Chief Technology Officer. Prior to joining the
Company, Mr. Burgher worked for Control Data Corporation, a computer services
company. Mr. Burgher holds a B.A. degree in Political Science from Drake
University.
The Company does not have any employment agreements with any of its
executive officers, but has one-year agreements not to compete with certain of
its executive officers and other key employees. The loss of service of one or
more of the Company's other executive officers could adversely affect the
Company's business.
The Company depends significantly on its Chairman, President and Chief
Executive Officer, Kenneth B. Kaplan. The Company maintains key man life
insurance policies in the amount of approximately $2,500,000 on Mr. Kaplan.
19
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's stock is listed on the Nasdaq National Market under the
trading symbol "MWAR." The Company's initial public offering of common stock
was effective April 2, 1996 and the Company began trading on the Nasdaq
National Market on April 3, 1996.
The closing price of the Company's common stock, no par value (the
"Common Stock"), as reported by the Nasdaq National Market as of June 12, 1997
was $8.25 per share. The price per share in the following table sets forth
the low and high closing sales prices on the Nasdaq National Market for the
quarter indicated.
<TABLE>
<CAPTION>
Fiscal 1997 Low High
------------------------------------------------------------------
<S> <C> <C>
Quarter ended June 30, 1996 $ 9.625 $19.625
Quarter ended September 30, 1996 $13.000 $23.250
Quarter ended December 31, 1996 $12.875 $21.250
Quarter ended March 31, 1997 $ 6.000 $15.000
</TABLE>
As of June 12, 1997, there were approximately 223 shareholders of record
of the Company's Common Stock. Certain recordholders are represented by
brokers and other institutions on behalf of shareholders. The Company has
estimated the total number of such shareholders to be 1,400.
The Company has never paid any cash dividends on its capital stock and
does not expect to pay any cash dividends in the foreseeable future. Any
future determinations to pay cash dividends will be at the discretion of the
Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition, credit and loan agreements in effect at
that time and any other factors deemed relevant by the Board of Directors.
20
<PAGE>
Item 6. Selected Consolidated Financial Data
The following table contains certain selected financial data. There were
no cash dividends or distributions made by the Company during the periods
presented.
(In thousand, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $15,087 $14,887 $18,899 $23,655 $26,134
Cost of revenues 3,217 3,927 3,755 5,100 6,969
------ ------- ------- ------- -------
Gross profit 11,870 10,960 15,144 18,555 19,165
Operating expenses:
Research & development 4,083 4,756 5,649 5,009 7,155
Sales & marketing 3,272 3,791 5,614 8,421 10,819
General & administrative 3,583 3,786 3,330 3,889 3,415
Special charges - 530 166 - 438
------ ------- ------- ------- -------
10,938 12,863 14,759 17,329 21,827
------ ------- ------- ------- -------
Operating profit (loss) 932 (1,903) 385 1,226 (2,662)
Other income (expense):
Foreign currency gain
(loss), net 25 98 293 13 (30)
Interest (expense)
income, net (253) (306) (132) 283 1,118
------ ------- ------- ------- -------
(228) (208) 161 296 1,088
------ ------- ------- ------- -------
Earnings (loss) before
income taxes 704 (2,111) 546 1,522 (1,574)
Income tax expense (benefit) 477 314 (375) 146 (3)
------ ------- ------- ------- -------
Net earnings (loss) $227 ($2,425) $921 $1,376 ($1,571)
====== ======= ======= ======= =======
Net earnings (loss) per
share (1) $0.02 ($0.25) $0.08 $0.11 ($0.11)
====== ======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding (1) 10,148 9,608 12,063 13,030 13,754
====== ======= ======= ======= =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash & short-term
investments $188 $2,823 $1,516 $12,337 $19,962
Working capital (deficit) (2,076) 1,374 1,479 13,300 23,024
Total assets 8,668 11,622 12,124 24,938 49,083
Total long-term debt (2) 1,527 1,949 1,446 1,227 8,076
Total shareholders' equity 2,330 4,889 5,559 18,543 34,726
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net earnings (loss) per share.
(2) Includes current installments of long-term debt and long-term portion of
notes payable to banks. See Note 5 of Notes to Consolidated Financial
Statements.
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE FOLLOWING DISCUSSION PROVIDES AN ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, AND SHOULD BE READ IN CONJUNCTION WITH
THE "SELECTED CONSOLIDATED FINANCIAL DATA" AND THE NOTES THERETO AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF THE COMPANY.
Forward-Looking Information is Subject to Risk and Uncertainty
This discussion and analysis of the Company's financial condition and
results of operations includes forward-looking statements that involve risk
and uncertainty, including management's expectations for fiscal 1998 and known
trends and uncertainties in the business. Actual future results and trends
may differ materially depending on a variety of factors, including the volume
and timing of orders received during the quarter, the timing and acceptance of
new products and product enhancements by the Company or its competitors,
changes in pricing, product life cycles, seasonality of customer buying
patterns, the existence of product errors, extraordinary events, such as
litigation or acquisition, including related charges, and economic conditions
generally or in various geographic areas. All of the foregoing factors, and
others mentioned elsewhere in this Form 10-K, make operating results difficult
to forecast. The Company's operating results have varied significantly from
quarter to quarter in the past, and the future operating results of the
Company may fluctuate as a result of the above and other risk factors detailed
from time-to-time in the Company's Securities and Exchange Commission reports
and in this Form 10-K. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as an indication of
future performance. During the last fiscal year, the Company's actual
performance did not meet the expectations of certain analysts. It is likely
that, in some future quarter, the Company's operating results will again be
below the expectations of stock market analysts and investors.
Overview
Microware develops, markets and supports real time operating system
software and high-level language compilers used in consumer electronics,
communications, process control and factory automation, scientific research,
and government/defense applications. Microware's product line is built around
the OS-9 family of real time operating systems for advanced 16-bit and 32-bit
microprocessors. The Company's OS-9 product family includes options for
programming languages, networking, graphical interfaces and productivity
tools. Substantially all of the Company's revenues in the last and current
fiscal years have been derived from licenses and related services from the
OS-9 product family.
The Company has historically derived revenues from development licenses
and run-time license royalty fees along with sales of related software
productivity tools, maintenance support and custom contract engineering work.
Custom contract engineering revenues are typically derived from discrete
software engineering projects porting the OS-9 operating system along with
customized software products. Commonly, license royalty fees follow the
completion of these contracts. For financial reporting purposes, product
revenues primarily consist of software licenses and software development tool
products, along with license run-time royalty fees earned, including non-
refundable prepaid royalties. Services revenues principally consist of
revenues from custom contract engineering and maintenance support agreements,
along with consulting and training activity.
A key element of the Company's long-term strategy is to focus on markets
the Company anticipates will significantly increase run-time license royalty
23
<PAGE>
fees. Since 1992, the Company has made significant investments targeting
various emerging markets including wireless personal communications,
interactive and digital television, and Internet access devices, through the
development of specialized software modules that utilize the OS-9 operating
system. DAVID development licenses and related engineering services have been
sold to over 20 manufacturers of digital television decoders. Run-time
license royalty fees, maintenance support and ongoing software engineering
contract work revenues are expected to grow with the development of the
digital television, wireless communications and Internet access device
industries.
In July 1995, the Company entered into a software license and custom
contract engineering agreement with Motorola to develop modular software
solutions for Motorola's personal wireless communication devices. Revenues of
approximately $371,000 and $1,805,000 resulted from contract engineering
services for Motorola in fiscal 1996 and 1997, respectively. In addition to
up-front development fees and future consulting and support activities, the
Company will receive a royalty for each pager or other wireless product using
OS-9 sold by Motorola or its sub-licensees. Development license fees and run
time royalties of $500,000 and $0 resulted from this agreement in fiscal 1996
and 1997, respectively. These revenues related to products under development
which Motorola has not yet begun to distribute. Motorola also acquired an
equity position in the Company as part of this strategic relationship. See
Notes 2 and 14 of the Notes to the Consolidated Financial Statements.
From fiscal 1996 to fiscal 1997 the Company's total product revenues
demonstrated a significant increase in revenues from large account, vertical
market product sales and related services, and a corresponding decrease in
revenues from traditional run-rate embedded systems business as a percentage
of total revenues. This trend resulted from the Company's deliberate focus on
the development of its vertical market business. The focus on revenues from
development licenses, non-refundable prepaid royalties and custom engineering
services from a relatively small number of customers, and the increase in
product offerings for these customers, increased the quarterly variability of
the Company's financial results in fiscal 1997. Management anticipates that
this quarterly variability will continue for the foreseeable future, and, due
to the fixed nature of most of the Company's expenses and based on current
revenue trends, currently anticipates an operating loss for at least the first
two quarters of fiscal 1998.
Future growth in the Company's product revenues will continue to be
substantially dependent on its customers' timely and successful development
and distribution of new products using the Company's products, making product
revenues difficult to accurately forecast on a quarterly or annual basis.
24
<PAGE>
Results of Operations
Amounts and percentage of revenues: The following table sets forth, for
the periods indicated, the amount and related percentage of the Company's
total revenues by each line item.
<TABLE>
<CAPTION>
($ in thousands)
Amounts and Percentage of Revenues
------------------------------------------
Years ended March 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product $15,667 83% $16,104 68% $16,586 64%
Services 3,232 17 7,551 32 9,548 36
------- --- ------ --- ------ ---
18,899 100 23,655 100 26,134 100
------- --- ------ --- ------ ---
Cost of revenues:
Product 2,463 13 2,428 10 3,046 12
Services 1,292 7 2,672 11 3,923 15
------- --- ------ --- ------ ---
3,755 20 5,100 21 6,969 27
------- --- ------ --- ------ ---
Gross profit 15,144 80 18,555 79 19,165 73
------- --- ------ --- ------ ---
Operating expenses:
Research & development 5,649 30 5,009 21 7,155 27
Sales and marketing 5,614 30 8,421 36 10,819 41
General & administrative 3,330 18 3,899 17 3,415 13
Special charges 166 1 - - 438 2
------- --- ------ --- ------ ---
14,759 79 17,329 74 21,827 83
------- --- ------ --- ------ ---
Operating profit (loss) 385 1 1,226 5 (2,662) (10)
------- --- ------ --- ------ ---
Other income (expense):
Foreign currency gains
(losses), net 293 2 13 * (30) *
Interest(expense) income, net (132) * 283 1 1,118 4
------- --- ------ --- ------ ---
161 2 296 1 1,088 4
------- --- ------ --- ------ ---
Earnings (loss) before income
tax expense (benefit) 546 3 1,522 6 (1,574) (6)
Income tax expense (benefit) (375) (2) 146 * (3) *
------- --- ------ --- ------ ---
Net earnings (loss) $921 5% $1,376 6% $(1,571) (6)%
======= === ====== === ====== ===
</TABLE>
*Insignificant
25
<PAGE>
Fiscal Year Ended March 31, 1997 Compared To Fiscal Year Ended March 31, 1996
Revenues. Total revenues increased 10.5%, or $2.4 million, from $23.7
million in fiscal 1996 to $26.1 million in fiscal 1997. Product revenues
increased 3.0%, or $482,000, from $16.1 million in fiscal 1996 to $16.6
million in fiscal 1997. Product revenues anticipated for fiscal 1997 from
certain strategic customers, including Motorola, IBM and the Company's DAVID
licensees, fell significantly below management's expectations due to customer
delays in the development and distribution of OS-9 based products and other
factors. As a result, product revenue growth remained relatively flat from
fiscal 1996 to 1997. The increase in overall Company revenues is primarily
attributable to the increase in services revenues. Services revenues
increased 26.5%, or $2.0 million, from $7.6 million in fiscal 1996 to $9.6
million in fiscal 1997. Services revenues increased primarily as a result of
the Company engaging in the development of new processor ports. In addition,
services revenues increased as a result of the Company adapting certain third
party software to OS-9 for key wireless, Internet and DAVID customers. The
proportion of total revenues attributable to international sales decreased
17%, from 67% of total revenues in fiscal 1996 to 50% of total revenues in
fiscal year 1997. This decrease resulted from a proportionate increase in
North American sales, the assignment of a services contract from an
international subsidiary to the Company's North American operations, and from
foreign currency exchange movements, primarily in the Japanese Yen.
Cost of Revenues. Cost of product revenues includes direct and indirect
costs for documentation, production quality (including maintaining ISO 9001
Certification), duplication of manuals and media for software products, as
well as those costs related to the packaging, shipping and delivery of the
product to the customer. Cost of product revenues also includes amortization
of capitalized software development costs. Cost of services revenues includes
direct and indirect costs for technical phone support, training and education,
and custom engineering.
Total cost of revenues increased 36.7%, or $1.9 million, from $5.1
million in fiscal 1996 to $7.0 million in fiscal 1997. Cost of product
revenues increased from $2.4 million in fiscal 1996 to $3.0 million in fiscal
1997. Cost of product revenues increased primarily due to the cost of third
party software being bundled with OS-9 products. Cost of services revenues
increased from $2.7 million in fiscal 1996 to $3.9 million in fiscal 1997.
The increase in cost of services revenues is primarily attributable to
increased services revenues with lower margins achieved on custom contract
work. Amortization of capitalized software amounted to $236,000 and $201,000
in fiscal 1996 and 1997, respectively.
Research and Development. Research and development expense includes
expenses associated with the development of new products and the enhancements
of existing products, and consists primarily of employee salaries and related
expenses. Research and development expense increased by 42.8%, or $2.2
million, from $5.0 million in fiscal 1996 to $7.2 million in fiscal 1997. The
increase primarily resulted from an increase of approximately 17 people, along
with associated costs, in the Company's technical staff from March 31, 1996 to
March 31, 1997. Additional technical staff was added primarily to support
additional Internet, wireless and digital television product offerings. The
Company has made substantial investments in product development. The Company
believes that its future success will depend in large part on its ability to
enhance its existing products, to develop new products and to maintain
technological competitiveness. The Company anticipates that it will continue
to commit substantial resources to product development in the future.
Sales and Marketing. Sales and marketing expense consists primarily of
sales and marketing personnel related costs, including sales commissions.
26
<PAGE>
Sales and marketing expense also includes costs of advertising, public
relations and attendance at industry trade shows. Sales and marketing expense
increased 28.5%, or $2.4 million, from $8.4 million in fiscal 1996 to $10.8
million in fiscal 1997. The overall increase was primarily attributable to
costs associated with the opening of a branch office in Munich, Germany and a
sales office in Osaka, Japan. Sales commissions, sales support and product
management personnel also increased in fiscal 1997. Approximately $387,000 of
the increase was due to an increase in the Company's allowance for doubtful
accounts. The increase in the allowance for doubtful accounts resulted from
an increase in the number of highly leveraged, emerging market customers.
General and Administrative. General and administrative expenses are
primarily related to finance and administrative functions. General and
administrative expenses decreased 12.4%, or $484,000, from $3.9 million in
fiscal 1996 to $3.4 million in fiscal 1997. The primary reason for the
overall decrease is attributable to organizational changes in management
responsibilities from general management to more direct duties associated with
revenue production.
Special Charges. During the fiscal year ended March 31, 1997, the
Company recorded a non-recurring special charge of $438,000. The special
charges in fiscal 1997 related primarily to employee severance and related
costs and lease termination costs for restructuring operations in Europe.
Fiscal Year Ended March 31, 1996 Compared To Fiscal Year Ended March 31, 1995
Revenues. Total revenues increased 25.2%, or $4.8 million from $18.9
million in fiscal 1995 to $23.7 million in fiscal 1996. Product and services
revenues respectively increased 2.8%, or $437,000 from $15.7 million to $16.1
million and 133.6%, or $4.3 million, from $3.2 million to $7.6 million in
fiscal 1996 as compared to the prior fiscal year. The increase in overall
Company revenues principally accrues to custom contract engineering and
support activity reported in services revenues. The increase in custom
contract engineering revenue, from fiscal 1995 to fiscal 1996, includes
approximately $2.4 million in New Media projects - primarily DAVID, and $1.8
million in customer paid porting of OS-9 product family technology to advanced
microprocessors, wireless personal communication devices, along with related
engineering advisory services.
Cost of Revenues. Total cost of revenues increased 35.8%, or
approximately $1.3 million between the fiscal years ended March 31, 1995 and
1996. Cost of product revenues remained relatively constant in amount, but
decreased by 2.7% of related sales from 13.0% in fiscal 1995, to 10.3% in
fiscal 1996. Cost of services revenues increased by approximately $1.4
million and from 6.8% of related revenues to 11.3% in fiscal 1995, as compared
to fiscal 1996. Gross profit on product revenues increased by 0.6% from 84.3%
to 84.9%, and on services revenues by 4.6% from 60.0% to 64.6% in fiscal 1995
as compared to fiscal 1996. Amortization of capitalized software development
cost included in cost of product revenues amounted to $166,000 and $236,000 in
fiscal 1995 and 1996, respectively.
Research and Development. Although the Company increased its technical
staff from 85 people at March 31, 1995 to 101 people at March 31, 1996, the
total amount of research and development expense decreased 11.3%, or $640,000,
from $5.6 million to $5.0 million in respective fiscal years. The primary
reason for the decrease is due to an increase in customer funded custom
contract services revenue which transfers the recording of related engineering
spending into the cost of services revenue line. Between fiscal years 1995
and 1996 an approximate $1.5 million increase in engineering related expense
has been charged to cost of services revenue.
27
<PAGE>
Sales and Marketing. Sales and marketing expense increased by 50.0%, or
$2.8 million from $5.6 million to $8.4 million, and as a percentage of revenue
from 29.7% to 35.6% from fiscal 1995 to fiscal 1996. Included in the $2.8
million additional fiscal 1996 over fiscal 1995 costs are incremental costs of
approximately $1.1 million in advertising and public relations/marketing
consulting; $1.1 million in additional commissions and salaries; $415,000 in
increased travel and trade show expense, and $175,000 in distributor/sales
force termination costs.
General and Administrative. Overall, general and administrative expenses
increased $569,000 or 17.0% from $3.3 million in fiscal 1995 to $3.9 million
in fiscal 1996. As a percentage of revenues, general and administrative
expenses decreased from 17.6% in fiscal 1995 to 16.5% in fiscal 1996. The
overall increase in spending was primarily attributable to additional
personnel and associated overhead costs necessary to support the overall
growth of the Company.
Variability of Quarterly Operating Results
The Company's revenues and operating results have varied substantially
from quarter to quarter and should not be relied upon as an indication of
future performance. The Company believes its revenues may fluctuate from
quarter to quarter depending upon such factors as new product introductions by
the Company or others, seasonality of customer buying patterns, the Company's
sales commission plan, renewals of product licenses by customers, product
development expenses, changes in Company and competitors' pricing policies,
the timing of significant orders, the mix of products sold, the mix of
international versus domestic revenues, currency fluctuations, the existence
of product errors and the hiring and training of additional staff.
Furthermore, delays in closing product licensing transactions or in completion
of custom contract engineering work during any quarter could cause quarterly
revenues and net earnings for that quarter to fall below anticipated levels.
The Company derives a significant portion of its revenues from a relatively
small number of large account customers, therefore any delay in the
consummation of business with this small number of customers could
significantly impact the Company's quarterly performance. The majority of the
Company's revenues in a quarter has been historically derived from orders
received in the last month of that quarter, which makes the Company's
financial performance more susceptible to an unexpected downturn in business
and makes quarterly results difficult to forecast. In addition, the Company's
expense levels are based on present expectations of future revenues levels,
and a shortfall in revenues could result in a disproportionate decrease in the
Company's net earnings. As the markets in which the Company competes mature
and as new and existing companies compete for customers, price competition is
likely to intensify and such competition could adversely affect quarterly
operating results. Variations in product mix may also affect gross profit
margin percentages. Therefore, although the Company's revenues and gross
profit in any period may increase in absolute terms, such an increase may
result in lower gross profit margin percentages.
Liquidity and Capital Resources
The Company has historically funded its operations primarily through cash
flow from operations, the sale of common and preferred stock and to a lesser
extent long-term debt. At March 31, 1997, the Company had approximately
$23,024,000 in working capital and $19,962,000 in cash and short-term
investments as compared to $13,300,000 in working capital and $12,337,000 in
cash and short-term investments at March 31, 1996. The increase in working
capital and cash and short-term investments resulted from the Company
completing an initial public offering, effective April 2, 1996, of its common
stock (selling 2,000,000 new shares of common stock of the Company and 500,000
shares offered by selling shareholders). The net proceeds to the Company from
28
<PAGE>
the sale of the new 2,000,000 shares of common stock were approximately
$17,600,000 after deducting underwriting discounts and commission and offering
expenses.
Cash provided by (used in) operating activities amounted to $480,000,
$1,068,000 and ($3,155,000) for fiscal years 1995, 1996 and 1997,
respectively. The $588,000 difference in cash provided by operating
activities in fiscal 1995, as compared to fiscal 1996 was primarily due to a
change in net earnings from $921,000 to $1,376,000 and net changes in other
reconciling items of $133,000. The $4,223,000 difference in cash provided by
(used in) operating activities in fiscal 1996, as compared to fiscal 1997, was
primarily due to a change in net earnings (loss) of $2,947,000, an increase in
trade receivables of $1,040,000, and net changes in other reconciling of
$236,000.
Cash used in investing activities was $823,000, $1,301,000 and
$27,297,000 for fiscal years 1995, 1996 and 1997, respectively. The uses of
cash in fiscal 1995 and 1996 were related primarily to the purchase of
computer and research equipment and furniture and fixtures. In fiscal 1997,
the increase in net cash used in investing activities as compared to fiscal
1996 was partially due to approximately $7,300,000 of cash being used to
purchase land and construct the Company's new corporate headquarter's
facility.
On May 9, 1996, the Company purchased approximately 17.5 acres of land
for approximately $2.1 million, on which the Company is constructing an 88,000
square foot office building to consolidate all Des Moines, Iowa operations.
The estimated overall cost of the project is approximately $10,000,000
(including associated land) and is being financed by a $10,000,000
construction loan secured by short-term investments, land and building. In
addition, cash used in investing activities increased in fiscal 1997 compared
to fiscal 1996 approximately $13,200,000 from the purchase of short-term
investments and $5,000,000 from the equity investment in Unwired Planet Inc.
Cash provided by (used in) financing activities was ($548,000),
$11,211,000 and $24,972,000 for fiscal years 1995, 1996 and 1997,
respectively. The cash from financing activities in fiscal 1996 was
primarily due to the issuance of $12,100,000 of Common Stock. See Note 14 of
Notes to Consolidated Financial Statements. The cash from financing
activities in fiscal 1997 resulted primarily from the issuance of
approximately $17,600,000 in common stock in connection with the Company's
initial public offering and proceeds of approximately $6,900,000 on the
Company's construction loan.
As of March 31, 1997, the Company had approximately $8,076,000 of long
term debt, including current portion, outstanding relating to its current
headquarters building and new headquarters building being currently
constructed. The notes bear interest between 6.4375% and 10.5280%. See Note
5 of Notes to Consolidated Financial Statements.
Management believes current working capital and its $1.0 million bank
line of credit will be adequate to meet the Company's future working capital,
new product development and capital expenditure requirements at least through
fiscal 1998.
Management does not believe that inflation has historically had a
material effect on the Company's results of operations.
Many of the Company's international contracts are denominated in local
currencies, and an increase in the relative value of the dollar against such
currencies would lead to a reduction in Company revenues. The Company
attempts to minimize its foreign currency exposure through keeping
intercompany balances current and minimizing assets in any one currency
29
<PAGE>
denomination. However, intercompany balances are not specifically hedged and
there can be no assurance that the Company's future results of operations will
not be adversely affected by currency fluctuations.
The Company anticipates that international sales will continue to account
for a significant portion of net sales in the foreseeable future. As a result,
the Company will be subject to certain risks, including tariffs and other
barriers, difficulty in staffing and managing foreign subsidiary operations,
difficulty in managing distributors and resellers, adverse tax consequences
and difficulty in accounts receivable collection. The Company is also subject
to the risks associated with the imposition of protective legislation and
regulations, including those relating to import or export or otherwise
resulting from trade or foreign policy. The Company cannot predict whether
quotas, duties, taxes or other charges or restrictions will be implemented by
the United States or any other country upon the import or export of the
Company's products in the future. There can be no assurance that any of these
factors or the adoption of restrictive policies will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Accounting Policies
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
Per Share," and No. 129 "Disclosure of Information About Capital Structure"
("SFAS 129"). SFAS 128 specifies the computation, presentation and disclosure
requirements for basic and diluted earnings per share. SFAS 128 supersedes
Accounting Principles Board Opinion No. 15, is effective for financial
statements ending after December 15, 1997, including interim periods, and
requires that prior periods be restated. SFAS 129 establishes standards for
disclosing information about an entity's capital structure. SFAS 129 is
effective for financial statements for periods ending after December 15, 1997.
The impact of the adoption of SFAS 128 on the financial statements of the
Company has not yet been determined.
30
<PAGE>
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by this Item is contained in the financial statements
set forth in Item 14(a) under the caption "Consolidated Financial Statements."
32
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosures
None.
33
<PAGE>
Part III
Items 10-13
The response to Items 10, 11, 12, and 13 are incorporated by reference to the
information concerning the applicable subjects in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders, expected to be filed
pursuant to Regulation 14A no later than 120 days following March 31, 1997.
34
<PAGE>
Part IV
Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
The following are included herein:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1996 and 1997
Consolidated Statements of Operations for the three years ended March 31, 1997
Consolidated Statements of Shareholders' Equity for the three years ended
March 31, 1997
Consolidated Statements of Cash Flows for the three years ended March 31, 1997
Notes to Consolidated Financial Statements
2. Exhibits. The following are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:
Exhibit No. Description
- ------------------------------------------------------------------------------
3.1 Restated and Amended Articles of Incorporation of the Company, filed as
Exhibit 3.1(a) to Pre-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1 Reg. No. 33-99160-3 and hereby
incorporated by reference.
3.2 Restated and Amended Bylaws of the Company, filed as Exhibit 3.2 to
Pre-Effective Amendment No. 3 to the Company's Registration Statement
on Form S-1 Reg. No. 33-99160-3 and hereby incorporated by reference.
4.1 Articles of Incorporation and Bylaws of the Company (included in
Exhibits 3.1 and 3.2).
10.1 Stock and Warrant Purchase Agreement between the Company and Motorola,
Inc. dated July 31, 1995, including Form of Warrant, filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1 Reg. No. 33-
99160 and hereby incorporated by reference.
10.2 Shareholder Agreement among the Company, Kenneth B. Kaplan, and
Motorola, Inc. dated July 31, 1995, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 Reg. No. 33-99160 and
hereby incorporated by reference.
10.3 Agreement among the Company, Kenneth B. Kaplan, Lawrence A. Crane, and
the 1994 Series A Preferred Stock holders dated March 11, 1996, filed
as exhibit 10.18 to Pre-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.4 Software Development and License Agreement between the Company and
Motorola, Inc. filed as Exhibit 10.17 to Pre-Effective Amendment No. 3
to the Company's Registration Statement on Form S-1, Reg. No. 33-99160,
and hereby incorporated by reference.10.5 1989 Stock Option Plan of
the Company, filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by
reference.
10.6 1991 Stock Option Plan of the Company, filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
35
<PAGE>
10.7 1992 Stock Option Plan of the Company, filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.8 1995 Stock Option Plan of the Company, filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.9 401(k) Plan of the Company, filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.10 Non-Contributory Profit Sharing Plan of the Company, filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1, Reg. No. 33-
99160, and hereby incorporated by reference.
10.11 Credit Agreement between the Company and Norwest Bank Iowa, National
Association dated October 20, 1995, including Commercial Note
Agreement, filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by
reference.
10.12 Lease Agreement between the Company and RW III Partnership dated
October 10, 1995, filed as Exhibit 10.12 to the Company's Registration
Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by
reference.
10.13 Mortgage between the Company and Brenton Bank, N.A., dated December 10,
1993, filed as Exhibit 10.13 to the Company's Registration Statement on
Form S-1, Reg. No. 33-99160, and hereby incorporated by reference.
10.14 Mortgage between the Company and the Iowa Business Growth Company,
dated February 24, 1987, filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.15 Real Estate Purchase Agreement between Charles I. Colby, Jr. And
Patricia E. Colby, Sellers, and Mid-America Investment Co., Buyer,
dated November 21, 1995, with amendments, and Assignment and Conveyance
of Interest from Mid-America Investment Co. to the Company, dated May
9, 1996, filed as Exhibit 10.15 to the Form 10-K Report of the Company
for the fiscal year ended March 31, 1996, and hereby incorporated by
reference.
10.16 Real Estate Purchase Agreement between Charles I. Colby, Jr. And
Victoria R. Colby, Sellers, and Mid-America Investment Co., Buyer,
dated November 21, 1995, with amendments, and Assignment and Conveyance
of Interest from Mid-America Investment Co. to the Company, dated May
9, 1996, filed as Exhibit 10.16 to the Form 10-K Report of the Company
for the fiscal year ended March 31, 1996, and hereby incorporated by
reference.
10.17 Real Estate Agreement between Mid-America Investment Co. and the
Company dated May 9, 1996, filed as Exhibit 10.17 to the Form 10-K
Report of the Company for the fiscal year ended March 31, 1996, and
hereby incorporated by reference.
10.18 Commercial Note, Letter Agreement, and Security Agreement between the
Company and Norwest Bank Iowa, N.A., dated July 23, 1996.
10.19 Contract for Construction between the Company and The Weitz Company,
Inc., dated July 25, 1996.
11.1 Statement Regarding Computation of Net Earnings (Loss) Per Share.21.1
Subsidiaries of the Registrant, filed as Exhibit 21.1 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
23 Consent of Independent Accountants.
27 Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of fiscal year 1996.
36
<PAGE>
SIGNATURES
- -----------
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 authorized, on the 27th day of
June, 1997.
MICROWARE SYSTEMS CORPORATION,
an Iowa Corporation
By: /S/ KENNETH B. KAPLAN
-------------------------
Kenneth B. Kaplan, President and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and
officers of Microware Systems Corporation, an Iowa corporation, which is
filing an Annual Report on Form 10-K with the Securities and Exchange
Commission, under the provisions of the Securities Exchange Act of 1934 as
amended, hereby constitute and appoint Kenneth B. Kaplan, M. Denis Connaghan,
Kent R. Kelderman, and Arthur Don and each of them, each of their true and
lawful attorneys-in-fact and agents; with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign such report and any or all amendments to the
report to be filed with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all interests and purposes as each
of them might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
- --------- ------ -----
/S/ KENNETH B. KAPLAN Chairman, President & Chief June 27, 1997
---------------------- Executive Officer (Principal
Kenneth B. Kaplan Executive Officer)
/S/ M. DENIS CONNAGHAN Director-elect, Executive June 27, 1997
---------------------- Vice President & Chief
M. Denis Connaghan Operating Officer
/S/ KENT R. KELDERMAN Chief Financial Officer, June 27, 1997
----------------------- Executive Vice President &
Kent R. Kelderman Treasurer (Principal
Financial & Accounting
Officer)
/S/ LAWRANCE A. CRANE Director June 27, 1997
---------------------
Lawrence A. Crane
/S/ ARTHUR DON Director June 27, 1997
---------------
Arthur Don
37
<PAGE>
/S/ JAMES A. GORDON Director June 27, 1997
-------------------
James A. Gordon
/S/ ROBERT L. GROWNEY Director June 27, 1997
---------------------
Robert L. Growney
/S/ DANIEL P. HOWELL Director June 27, 1997
--------------------
Daniel P. Howell
/S/ DENNIS E. YOUNG Director June 27, 1997
--------------------
Dennis E. Young
38
<PAGE>
EXHIBIT INDEX
Description Page
- ------------------------------------------------------------------------
10.18 Commercial Note, Letter Agreement, and Security
Agreement between the Company and Norwest Bank
Iowa, N.A., dated July 23, 1996 40
10.19 Contract for Construction between the Company
and The Weitz Company, Inc., dated July 25, 1996 49
11.1 Statement Regarding Computation of Net Earnings 64
(Loss) Per Share.
23 Consent of Independent Accountants. 65
27 Financial Data Schedule (Edgar Version Only)
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Microware Systems Corporation:
We have audited the accompanying consolidated balance sheets of Microware
Systems Corporation and subsidiaries as of March 31, 1996 and 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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 that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Microware
Systems Corporation and subsidiaries at March 31, 1996 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
April 24, 1997, except for the last sentence of
Note 5(c) which is as of June 18, 1997
F-1
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
---------------------
Assets 1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,337 $ 6,758
Short-term investments (note 5) - 13,204
Trade receivables, net of allowance
for doubtful accounts of $366
and $635 (notes 2 and 4) 4,946 7,014
Income taxes receivable 211 207
Inventories (note 4) 39 96
Prepaid royalties - 1,005
Prepaid expenses and other current assets 226 316
Deferred tax assets (note 6) 518 507
--------- ---------
Total current assets 18,277 29,107
--------- ---------
Investment, at cost (note 1) - 5,004
--------- ---------
Property and equipment, net (notes 3 and 5) 4,002 11,917
--------- ---------
Other assets:
Intangible assets, net of amortization (no 1,228 1,675
Deposits and other (note 4) 1,431 1,380
--------- ---------
Total other assets 2,659 3,055
--------- ---------
$ 24,938 $ 49,083
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
Liabilities and ---------------------
Shareholders' Equity 1996 1997
--------- ---------
<S> <C> <C>
Current liabilities:
Notes payable to banks (note 4) $ 873 $ 323
Current installments of
long-term debt (note 5) 39 38
Accounts payable 1,665 2,559
Accrued expenses 1,361 2,194
Deferred revenues 888 867
Income taxes payable 151 102
--------- ---------
Total current liabilities 4,977 6,083
Long-term debt, less current
installments (note 5) 1,188 8,038
Deferred income taxes (note 6) 230 236
--------- ---------
Total liabilities 6,395 14,357
Shareholders' equity (notes 7, 8, 9 and 14):
Series A preferred stock, $14.71 par value;
340,000 shares authorized; 340,000
shares and none 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 14,190,561 shares issued;
10,214,452 and 13,965,461 shares outstanding 13,094 36,152
Retained earnings 1,660 89
Cumulative adjustment from foreign
currency translation (435) (738)
--------- ---------
19,320 35,503
Less cost of common shares acquired for
the treasury, 225,100 and 225,100 shares 777 777
--------- ---------
Total shareholders' equity 18,543 34,726
--------- ---------
Commitments (note15)
$ 24,938 $ 49,083
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues (notes 2 and 11):
Product $ 15,667 $ 16,104 $ 16,586
Services 3,232 7,551 9,548
--------- --------- ---------
18,899 23,655 26,134
Cost of revenues:
Product 2,463 2,428 3,046
Services 1,292 2,672 3,923
--------- --------- ---------
3,755 5,100 6,969
--------- --------- ---------
Gross profit 15,144 18,555 19,165
--------- --------- ---------
Operating expenses:
Research and development 5,649 5,009 7,155
Sales and marketing 5,614 8,421 10,819
General and administrative 3,330 3,899 3,415
Special charges (note 13) 166 - 438
--------- --------- ---------
14,759 17,329 21,827
--------- --------- ---------
Operating profit (loss) 385 1,226 (2,662)
--------- --------- ---------
Other income (expense):
Foreign currency gain (loss), net 293 13 (30)
Interest expense (162) (151) (106)
Interest income 30 434 1,224
--------- --------- ---------
161 296 1,088
--------- --------- ---------
Earnings (loss) before income
tax (benefit) expense 546 1,522 (1,574)
Income tax (benefit) expense (note 6) (375) 146 (3)
--------- --------- ---------
Net earnings (loss) (note 11) $ 921 $ 1,376 $ (1,571)
========= ========= ==========
Net earnings (loss) per share $ .08 $ .11 $ (.11)
========= ========= ==========
Weighted average common and common
equivalent shares outstanding (in thousands) 12,063 13,030 13,754
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Cumulative
adjustment
from
Retained foreign Total
Preferred Common earnings currency Treasury shareholders'
stock stock (deficit) translation stock equity
--------- ------- --------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 $ 5,001 $ 1,052 $ (637) $ 139 $ (666) $ 4,889
Purchase of common shares
of stock at cost - - - - (111) (111)
Net earnings - - 921 - - 921
Current translation
adjustment - - - (140) - (140)
------- ------- --------- ------- ------ --------
Balance at March 31, 1995 5,001 1,052 284 (1) (777) 5,559
Issuance of common shares
of stock - 12,104 - - - 12,104
Legal and other fees
incurred for issuance
of common shares of stock - (62) - - - (62)
Net earnings - - 1,376 - - 1,376
Current translation
adjustment - - - (434) - (434)
------- ------- --------- ------- ------ --------
Balance at March 31, 1996 5,001 13,094 1,660 (435) (777) 18,543
Issuance of common shares
of stock - 19,046 - - - 19,046
Legal and other fees incurred
incurred for issuance of
common shares of stock - (989) - - - (989)
Conversion of preferred
stock to common stock upon
initial public offering (5,001) 5,001 - - - -
Net loss - - (1,571) - - (1,571)
Current translation
adjustment - - - (303) - (303)
------- ------- --------- ------- ------ --------
Balance at March 31, 1997 $ - $36,152 $ 89 $ (738) $(777) $ 34,726
======= ======= ========= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 921 $ 1,376 $ (1,571)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 976 1,273 1,797
Loss on sale of property and equipment 128 23 5
Deferred income taxes (319) (185) 17
Increase in trade receivables, net (1,058) (1,248) (2,288)
(Increase) decrease in income taxes receivable (292) 111 4
Decrease (increase) in inventories 49 3 (58)
Increase in prepaid royalties - - 1,005
(Increase) decrease in prepaid expenses
and other current asset (135) 69 (95)
Decrease (increase) in other assets 75 (726) (1,749)
(Decrease) increase in accounts payable (664) 547 942
Increase (decrease) in accrued expenses 617 (333) 905
Increase (decrease) in deferred revenues 138 164 (9)
Increase (decrease) in income taxes payable 44 (6) (50)
------- -------- --------
Net cash provided by (used in) operating activities 480 1,068 (3,155)
------- -------- --------
Cash flows from investing activities:
Capital expenditures (841) (1,320) (9,089)
Proceeds from sale of property and equipment 18 191 -
Purchases of short-term investments - - (39,417)
Maturities of short-term investments - - 26,213
Purchase of investment, at cost - - (5,004)
------- -------- --------
Net cash used in investing activities (823) (1,301) (27,297)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable to banks
and long-term debt 2,667 3,142 7,901
Principal payments on notes payable to
banks and long-term debt (3,099) (3,406) (1,553)
Principal payments under capital lease obligations (5) - -
Purchase of treasury shares of stock (111) - -
Cost of issuance of common stock - (62) (422)
Proceeds on issuance of common shares of stock - 12,104 19,046
Deferred offering costs - (567) -
------- -------- --------
Net cash (used in) provided by financing activities (548) 11,211 24,972
------- -------- --------
(891) 10,978 (5,480)
Effect of foreign currency exchange rate changes on cash (416) (157) (99)
------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,307) 10,821 (5,579)
Cash and cash equivalents at beginning of year 2,823 1,516 12,337
------- -------- --------
Cash and cash equivalents at end of year $ 1,516 $ 12,337 $ 6,758
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters
Principles of Consolidation
The consolidated financial statements include the financial statements of
Microware Systems Corporation (Microware) and its subsidiaries (the
Company): Microware Systems (U.K.) Limited; Microware Systems K.K.;
MSC Toolco, Inc.; Microware Systems France S.A.R.L.; and MicroMall,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
Nature of Business
The Company develops and markets operating system software and high-level
language compilers used in industrial automation, communications,
scientific research, and consumer electronics applications. The
Company's operations are primarily conducted in North America, Japan
and Europe.
Translation of Foreign Financial Statements
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated
at year-end exchange rates. Income and expense items are translated at
the average exchange rate for the year. Translation gains and losses
are not included in determining net earnings but are accumulated as a
separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in determining net earnings
(loss).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents and Short-term Investments
Cash equivalents consist of money market funds, a United States treasury
fund and United States treasury bills with stated effective maturities
of three months or less at time of purchase. Short-term investments
consist of United States treasury bills with stated effective
maturities greater than three months at time of purchase. Cash
equivalents and all of the Company's short-term investments are
classified as "held-to-maturity" under the Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and are stated at amortized
cost, which approximates fair value.
Inventories
Inventories are composed primarily of user manuals and software media
production materials and are stated at the lower of cost or market on a
first-in, first-out basis. Additionally, inventories include costs
incurred to develop customized software under certain consulting
agreements in progress.
F-7
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
Investments
In October of 1996, Microware purchased a preferred stock interest in
another company for $5,004. The Company owns 1,967,961 shares of the
other company's Series C Preferred Stock. A conversion formula in the
stock purchase agreement provides for conversion of the preferred stock
into common stock (initially at a ratio of 1 to 1) with adjustments for
dilution. The preferred stock is convertible at the option of the
Company or automatically upon an initial public offering of common
stock or upon consent of at least two-thirds of the preferred holders.
The investment is accounted for on the cost basis.
Property and Equipment
Property and equipment are stated at cost and are depreciated on
straight-line methods with estimated useful lives of 5 to 30 years for
building and improvements and 3 to 5 years for furniture, fixtures, and
equipment and research and development equipment.
Intangible Assets
The balance of intangible assets as of March 31, 1996 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1996
--------------------------------
Accumulated
Cost amortization Net
------- ------- -------
<S> <C> <C> <C>
Capitalized software
development costs $ 851 $ 536 $ 315
Purchased software 441 - 441
Goodwill 789 547 242
Patents, copyrights, and other 624 394 230
------- ------- -------
$ 2,705 $ 1,477 $ 1,228
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------
Accumulated
Cost amortization Net
------- ------- -------
<S> <C> <C> <C>
Capitalized software
development costs $ 932 $ 737 $ 195
Purchased software 1,476 418 1,058
Goodwill 727 506 221
Patents, copyrights, and other 639 438 201
------- ------- -------
$ 3,774 $ 2,099 $ 1,675
======= ======= =======
</TABLE>
F-8
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
Intangible Assets, Continued
The Company capitalizes software development costs incurred in the
production of computer software once technological feasibility of the
product to be marketed has been established. Software development
costs incurred prior to technological feasibility are expensed as
research and development costs. Capitalization of these costs ceases
when the product is considered available for general release to
customers.
Amortization of capitalized software development costs is calculated as
the greater of the ratio that current revenues bear to estimated future
revenues or the straight-line method over the expected product life
cycle of three years. Amortization of capitalized software development
costs amounted to $166, $236, and $201 for the years ended March 31,
1995, 1996, and 1997, respectively.
Purchased software represents the cost of acquiring computer software
used in the Company's products. Amortization of purchased software is
calculated as the greater of the ratio that current revenues bear to
estimated future revenues or the straight-line method over three years.
Goodwill and patents, copyrights, and other are being amortized over 5 to
15 year periods on the straight-line method. The Company assesses the
recoverability of goodwill through analysis of undiscounted cash flows.
Advertising
Advertising costs incurred for the years ended March 31, 1995, 1996, and
1997 were $539, $1,277, and $764, respectively.
Revenue Recognition
Product revenues primarily consist of software licenses and development
tool products sold and royalties earned from equipment distributors.
Software license fees are recognized as revenues upon contract signing
and shipment of the software master copy. Sales of development tool
products are recognized as revenues upon shipment. Royalties earned
from equipment distributors are recognized as revenues when reported by
the equipment distributors or upon payment of non-refundable prepaid
royalties.
Service revenues are derived primarily from custom contract engineering,
postcontract customer support (maintenance) agreements, and training
and consulting services. Revenues from custom contract engineering are
recognized using the percentage of completion method. Maintenance
revenues, including maintenance bundled with software license fees, are
recognized ratably over the term of the related agreements. Revenues
from training and consulting services are recognized as the services
are rendered.
F-9
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
Income Taxes
The provision for income taxes includes federal, state and foreign taxes
currently payable and deferred taxes arising from temporary differences
in determining income for financial statement and tax purposes using
the asset and liability method of SFAS No. 109, "Accounting for Income
Taxes".
Computation of Net Earnings (Loss) Per Share
Net earnings (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (common stock options and
warrants using the treasury stock method) and convertible preferred
stock (as if converted to common stock on the original date of
issuance) outstanding during the periods presented. Effective April 2,
1996, the Company completed an initial public offering of its common
stock. Prior to April 2, 1996, there were no established market prices
for the common stock of the Company. The market prices used in the
computation of net earnings (loss) per share prior to April 2, 1996
were average values calculated from the annual appraisals of the
Company's common shares of stock performed by independent appraisers.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all stock issued and warrants and options to purchase
shares of common stock granted by the Company at a price less than the
initial filing price during the twelve months preceding the initial
public offering date (using the treasury stock method) have been
included in the computation of common and common equivalent shares as
if they were outstanding for all periods presented.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose the estimated fair values for its
financial instruments. Fair value estimates, methods, and assumptions
are set forth below:
Cash and Cash Equivalents, Short-Term Investments, Trade Receivables,
Notes Payable to Banks,
Accounts Payable and Accrued Expenses
The carrying amount approximates the estimated fair value due to the
short-term nature of those instruments.
Long-Term Debt
Rates currently available to the Company for such borrowings with
similar terms and remaining maturities are used to discount the future
cash flows to estimate the fair value for long-term debt.
F-10
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (ABP No. 25) and related
interpretations. Under APB No. 25, compensation cost is measured as
the excess, if any, of the quoted market price of the Company's stock
at the date of grant over the exercise price of the option ratably over
the vesting period. The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock
on the grant date. Accordingly, no compensation cost has been
recognized for the Company's stock option plan. The Company provides
additional pro forma disclosures as required under SFAS No. 123,
"Accounting for Stock-Based Compensation" (see note 9).
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information About Capital Structure". SFAS No. 128 establishes
financial accounting and reporting standards for calculation of basic
earnings per share and diluted earnings per share. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share" and is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. SFAS No.
129 establishes financial reporting standards for disclosing
information about an entity's capital structure and is effective for
financial statements issued for periods ending after December 15, 1997.
The Company will adopt the new standards in the year ending March 31,
1998.
(2) Trade Receivables
At March 31, 1996 and 1997, the Company had one customer whose trade
receivable balance exceeded 10 percent of consolidated trade
receivables. Trade receivables at March 31, 1996 and 1997 for this
customer were $768 and $704, respectively, and revenues for the years
ended March 31, 1996 and 1997 for this customer totaled approximately
$1,516 and $2,279, respectively. This customer is also a shareholder
of the Company (see note 14).
F-11
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(2) Trade Receivables, Continued
The activity in the Company's allowance for doubtful accounts for the
years ended March 31, 1995, 1996, and 1997 consisted of the following:
<TABLE>
<CAPTION>
Balance at Additions Deductions,
beginning charged to net of Balance
of year expenses recoveries end of year
---------- ---------- ---------- -----------
<C> <S> <S> <S> <S>
Year ended March 31, 1995 $ 94 $ 57 $ 73 $ 78
===== ===== ===== =====
Year ended March 31, 1996 $ 78 $ 367 $ 79 $ 366
===== ===== ===== =====
Year ended March 31, 1997 $ 366 $ 754 $ 485 $ 635
===== ===== ===== =====
</TABLE>
(3) Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
1996 1997
------- -------
<S> <C> <C>
Land and improvements $ 144 $ 144
Building 2,017 2,017
Furniture, fixtures, and equipment 3,316 4,115
Research and development equipment 2,900 3,612
Leasehold improvements 102 123
Construction in progress 25 7,369
------- -------
8,504 17,380
Accumulated depreciation
and amortization 4,502 5,463
------- -------
$ 4,002 $11,917
======= =======
</TABLE>
Included in construction in progress is $190 of capitalized interest at
March 31, 1997.
(4) Notes Payable to Banks
Microware has a $1,000 line of credit with a bank bearing interest at the
bank's base rate. The line of credit matures on October 31, 1997 and
is renewable annually. Funds advanced are secured by Microware's trade
receivables, inventories, and intangible assets. There was $500 in
borrowings outstanding at March 31, 1996. There were no borrowings
outstanding at March 31, 1997.
Microware Systems K.K. has credit agreements with various maturities with
two Japanese banks. Outstanding balances at March 31, 1996 and 1997
totaled $373 and $323, respectively. The weighted average interest
rate was 2.125 percent at March 31, 1997. The credit agreements are
secured by Microware Systems K.K.'s deposit for office space in the
amount of $489 at March 31, 1997.
F-12
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(5) Long-Term Debt
Long-term debt at March 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Mortgage note (A) $ 203 $ 193
Mortgage note with bank (B) 1,024 997
Construction note (C) - 6,886
------- -------
1,227 8,076
Less current installments 39 38
------- -------
Long-term debt, excluding
current installments $ 1,188 $ 8,038
======= =======
</TABLE>
(A) The note is secured by the Company's headquarters building, subject
to mortgage note (B), and is guaranteed by the Small Business
Administration and the Company's major shareholder. Monthly payments
are $3, including interest at 10.528 percent, with the unpaid balance
due June 1, 2007.
(B) The note is secured by the Company's headquarters building and is
guaranteed by the Company's major shareholder. Monthly payments are
$9, including a variable interest rate, adjusted every 3 years (9.125
percent at March 31, 1997), with the unpaid balance due December 13,
2013.
(C) The Company has a $10,000,000 commercial real estate construction
note with a bank. The construction note is secured by liens on the
Company's new headquarters and pledged United States treasury bills.
Interest payments are due monthly, at a variable interest rate equal
to 1 percent over the bank's fed funds rate (6.4375% at March 31,
1997), with the principal balance due December 31, 1997. On June 18,
1997, the Company obtained a renewal of the construction note through
April 30, 1998 and the aggregate maturities of long-term debt have
been presented under the renewal terms.
The aggregate maturities of long-term debt for each of the five years
ending March 31, 2002 and thereafter are as follows:
1998 $ 38
1999 6,920
2000 37
2001 41
2002 45
Thereafter 995
-------
$ 8,076
=======
The carrying amount of the Company's long-term debt approximates the fair
value as of March 31, 1997.
F-13
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(6) Income Taxes
The provision for income taxes is based on earnings (loss) before
income tax expense (benefit) as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
United States $ (228) $ (234) $ (1,404)
Foreign 774 1,756 (170)
-------- -------- ---------
$ 546 $ 1,522 $ (1,574)
======= ======= =========
</TABLE>
Components of income tax expense (benefit) for the years ended March 31,
1995, 1996, and 1997 consist of the following:
<TABLE>
<CAPTION>
1995
-------------------------------
Domestic Foreign
income income Total
--------- ----------- -----
<S> <C> <C> <C>
Current $ 12 $ 3 $ 15
Deferred (390) - (390)
------ ----- ------
$ (378) $ 3 $ (375)
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------
Domestic Foreign
income income Total
--------- ----------- -----
<S> <C> <C> <C>
Current $ 269 $ 62 $ 331
Deferred (185) - (185)
------ ----- ------
$ 84 $ 62 $ 146
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------
Domestic Foreign
income income Total
--------- ----------- -----
<S> <C> <C> <C>
Current $ 34 $ (54) $ (20)
Deferred 17 - 17
------ ----- ------
$ 51 $ (54) $ (3)
====== ===== ======
</TABLE>
F-14
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(6) Income Taxes, Continued
Income tax expense (benefit) for the years ended March 31, 1995, 1996,
and 1997 differs from the "expected" income tax expense (benefit)
computed by applying the United States federal income tax rate of 34
percent to pretax income (loss) due to the following:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 186 $ 517 $ (535)
Increase (decrease) in taxes resulting from:
U.S. losses without current benefit - - 660
Foreign losses without current benefit - - 209
Utilization of foreign net
operating loss carryforwards (262) (208) (457)
Foreign taxes - - 99
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (284) (173) -
Other (15) 10 21
------ ------ -----
$ (375) $ 146 $ (3)
====== ====== =====
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at March 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
March 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards $ - $ 1,400
Foreign net operating loss carryforwards 913 445
Post contract customer support unearned revenue 177 161
Compensation/benefits 28 43
Inventories 54 54
Allowance for doubtful accounts 115 214
Other 64 95
------- -------
Total gross deferred tax assets 1,351 2,412
Less valuation allowance 760 1,845
------- -------
Total deferred tax assets 591 567
------- -------
Deferred tax liabilities:
Capitalized software costs 114 70
Property and equipment 189 226
------- -------
Total deferred tax liabilities 303 296
------- -------
Net deferred tax assets $ 288 $ 271
======= ========
</TABLE>
The net deferred tax assets at March 31, 1996 and 1997, are composed of
current deferred tax assets of $518 and $507, respectively, and
noncurrent deferred tax liabilities of $230 and $236, respectively.
F-15
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(6) Income Taxes, Continued
The net change in the total valuation allowance for the years ended March
31, 1996 and 1997 was a decrease of $820 and an increase of $1,085,
respectively. A valuation allowance has been set up to offset the
gross deferred tax assets created by U.S. and foreign net operating
loss carryforwards. Utilization of the U.S. and foreign net operating
losses is dependent upon future taxable income generated in the
respective U.S. and foreign subsidiaries. The Company recorded the
valuation allowance due to its lack of history of consistent earnings
in the U.S. and in a foreign subsidiary generating the net operating
loss carryforwards. At March 31, 1997, the Company has U.S. net
operating loss carryforwards for federal income tax purposes of
approximately $4,000 (including approximately $2,000 from tax benefits
related to employee stock options) which are available to offset future
federal taxable income, if any, through 2012. The foreign net
operating loss carryforwards expire as follows: $395 in 1998, $233 in
1999 and $485 in 2000.
(7) Series A Preferred Stock
On March 31, 1994, the Company issued and sold 340,000 shares of Series A
preferred stock, par value $14.71 per share to a group of four
investors. A conversion formula in the stock purchase agreement
provided for conversion of preferred stock into common stock with
adjustments for dilution. Effective April 2, 1996, upon completion of
the initial public offering of the Company's common stock, the 340,000
shares of Series A preferred stock were each converted into 4 shares of
common stock.
(8) Shareholders' Equity
On March 12, 1996, the Company effected a 4-for-1 split as a share
dividend of common stock of the Company. All common share and per
share amounts have been adjusted Company's shareholders and board of
directors approved an increase in the number of authorized common
shares of stock of the Company to 50,000,000. The authorized number of
common shares of stock of the Company have been adjusted to give effect
to this increase.
Effective April 2, 1996, the Company completed an initial public offering
of its common stock (selling 2,000,000 new shares of common stock of
the Company and 500,000 shares offered by selling shareholders). The
net proceeds to the Company from the sale of the new 2,000,000 shares
of common stock were approximately $17,600 after deducting underwriting
discounts and commissions and offering expenses.
(9) Stock Options
The Company has established 1989, 1991, 1992 and 1995 Stock Option Plans
(the Plans) and granted options to certain officers, directors, and
employees to purchase shares of common stock. The options granted
under the Plans expire 10 years from the date such option is granted.
Options vest over a two to four year period and are exercisable under
conditions specified in the Plans' agreements.
The 1989, 1991, 1992 and 1995 Plans had available 1,200,000, 512,000,
496,000 and 1,120,000 total shares of common stock subject to option,
respectively.
F-16
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(9) Stock Options, Continued
Activity for the Company's Plans is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- -------------------------
Number Option Price Number Option Price Number Option Price
of Shares Per Share of Shares Per Share of Shares Per Share
----------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning
balance 1,671,928 $.50-1.3125 1,520,000 $0.50-1.3125 2,250,200 $0.50-3.125
Issued - - 784,400 $3.125 373,100 $10.00-15.50
Exercised - - 4,000 $.9375 391,009 $0.50-3.125
Canceled 151,928 $.50-1.3125 50,200 $.9375-3.125 171,600 $3.125
--------- --------- ---------
Ending
balance 1,520,000 $.50-1.3125 2,250,200 $0.50-3.125 2,060,691 $0.50-15.50
========= =========== ========= =========== ========= ===========
</TABLE>
SFAS No. 123 requires proforma information regarding net earnings (loss)
and earnings (loss) per share be determined as if the Company has
accounted for its stock options granted subsequent to December 15, 1994
under the "fair value" method. Under SFAS No. 123, the fair value of
each option grant is estimated on the date of grant using the Black-
Scholes option valuation model with the following assumptions used for
grants during fiscal 1996 and 1997: risk free interest rates of 6.0%
and 6.25%, respectively; expected volatility of 0.00% and 80.89%,
respectively; an expected option life of 5.75 years and 6.0 years,
respectively, and no expected dividends for both years. As the Company
was a nonpublic entity until prior to April 2, 1996, it is permitted
under SFAS No. 123 to use the "minimum value" method to value stock
options granted April 2, 1996. Under the "minimum value" method
expected volatility is effectively zero. The weighted average fair
value of stock options granted under the Plans for the years ended
March 31, 1996 and 1997, were $0.82 and $10.80, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair-value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing option valuation models do not necessarily provide a reliable
single measure of the fair value of its stock options.
F-17
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(9) Stock Options, Continued
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for compensation expense under the Plans.
Had compensation expense under the Plans been determined pursuant to
SFAS No. 123, the Company's proforma net earnings (loss) and net
earnings (loss) per share for the years ended March 31, 1996 and 1997
would have been as follows:
1996 1997
------- --------
Net earnings (loss):
As reported $ 1,376 $ (1,571)
Proforma $ 1,215 $ (2,763)
Net earnings (loss) per share:
As reported $ 0.11 $ (0.11)
Proforma $ 0.09 $ (0.20)
The above proforma disclosures are not necessarily representative of the
effects on reported net earnings (loss) for future years.
The following table summarizes information about fixed stock options
outstanding under the Plans at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.50-0.9375 840,191 3.0 $ 0.6742 840,191 $ 0.6742
$1.3125-3.125 847,400 7.2 $ 2.4779 438,350 $ 1.8742
$10.00-15.50 373,100 9.5 $15.2051 - $ -
--------- ---------
2,060,691 5.9 $ 4.0469 1,278,541 $ 1.0856
========= === ======== ========= ========
(10) Profit Sharing Plans
Microware had a noncontributory profit sharing plan for employees meeting
certain service requirements. Subject to certain limitations, annual
contributions to the noncontributory plan were determined by the board
of directors and were made in the form of Microware's common stock.
There were no annual contributions to the noncontributory plan for the
years ended March 31, 1995, 1996, and 1997. Effective January 1, 1997
the noncontributory plan was merged into the contributory profit
sharing plan.
F-18
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(10) Profit Sharing Plans, Continued
Microware has a contributory profit sharing plan for substantially all
full-time employees. Under the contributory plan, Microware provides
matching cash contributions based on qualified employee contributions,
as well as certain other contributions. Microware's contributions to
the contributory plan for the years ended March 31, 1995, 1996 and 1997
amounted to $49, $88 and $131, respectively.
(11) Foreign Operations
A summary of the Company's domestic and foreign operations as of and for
the years ended March 31, 1995, 1996 and 1997 is presented below:
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
U.S U.K. Japan France Eliminations Total
-------- -------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $10,658 $ 2,567 $ 6,513 $ 1,592 $ (2,431) $18,899
======= ======= ======= ======= ========= =======
Operating (loss) profit $ (558) $ 288 $ 636 $ 69 $ (50) $ 385
======= ======= ======= ======= ========= =======
Net earnings $ 200 $ 264 $ 449 $ 58 $ (50) $ 921
======= ======= ======= ======= ========= =======
Total assets $14,974 $ 412 $ 3,519 $ 659 $ (7,440) $12,124
======= ======= ======= ======= ========= =======
Total liabilities $ 4,447 $ 1,643 $ 6,064 $ 1,618 $ (7,207) $ 6,565
======= ======= ======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
U.S U.K. Japan France Eliminations Total
-------- -------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $13,377 $ 4,464 $ 7,309 $ 1,670 $ (3,165) $23,655
======= ======= ======= ======= ========= =======
Operating (loss) profit $ (558) $ 1,126 $ 661 $ (3) $ - $ 1,226
======= ======= ======= ======= ========= =======
Net (loss) earnings $ (318) $ 1,000 $ 677 $ 17 $ - $ 1,376
======= ======= ======= ======= ========= =======
Total assets $26,353 $ 1,189 $ 2,352 $ 641 $ (5,597) $24,938
======= ======= ======= ======= ========= =======
Total liabilities $ 4,435 $ 1,379 $ 1,390 $ 1,662 $ (2,471) $ 6,395
======= ======= ======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Elimin-
U.S U.K. Japan France Germany ations Total
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $16,909 $ 2,658 $ 6,820 $ 1,413 $ 838 $(2,504) $26,134
======= ======= ======= ======= ====== ======= =======
Operating (loss) profit $(2,501) $ (191) $ 1,041 $ (697) $ (314) $ - $(2,662)
======= ======= ======= ======= ====== ======= =======
Net (loss) earnings $(1,456) $ (137) $ 1,026 $ (682) $ (322) $ - $(1,571)
======= ======= ======= ======= ====== ======= =======
Total assets $50,708 $ 1,315 $ 3,025 $ 594 $ 733 $(7,292) $49,083
======= ======= ======= ======= ====== ======= =======
Total liabilities $12,251 $ 1,657 $ 1,261 $ 2,314 $1,038 $(4,164) $14,357
======= ======= ======= ======= ====== ======= =======
</TABLE>
Included in U.S. revenues are foreign export sales, primarily to Germany,
of approximately $2,265, $2,324, and $1,226 during the years ended
March 31, 1995, 1996, and 1997, respectively. Revenue eliminations
represent primarily intercompany sales between the U.S. and foreign
operations and royalties paid to the U.S. by foreign subsidiaries.
F-19
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(12) Supplemental Disclosure of Cash Flow Information
During the years ended March 31, 1995, 1996, and 1997, the Company paid
interest of approximately $179, $124, and $262, respectively.
Income taxes paid during the years ended March 31, 1995, 1996, and 1997
amounted to approximately $-0-, $168, and $242, respectively.
(13) Special Charges
During the year ended March 31, 1995, the Company recorded special
charges in Japan of $166. No adjustments were necessary to the
liabilities recorded in 1995, and all amounts were paid as of March 31,
1995. The 1995 charges relate primarily to employee severance and
related costs and lease termination costs for restructuring operations
in Japan.
During the year ended March 31, 1997, the Company recorded special
charges of $438 relating to the restructuring of its European
operations. The 1997 charges relate primarily to employee severance
and related benefits for resizing operations in Europe.
(14) Motorola Stock and Warrant Purchase Agreement
On July 31, 1995, the Company entered into a Stock and Warrant Purchase
Agreement (the Agreement) with Motorola, Inc. (Motorola) pursuant to
which Motorola purchased 1,526,232 common shares of stock of the
Company for $12,100 ($7.93 per share). In addition, pursuant to the
Agreement, the Company issued Motorola five separate warrants to
purchase a total maximum of an additional 1,803,728 common shares of
stock of the Company at an exercise price of $10.81 per share. The
warrants are exercisable at various periods through July 31, 2001. The
Agreement contains certain anti-dilution protection in the event of
certain dividends, stock splits, reclassifications, or issuances of
common shares of stock of the Company or rights thereto. In connection
with the Agreement, the Company delivered 1,373,608 common shares of
stock of the Company on July 31, 1995 for $10,890. The 152,624
deferred delivery common shares of stock of the Company were delivered
to Motorola on August 18, 1995 for $1,210. Motorola is also a customer
of the Company (see note 2).
(15) Commitments
The Company leases certain domestic and foreign facilities under
noncancelable operating leases. Minimum annual rental commitments at
March 31, 1997 under all noncancelable operating leases are as follows:
1998 $ 775
1999 $ 259
2000 $ 185
2001 $ 172
2002 $ 151
Thereafter $ 934
Rental expense under cancelable and noncancelable operating leases was
$786, $950, and $922 during the years ended March 31, 1995, 1996 and
1997, respectively.
F-20
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
(15) Commitments, Continued
The Company is constructing an office building and as of March 31, 1997
the estimated remaining costs to complete construction approximated
$3,000.
F-21
<PAGE>
Norwest Banks Commercial Note
Name: Microware Systems Corporation Date of Note: 07-23-96
On 12-31-1997, the "Due Date", which also means the date, if any, on which
this note is accelerated.
For value received, the undersigned promises to pay to the order of Norwest
Bank Iowa, National Association, 666 Walnut, Des Moines, IA 50309 or at any
other place designated by the holder of this Note, in lawful money of the
United States of America, the principal sum of Ten Million and 00/100 Dollars
($10,000,000.00)- Terms & conditions according to July 23, 1996 Letter
Agreement, or as much as has been disbursed and remains outstanding on this
Note at the Due Date, as is shown by the Bank's records, together with
interest (calculated on the basis of actual days elapsed in a year of 360 days
on the unpaid principal of this Note from the Date until this Note is fully
paid, at an annual rate equal to 1.0000% above the Base Rate, each change in
the interest rate to become effective on the day of the corresponding change
in the Base Rate becomes effective (the "Note Rate"). "Base Rate" means the
rate of interest established by Norwest Bank Iowa, N.A. from time to time as
its "base": or "Fed Funds" rate.
Interest shall be payable Monthly, commencing 08-31-1996 and on the same day
of each succeeding Month, and on the Due Date. The undersigned may, at any
time, prepay this Note, in whole or from time to time in part without premium
or penalty, upon written or telephonic notice to the Bank. In addition, the
undersigned shall pay to the Bank a nonrefundable facility fee of 0.1500% of
the Note Amount. "Note Amount" means the principal amount of the Note, at the
time this Note is signed.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT AND ANY RELATED
DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN
CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE
AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO
ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT
TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THIS LENDER.
The undersigned acknowledges receipt of a copy of this document.
THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITONAL PROVISIONS, ALL OF
WHICH ARE MADE A PART HEREOF.
The proceeds of this loan will be used for business or agricultural purposes
only.
Name Microware Systems Corporation
Street address 1900 N.W. 114th Street
City, State and Zip Des Moines, IA 50325
By: /S/ KENNETH B. KAPLAN, CEO
---------------------------
By: /S/ GEORGE J. BARRY, CFO
---------------------------
Page 1 of 2
[REVERSE SIDE OF NOTE]
This Note shall be in default if;
40
<PAGE>
1. payment is not paid when due;
2. any other debt owed by the undersigned to the Bank is not paid when due;
3. a garnishment, summons or writ of attachment is issued against or served
on the Bank or any financial institution for the attachment of any
property of the undersigned in the Bank's or any other financial
institution's possessions, or any indebtedness owing to the undersigned;
4. any statement made to the Bank or information provided to the Bank proves
to be false in any material respect; or,
5. the holder of this Note at any time, in good faith, believes that the
undersigned will not be able to pay this Note when it is due.
If this Note is in default, the holder may, in its sole option, declare this
Note to be immediately due and payable, at which time this Note will be
immediately due and payable together with all unpaid interest accrued on this
Note and Late Fees, if any, without further notice or demand. If this Note is
payable on demand, nothing in the preceding sentence shall preclude or limit
the holder of this Note from demanding payment of this Note at any time and
for any reason. This Note shall become automatically due and payable
(including all unpaid interest accrued and Late Fees) without notice or demand
should the undersigned die (an individual) or should a petition be filed by or
against the undersigned under the United States Bankruptcy Code.
Miscellaneous: The undersigned and each endorser and guarantor, if any,
agrees:
1. "Bank," as used in the Note means the Bank and any subsequent holder of
this Note.
2. Unless prohibited by applicable law, if this Note is not paid when due,
the undersigned will pay all costs of collection, including, without
limitation, reasonable attorney's fees and legal expenses, incurred by
the holder of this Note.
3. Each provision whose box is checked is a part of this Note.
4. No single or partial exercise of the Bank of any right or remedy shall
preclude any other future exercise of such right or remedy or the
exercise of any other right or remedy.
5. This note shall be governed by the substantive laws of the state named
as part of the Bank's address above.
Waiver: If this Note is signed by any party who is not receiving any of the
proceeds of the loan evidenced by it, each such party and any other party
liable for payment of the debt evidenced by this Note waives demand,
presentment, notice of dishonor and protest of this Note, as such terms are
defined in the Uniform Commercial Code.
In addition, each such party consents to:
1. any extension or postponement of time of this Note's payment without
limit as to the number or duration of any such extension or postponement;
2. any substitution, exchange or release of all or part of the collateral
securing this Note; and
3. the release or discharge of, or suspension of any rights and remedies
against, any person who may be liable for payment of the debt evidenced
by this Note.
If the Bank delays the exercise of any right or remedy it has, it can exercise
such right or remedy later. If the Bank grants a waiver or indulgence of any
default, the waiver or indulgence must be in writing and the writing must be
signed by the Bank. If the Bank grants a waiver, it is for that occasion only.
Acceptance by the Bank of any Late Fee shall not constitute a waiver by the
Bank of any past of future default by the undersigned or any right or remedy
the Bank has.
41
<PAGE>
Arbitration: The Bank and the undersigned agree to submit to binding
arbitration all claims, disputes and controversies (whether in tort, contract
or otherwise, except "core proceeding" under the U.S. Bankruptcy Code) arising
between themselves and their respective employees, officers, directors,
attorneys and other agents, which relate in any way without limitation to this
note, including but not limited to, the negotiation, collateralization,
administration, repayment, modification, default, termination and enforcement
of the loan or credit evidenced by this Note.
Arbitration will be governed by the Federal Arbitration Act (if in Colorado,
shall be governed by Colorado Law) and proceed in the city and state named as
part of the Bank's address or other mutually agreed upon location in
accordance with the American Arbitration Association's commercial arbitration
rules (the "AAA Rules"). Arbitration will be conducted before a single neutral
arbitrator selected in accordance with AAA Rules and who shall be an attorney
who has practiced commercial law for at least ten (10) years. The arbitrator
will determine whether an issue is arbitratable and will give effect to
applicable statutes of limitation.
Judgment upon the arbitrator's award may be entered in any court having
jurisdiction. The arbitrator has the discretion to decide, upon documents only
or with a hearing, any pre-hearing motion similar to motions to dismiss for
failure to state a claim or motions for summary judgment. Discovery will be
governed by the Rules of Civil Procedure for the state in which the Bank is
located. Discovery must be completed at least twenty (20) days before the
hearing date and within one hundred eighty (180) days of the commencement of
arbitration. Each request for an extension and all other discover disputes
will be determined by the arbitrator upon a showing that the request is
essential for the party's presentation and that no alternative means for
obtaining information are available during the initial discovery period.
The parties' agreement to arbitrate does not limit the right of either party
to (a) foreclose against real or personal property collateral; (b) exercise
self-help remedies such as setoff or repossession; or (c) obtain provisional
remedies such as replevin, injunctive relieve, attachment or the appointment
of a receiver during the pendency or before or after any arbitration
proceeding. These exceptions do not constitute a waiver of the right or
obligation of either party to submit any dispute or arbitration, including
those arising from the exercise of these remedies. The arbitrator will award
costs and expenses in accordance with the provisions of this Note.
Page 2 of 2
Letter Agreement
Norwest Bank Iowa, N.A.
666 Walnut Street
Post Office Box 837
Des Moines, Iowa 50304
515/245-3131
July 23, 1996
Mr. Kenneth Kaplan
Chief Executive Officer
Mr. George Barry
42
<PAGE>
Chief Financial Officer
Microware Systems Corporation
1900 N.W. 114th Street
Des Moines, IA 50325-7077
Dear Gentlemen:
Norwest Bank Iowa, National Association (herein referred to as "we," "our," or
"us") is pleased to grant you a non-revolving Commercial Real Estate
Construction Loan (the "Loan") in the principal amount of TEN MILLION AND
NO/100 dollars ($10,000,000), under the following terms and conditions:
1. The Loan shall be in the form of advances in an aggregate principal amount
not to exceed at any one time $10,000,000, payable as set forth in the copy
of the note attached and all amounts outstanding under the note will be due
and payable in full on December 31, 1997. The proceeds of the loan shall be
used by you, together with your funds, to finance expenses incurred to
construct and finance an office building located in Clive, Iowa.
2. Upon your acceptance of this letter, you shall pay to us a construction
loan management fee equal to FIFTEEN BASIS POINTS (0.15%) of the Loan.
3. Your obligation to repay all loans made by us under the Loan will be
secured by your single promissory note in the amount of our commitment,
dated the same as this commitment letter (the "Note").
4. The Note shall bear interest (computed on the basis of actual days elapsed
and a 360-day year) on the principal balance outstanding from time to time,
from the date of the initial advance until the Note is paid in full at the
rate of 1.00% per annum in excess of the Fed Funds Rate in effect from time
to time at the bank. The rate of interest shall initially be determined as
of the date hereof and shall thereafter be adjusted simultaneously with
each change in the Fed Funds Rate.
You may also chose to take advances under the LIBOR Rate Option. With one
day's advance notice you may select either the 30 Day or 90 Day LIBOR Rate
Option, advances under this option shall bear interest (computed on the
basis of actual days elapsed and a 360-day year) on the principal balance
outstanding until the end of the interest rate period (30 or 90 days) at
the rate of 1.00% per annum in excess of the LIBOR Rate in effect at the
Bank on the date of the advance.
The amount of interest earned each month will be payable on or before the
last day of the month, and on demand. In addition, any earned and unpaid
interest will be payable on the due date of the Note.
The unpaid balance of the Note shall be due and payable in full on the date
stated in the Note.
The Note will also specify events of default and the rights and remedies
available to us upon the occurrence of an event of default. The Note must
be properly executed by you and be in form and substance acceptable to us.
5. The Loan shall be secured by a security interest in U.S. Treasuries held by
Norwest Investment Services, Inc.
6. So long as any indebtedness remains outstanding hereunder, you will:
A. Maintain insurance with financially sound and reputable insurers
covering properties and business against those casualties and
contingencies and in the types and amounts as are in accordance with
sound business and industry practices.
43
<PAGE>
B. Maintain your existence and business operations as presently in
effect in accordance with all applicable laws and regulations, pay
your indebtedness and obligations when due under normal terms, and
pay on or before the date when payable without penalty all taxes,
assessments, fees, and other governmental monetary obligations, except
as they may be contested in good faith if they have been properly
reflected on your books, and at our request you have pledged adequate
funds or security to insure payment.
C. Maintain proper books of record and account.
D. Furnish to us:
(1) Within 45 days after each fiscal quarterly period, a balance
sheet as of the end of that period, statement of cash flow and a
statement of profit and loss and surplus, from the beginning of
that fiscal year to the end of that period, certified as correct
by one of your authorized agents.
(3) [sic] Within 90 days after, and as of the end of each of your
fiscal years, a detailed audit, including a balance sheet and a
statement of profit and loss and surplus, certified by an
independent, certified public accountant of recognized standing.
(4) Any other information or books and records that we may reasonably
require.
7. Without our written consent, so long as any indebtedness remains
outstanding hereunder, you will not:
A. Permit your ratio of senior liabilities to tangible net worth to be
more than 0.75 to 1.00. Generally accepted accounting principles
shall determine the manner of computation.
8. You represent that you are authorized to accept this letter and execute the
note, which constitutes valid and enforceable obligations. All balance
sheets, profits and loss statements, and other information furnished to us
are true and correct and fairly reflects your financial condition on their
effective dates including contingent liabilities of every type that your
financial condition has not changed materially and adversely since those
dates.
Upon default in the payment or interest as provided in the note or in any
other instrument evidencing indebtedness of the undersigned; or upon default
in any term, condition, agreement, representation or warranty contained in the
note; or in the event the holder of the note shall, at any time, deem itself
insecure; or if the undersigned becomes insolvent or bankrupt or makes an
assignment for the benefit of creditors; or if a trustee, custodian, or
receiver is appointed for the undersigned or for the greater portion of the
property of the undersigned without the undersigned's consent and is not
discharged within 40 days; or if bankruptcy, reorganization, or liquidation
proceedings are instituted by or against the undersigned, and if instituted
against undersigned, and if instituted against the undersigned are consented
to by the undersigned or remain undismissed for 40 days; then and at any time
thereafter, this commitment letter shall automatically terminate and the
entire indebtedness shall become due and payable immediately, without notice,
at the option of the holder.
This letter is addressed to you only and is not to be relied upon in any
manner by other persons or entities.
44
<PAGE>
If the foregoing is agreeable to you as it is to us, please execute the
attached copy of this letter and return it to us on or before July 26, 1996,
whereupon this shall become a binding agreement between us.
Very truly yours,
NORWEST BANK IOWA, NATIONAL ASSOCIATION
Douglas C. Barclay
Vice President
IMPORTANT: READ BEFORE SIGNING THE AGREEMENT(S) ACCOMPANYING THIS NOTICE. THE
TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN
WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE
WRITTEN CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE
AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO
ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT
TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THIS LENDER.
Accepted and agreed to this 23rd date of July, 1996. Proceeds of the loans,
if any, made under the Line will be used for business purposes exclusively.
MICROWARE SYSTEMS CORPORATION
By: /S/ GEORGE J. BARRY By: /S/ KENNETH B. KAPLAN
------------------- ---------------------
Title: CFO Title: President
NORWEST BANK SECURITY AGREEMENT
Collateral Pledge Agreement
Date: 07-23-97
Debtor: Secured Party:
Microware Systems Corporation Norwest Bank Iowa, National Association
1900 N.W. 114th Street 666 Walnut
Des Moines, IA 50322 Des Moines, IA
1. SECURITY INTEREST AND COLLATERAL To secure: the debt, liability or
obligation of the Debtor to Secured Party evidenced by the following:
$10,000,000 note dated July 23, 1996 and any extensions, renewals or
replacements thereof (herein referred to as the "Obligations"),
Debtor hereby grants Secured Party a security interest (herein called the
"Security Interest") in:
the property owned by Debtor and held by Secured Party or held by Secured
Party's agents or correspondents or held by a bailee that is described as
follows: U.S. Treasuries held by Norwest Investment Services, Inc.
together with all rights in connection with such property (herein called
the "Collateral").
2. REPRESENTATIONS, WARRANTIES AND COVENANTS Debtor represents, warrants and
covenants that:
(i) Debtor will duly endorse, in blank, each and every instrument
constituting Collateral by signing on said instrument or by signing a
separate document of assignment or transfer, if required by Secured
Party.
(ii) Debtor is the owner of the Collateral free and clear of all liens,
encumbrances, security interests and restrictions, except the Security
45
<PAGE>
Interest and any restrictive legend appearing on any instrument
constituting Collateral.
(iii) Debtor will keep the Collateral free and clear of all liens,
encumbrances and security interests, except the Security Interest.
(iv) Debtor will pay, when due, all taxes and other governmental charges
levied or assessed upon or against any Collateral.
(v) At any time, upon request by Secured Party, Debtor will deliver to
Secured Party all notices, financial statements, reports or other
communications received by Debtor as an owner or holder of the
Collateral.
(vi) Debtor will upon receipt deliver to Secured Party in pledge as
additional Collateral all securities distributed on account of the
Collateral such as stock dividends and securities resulting from stock
splits, reorganizations and recapitalizations.
3. RIGHTS OF SECURED PARTY Debtor agrees that Secured Party may at any time,
whether before or after the occurrence of an Event of Default and without
notice or demand of any kind,
(i) notify the obligor on or issuer of any Collateral to make payment to
Secured Party of any amounts due or distributable thereon,
(ii) in Debtor's name or Secured Party's name enforce collection of any
Collateral by suit or otherwise, or surrender, release or exchange all
or any part of it, or compromise, extend or renew for any period any
obligation evidenced by the Collateral,
(iii) receive all proceeds of the Collateral, and
(iv) hold any increase or profits received from the Collateral as additional
security for the Obligations, except that any money received from the
Collateral shall, at Secured Party's option, be applied in reduction of
the Obligations, in such order of application as Secured Party may
determine, or be remitted to Debtor.
THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2 HEREOF, ALL
OF WHICH ARE MADE A PART HEREOF.
Microware Systems Corporation by /S/ GEORGE J. BARRY
--------------------------
Chief Financial Officer
by /S/ KENNETH B. KAPLAN
--------------------------
Chief Executive Officer
Page 1 of 2
4. EVENTS OF DEFAULT
Each of the following occurrences shall constitute an event of default under
this Agreement (herein called "Events of Default");
(i) Debtor shall fail to pay any or all of the Obligations when due or (if
payable on demand) on demand, or shall fail to observe or perform any
covenant or agreement herein binding on it;
(ii) any representation or warranty by Debtor set forth in this Agreement or
made to Secured Party in any financial statements or reports submitted
to Secured Party by or on behalf of Debtor shall prove materially false
or misleading;
(iii) a garnishment, summons or a writ of attachment shall be issued against
46
<PAGE>
or served upon the Secured Party for the attachment of any property of
the Debtor or any indebtedness owing to Debtor;
(iv) Debtor or any guarantor of any Obligation shall
a. be or become insolvent (however defined); or
b. voluntarily file, or have filed against it involuntarily, a petition
under the United States Bankruptcy Code; or
c. if a corporation, partnership or organization, be dissolved or
liquidated or, of a partnership, suffer the death of a partner or,
if any individual, die; or
d. go out of business;
(v) Secured Party shall in good faith believe that the value then realizable
by collection or disposition of the Collateral, after deduction of
expenses or collection and disposition, is less than the aggregate
unpaid balance of all Obligations then outstanding;
(vi) Secured Party shall in good faith believe that the prospect of due and
punctual payment of any or all of the Obligation is impaired.
5. REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of an Event of Default and at any time thereafter, Secured
Party may exercise any one or more of the following rights or remedies:
(i) declare all unmatured Obligations to be immediately due and payable, and
the same shall thereupon be immediately due and payable, without
presentment or other notice or demand;
(ii) exercise all voting and other rights as holder of the Collateral;
(iii) exercise and enforce any or all rights and remedies available upon
defaults to a secured party under the Uniform Commercial Code, including
the right to offer and sell the Collateral privately to purchasers who
will agree to take the Collateral for investment and not with a view to
distribution and who will agree to the imposition of restrictive legends
on the certificates representing the Collateral, and the right to
arrange for a sale which would otherwise qualify as exempt from
registration under the Securities Act of 1933; and if notice to Debtor
of any intended disposition of the Collateral or any other intended
action is required by law in a particular instance, such notice shall be
deemed commercially reasonable if given at least 10 calendar days prior
to the date of intended disposition or other action;
(iv) exercise or enforce any or all other rights or remedies available to
Secured Party by law or agreement against the Collateral, against Debtor
or against any other person or property. Upon the occurrence of the
Event of Default described in Section 4 (iv) (b), all Obligations shall
be immediately due and payable without demand or notice thereof.
6. MISCELLANEOUS
Any disposition of the Collateral in the manner provided in Section 5 shall be
deemed commercially reasonable. This Agreement can be waived, modified,
amended, terminated or discharged, and the Security Interest can be released,
only explicitly in a writing signed by Secured Party. A waiver signed by
Secured Party shall be effective only in the specific instance and for the
specific purpose given. Mere delay or failure to act shall not preclude the
exercise or enforcement of any of Secured Party's rights or remedies. All
rights and remedies of Secured Party shall be cumulative and may be exercised
singularly or concurrently, at Secured Party's option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to
nor bar the exercise or enforcement of any other. All notices to be given to
Debtor shall be deemed sufficiently given if delivered or mailed by registered
or certified mail, postage prepaid, to Debtor at its address set forth above
or at the most recent address shown on Secured Party's records. Secured
Party's duty of care with respect to Collateral in its possession (as imposed
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by law) shall be deemed fulfilled if Secured Party exercises reasonable care
in physically safekeeping such Collateral or, in the case of Collateral in the
custody or possession of a bailee or other third person, exercises reasonable
care in the selection of the bailee or other third person, and Secured Party
need not otherwise preserve, protect, insure or care for any Collateral.
Secured Party shall not be obligated to preserve any rights Debtor may have
against prior parties, to exercise at all or in any particular manner any
voting rights which may be available with respect to any Collateral, to
realize on the Collateral at all or in any particular manner or order, or to
apply any cash proceeds of Collateral in any particular order of application.
Debtor will reimburse Secured Party for all expenses (including reasonable
attorneys' fees and legal expenses) incurred by Secured Party in the
protection, defense or enforcement of the Security Interest, including
expenses incurred in any litigation or bankruptcy or insolvency proceedings.
This Agreement shall be binding upon and inure to the benefit of Debtor and
Secured Party and their respective heirs, representatives, successors and
assigns and shall take effect when signed by Debtor and delivered to Secured
Party, and Debtor waives notice of Secured Party's acceptance hereof. This
Agreement shall be governed by the internal laws of the state named as part of
Secured Party's address above and, unless the context otherwise requires, all
terms used herein which are defined in Articles 1 and 9 of the Uniform
Commercial Code, as in effect in said state, shall have the meanings therein
stated. If any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations. If this Agreement is signed by more than one
person as Debtor, the term "Debtor" shall refer to each of them separately and
to both or all of them jointly; all such persons shall be bound both severally
and jointly with the other(s); and the Obligations shall include all debts,
liabilities and obligations owed to Secured Party by any Debtor solely or by
both or several or all Debtors jointly or jointly and severally, and all
property described in Section 1 shall be included as part of the Collateral,
whether it is owned jointly by both or all Debtors or is owned in whole or in
part by one (or more) of them.
Page 2 of 2
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STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONTRACTOR WHERE THE BASIS OF
PAYMENT IS THE COST OF THE WORK PLUS A FEE WITH OR WITHOUT A GUARANTEED
MAXIMUM PRICE
AIA Document A111 - Electronic Format
AGREEMENT
made as of the 25th day of July in the year of Nineteen Hundred and Ninety-
six.
BETWEEN the Owner:
(Name and address)
Microware Systems Corporation
1900 N.W. 114th Street
Des Moines, Iowa 50325-7077
and the Contractor:
The Weitz Company, Inc.
800 Second Avenue
Des Moines, Iowa 50309
the Project is:
(Name and address)
Microware Corporation Headquarters
Clive, IA
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN ATTORNEY
IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION
OF THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT
D401.
The 1987 Edition of AIA Document A201, General Conditions of the Contract for
Construction, is adopted in this document by reference. Do not use with other
general conditions unless this document is modified. This document has been
approved and endorsed by The Associated General Contractors of America.
The Architect is:
(Name and address)
Savage-Ver Ploeg & Associates
2929 Westown Parkway, Suite 100
West Des Moines, IA 50266
The Owner and Contractor agree as set forth below.
ARTICLE 1
THE CONTRACT DOCUMENTS
1.1 The Contract Documents consist of this Agreement, Conditions of the
Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda issued prior to execution of this Agreement, other
documents listed in this Agreement and Modifications issued after execution of
this Agreement; these form the Contract, and are as fully a part of the
Contract as if attached to this Agreement or repeated herein. The Contract
represents the entire and integrated agreement between the parties hereto and
supersedes prior negotiations, representations or agreements, either written
or oral. An enumeration of the Contract Documents, other than Modifications,
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appears in Article 16. If anything in the other Contract Documents is
inconsistent with this Agreement, this Agreement shall govern.
ARTICLE 2
THE WORK OF THIS CONTRACT
2.1 The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract
Documents to be the responsibility of others, or as follows:
Construction services for the Corporate Headquarters for Microware Systems
Corporation located in Clive, IA.
ARTICLE 3
RELATIONSHIP OF THE PARTIES
3.1 The Contractor accepts the relationship of trust and confidence
established by this Agreement and covenants with the Owner to cooperate with
the Architect and utilize the Contractor's best skill, efforts and judgment in
furthering the interests of the Owner; to furnish efficient business
administration and supervision; to make best efforts to furnish at all times
and adequate supply of workers and materials, and to perform the Work in the
best way and most expeditious and economical manner consistent with the
interests of the Owner. The Owner agrees to exercise best efforts to enable
the Contractor to perform the Work in the best way and most expeditious manner
by furnishing and approving in a timely way information required by the
Contractor in accordance with requirements of the Contract Documents.
3.1.1 For the purpose of the agreement the Project Consultant is:
Jim McCulloh
Mid-America Group, Ltd.
4700 Westown Parkway, Suite 303
West Des Moines, IA 50266
ARTICLE 4
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
4.1 The date of commencement is the date from which the Contract Time of
Subparagraph 4.2 is measured; it shall be the date of this Agreement, as first
written above, unless a different date is stated below or provision is made
for the date to be fixed in a notice to proceed issued by the Owner.
(Insert the date of commencement, if it differs from the date of this
Agreement or, if applicable, state that the date will be fixed in a notice to
proceed.)
August 1, 1996
Unless the date of commencement is established by a notice to proceed issued
by the Owner, the Contractor shall notify the Owner in writing not less than
five days before commencing the Work to permit timely filing of mortgages,
mechanic's liens and other security interests.
4.2 The Contractor shall achieve Substantial Completion of the entire Work not
later than (Insert the calendar date or number of calendar days after the date
of commencement. Also insert any requirements for earlier Substantial
Completion of certain portions of the Work, if not stated elsewhere in the
Contract Documents.)
June 15, 1997
, subject to adjustments of this Contract Time as provided in the Contract
Documents.
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(Insert provisions, if any, for liquidated damages relating to failure to
complete on time.)
ARTICLE 5
CONTRACT SUM
5.1 The Owner shall pay the Contractor in current funds for the Contractor's
performance of the Contract the Contract Sum consisting of the Cost of the
Work as defined in Article 7 and the Contractor's Fee determined as follows:
(State a lump sum, percentage of Cost of the Work or other provision for
determining the Contractor's Fee, and explain how the Contractor's Fee is to
be adjusted for changes in the Work.)
The Fee shall be $165,000.
5.2 GUARANTEED MAXIMUM PRICE (IF APPLICABLE)
5.2.1 The sum of the Cost of the Work and the Contractor's Fee shall be
guaranteed by the Contractor not to exceed (See 5.2.1.1) Dollars ($ ),
subject to additions and deductions by Change Order as provided in the
Contract Documents. Such maximum sum is referred to in the Contract Documents
as the Guaranteed Maximum Price. Costs which would cause the Guaranteed
Maximum Price to be exceeded shall be paid by the Contractor without
reimbursement by the Owner.
(Insert specific provisions if the Contractor is to participate in any
savings.)
All savings shall be split 50% to Microware Systems Corporation and 50% to The
Weitz Company, Inc.
5.2.1.1 At the execution of this agreement, the target Guaranteed Maximum
Price (GMP) is $5,269,000. The final GMP shall be established by September 1,
1996. Tenant Improvements will be carried as an allowance if sufficient
design information is not available.
(State the numbers or other identification of accepted alternates, but only if
a Guaranteed Maximum Price is inserted in Subparagraph 5.2.1. If decisions
on other alternates are to be made by the Owner subsequent to the execution of
this Agreement, attach a schedule of such other alternates showing the amount
for each and the date until which that amount is valid.)
It is agreed that the Guaranteed Maximum Price may include certain items for
which all specifications or determinations have not been made, and thus
estimates of cost cannot be made. For such items, reasonable allowances have
been made based upon experience and customary practice, and all such items are
specifically listed as "allowance" items on the breakdown on the Guaranteed
Maximum Price. When the actual costs of each allowance item is determined,
such actual cost shall be submitted in place of the applicable allowance.
Whenever costs are less than a stated allowance, 100% of the difference will
be returned to the Owner by Change Order. Whenever costs are more than a
stated allowance, the Contract Sum will be adjusted by change or per Article 5
and 6 accordingly.
5.2.3 The amount agreed to for unit prices, if any, are as follows:
(State unit prices only if a Guaranteed maximum Price is inserted in
Subparagraph 5.2.1)
It is the intent of the Owner to release initial work scopes through Project
work orders (see Exhibit B) prior to establishment of the Guaranteed Maximum
Price. All Project work orders executed prior to the GMP will be incorporated
within the GMP, when established.
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It is the Owner, Architect, and the Contractor's intent to establish the GMP
following completion of all Design Documents and bidding of all trade
packages, materials, and determination of Project costs. Allowances and
contingencies, if any, will be incorporated within the GMP with prior
agreement by all parties.
The Contractor will provide total Project cost estimates, incorporating all
information known to date, and track final bid packages compared to the
Project budget, until the GMP is established.
ARTICLE 6
CHANGES IN THE WORK
6.1 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
6.1.1 Adjustments to the Guaranteed Maximum Price on account of changes in
the Work may be determined by any of the methods listed in Subparagraph 7.3.3
of the General Conditions.
6.1.2 In calculating adjustments to subcontracts (except those awarded with
the Owner's prior consent on the basis of cost plus a fee), the terms "cost"
and "fee" as used in Clause 7.3.3.3 of the General Conditions and the terms
"costs" and "a reasonable allowance for overhead and profit" as used in
Subparagraph 7.3.6 of the General Conditions shall have the meanings assigned
to them in the General Conditions and shall not be modified by Articles 5, 7
and 8 of this Agreement. Adjustments to subcontracts awarded with the Owner's
prior consent on the basis of cost plus a fee shall be calculated in
accordance with the terms of those subcontracts.
6.1.3 In calculating adjustments to this Contract, the terms "cost" and
"costs" as used in the above-referenced provisions of the General Conditions
shall mean the Cost of Work as defined in Article 7 of this Agreement and the
terms "fee" and "a reasonable allowance for overhead and profit" shall mean
the Contractor's Fee as defined in Paragraph 5.1 of this Agreement.
6.1.4 After the GMP is established, the fee shall be fixed. The first
$100,000 of additive changes shall be at cost with no fee mark-up. All
changes after the $100,000 threshold is reached shall have a mark-up of 4% for
Contractor's fee. All costs shall be identified in Article 7 and 8.
6.2 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE
6.3 ALL CONTRACTS
6.3.1 If no specific provision is made in Paragraph 5.1 for adjustment of the
Contractor's Fee in the case of changes in the Work, or if the extent of such
changes is such, in the aggregate, that application of the adjustment
provisions of Paragraph 5.1 will cause substantial inequity to the Owner or
Contractor, the Contractor's Fee shall be equitably adjusted on the basis of
the Fee established for the original Work.
ARTICLE 7
COSTS BE TO REIMBURSED
7.1 The term Cost of the Work shall mean costs necessarily incurred by the
Contractor in the proper performance of the Work. Such costs shall be at
rates not higher than the standard paid at the place of the Project except
with prior consent of the Owner. The Cost of the Work shall include only the
items set forth in this Article 7.
7.1.1 LABOR COSTS
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7.1.1.1 Wages of construction workers directly employed by the Contractor to
perform the construction of the Work at the site or, with the Owner's
agreement, at off-site workshops.
7.1.1.2 Wages or salaries of the Contractor's supervisory and administrative
personnel when stationed at the site with the Owner's agreement. See attached
7.1.1.2.
(If it is intended that the wages or salaries of certain personnel stationed
at the Contractor's principal or other offices shall be included in the Cost
of the Work, identify in Article 14 the personnel to be included and whether
for all or only part of their time.)
7.1.1.2 Wages or salaries of Contractor's employees, in that capacity
employed in the performance of the Work. Wages or salaries of the
Contractor's supervisory and administrative personnel wherever stationed, not
limited to the job site, and in that capacity employed. If personnel are not
stationed at the job site, the charging rates will apply on a pro-rated hourly
basis to only time spent specifically on work for this project. In lieu of
actual wages or salaries, the charging rates below shall apply.
Project Manager $2,000/Week
Project Engineer $1,250/Week
Project Superintendent $1,950/Week
Estimator
Project Coordinator $750/Week
Assistant Superintendent $1,500/Week (If necessary)
7.1.1.3 Wages and salaries of the Contractor's supervisory or administrative
personnel engaged, at factories, workshops or on the road, in expediting the
production or transportation of materials or equipment required for the Work,
but only for the portion of their time required for the Work, with prior
consent of the Owner.
7.1.1.4 Costs paid or incurred by the Contractor for taxes, insurance,
contributions, assessments and benefits required by law or collective
bargaining agreements and, for personnel not covered by such agreements,
customary benefits such as sick leave, medical and health benefits, holidays,
vacations and pensions, provided such costs are based on wages and salaries
included in the Cost of the Work under Clauses 7.1.1.1 through 7.1.1.3.
7.1.2 SUBCONTRACT COSTS
Payments made by the Contractor to Subcontractors in accordance with the
requirements of the subcontracts.
7.1.3 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
7.1.3.1 Costs, including transportation, of materials and equipment
incorporated or to be incorporated in the completed construction.
7.1.3.2 Costs of materials described in the preceding Clause 7.1.3.1 in
excess of those actually installed but required to provide reasonable
allowance for waste and for spoilage. Unused excess materials, in any, shall
be handed over to the Owner at the completion of the Work, or at the Owner's
option, shall be sold by the Contractor; amounts realized, if any, from such
sales shall be credited to the Owner as a deduction from the Cost of the Work.
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7.1.4 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITES AND RELATED
ITEMS
7.1.4.1 Costs, including transportation, installation, maintenance,
dismantling and removal of materials, supplies, temporary facilities,
machinery, equipment, and hand tools not customarily owned by the construction
workers, which are provided by the Contractor at the site and fully consumed
in the performance of the Work; and cost less fair market value on such items
if not fully consumed, whether sold to others or retained by the Contractor.
Cost for items previously used by the Contractor shall mean fair market value.
7.1.4.2 Rental charges for temporary facilities, machinery, equipment, and
hand tools not customarily owned by the construction workers, which are
provided by the Contractor at the site, whether rented from the Contractor or
others, and costs of transportation, installation, minor repairs and
replacements, dismantling and removal thereof. Rates and quantities of
equipment rented shall be subject to the Owner's prior approval. See Attached
7.1.4.2.1
7.1.4.2.1 Attached, as Exhibit A, is the schedule for major equipment rental
rates to be used on the project. These rates are to be used for the duration
of the Project.
7.1.4.3 Costs of removal of debris from the site.
7.1.4.4 Costs of telegrams and long-distance telephone calls, postage and
parcel delivery charges, telephone service at the site and reasonable petty
cash expenses of the site office.
7.1.4.5 That portion of the reasonable travel and subsistence expenses of the
Contractor's personnel incurred while traveling in discharge of duties
connected with the Work, with prior consent of the Owner.
7.1.5 MISCELLANEOUS COSTS
7.1.5.1 That portion directly attributable to this Contract of premiums for
insurance and bonds.
7.1.5.2 Sales, use or similar taxes imposed by a governmental authority which
are related to the Work and for which the Contractor is liable.
7.1.5.3 Fees and assessments for the building permit and for other permits,
licenses and inspections for which the Contractor is required by the Contracts
Documents to pay.
7.1.5.4 Fees of testing laboratories for tests required by the Contract
Documents, except those related to defective or nonconforming Work for which
reimbursement is excluded by Subparagraph 13.5.3 of the General Conditions or
other provisions of the Contract Documents and which do not fall within the
scope of Subparagraphs 7.2.2 through 7.2.4 below.
7.1.5.5 Royalties and license fees paid for the use of a particular design,
process or product required by the Contract Documents; the cost of defending
suits or claims for infringement of patent rights arising from such
requirement by the Contract Documents; payments made in accordance with legal
judgments against the Contractor resulting from such suits or claims and
payments of settlements made with the Owner's consent; provided, however, that
such costs of legal defenses, judgments and settlements shall not be included
in the calculation of the Contractor's Fee or of a Guaranteed Maximum Price,
if any, and provided that such royalties, fees and costs are not excluded by
the last sentence of Subparagraph 3.17.1 of the General Conditions or other
provisions of the Contract Documents.
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7.1.5.6 Deposits lost for causes other than the Contractor's fault or
negligence.
7.1.6 OTHER COSTS
7.1.6.1 Other costs incurred in the performance of the Work if and to the
extent approved in advance in the writing of the Owner.
7.1.6.2 Utility fees including but not limited to water, steam, gas, oil,
electricity, snow removal, winterizing and temporary toilets; protection and
altering of public utility; protection and repairs of adjoining property;
rental property for storage of materials to be incorporated in the Work.
General Liability insurance charges shall be reimbursed at the rate of
$8.50 per thousand times the total Cost of the Work per Article 7, including
Fee.
7.2 EMERGENCIES: REPAIRS TO DAMAGED, DEFECTIVE OR NONCONFORMING WORK
The Cost of the Work shall also include costs described in Paragraph 7.1 which
are incurred by the Contractor:
7.2.1 In taking action to prevent threatened damage, injury or loss in case
of an emergency affecting the safety of persons and property, as provided in
Paragraph 10.3 of the General Conditions.
7.2.2 In repairing or correcting Work damaged or improperly executed by
construction workers in the employ of the Contractor, provided such damage or
improper execution did not result from the fault or negligence of the
Contractor or the Contractor's foremen, engineers or superintendents, or other
supervisory, administrative or managerial personnel of the Contractor.
7.2.3 In repairing damaged Work other than that described in Subparagraph
7.2.2, provided such damage did not result from the fault or negligence of the
Contractor or the Contractor's personnel, and only to the extent that the cost
of such repairs is not recoverable by the Contractor from others and the
Contractor is not compensated therefor by insurance or otherwise.
7.2.4 In correcting defective of nonconforming Work performed or supplied by
a Subcontractor or material supplier and not corrected by them, provided such
defective or nonconforming Work did not result from the fault of neglect of
the Contractor of the Contractor's personnel adequately to supervise and
direct the Work of the Subcontractor or material supplier, and only to the
extent that the cost of correcting the defective or nonconforming Work is not
recoverable by the Contractor from the Subcontractor or material supplier.
ARTICLE 8
COSTS NOT TO BE REIMBURSED
8.1 The Cost of the Work shall not include:
8.1.1 Salaries and other compensation of the Contractor's personnel stationed
at the Contractor's principal office or offices other than the site office,
except as specifically provided in Clauses 7.1.1.2 and 7.1.1.3 or as may be
provided in Article 14.
8.1.2 Expenses of the Contractor's principal office and offices other than
the site office.
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8.1.3 Overhead and general expenses, except as may be expressly included in
Article 7.
8.1.4 The Contractor's capital expenses, including interest on the
Contractor's capital employed for the Work.
8.1.5 Rental costs of machinery and equipment, except as specifically
provided in Clause 7.1.4.2.
8.1.6 Except as provided in Subparagraphs 7.2.2 through 7.2.4 and Paragraph
13.5 of this Agreement, costs due to the fault or negligence of the
Contractor, Subcontractors, anyone directly or indirectly employed by any of
them, or for whose acts any of them may be liable, including but not limited
to costs for the correction of damaged, defective or nonconforming Work,
disposal and replacement of materials and equipment incorrectly ordered or
supplied, and making good damage to property not forming part of the Work.
8.1.7 Any cost not specifically and expressly described in Article 7.
8.1.8 Costs which would cause the Guaranteed Maximum Price, if any, to be
exceeded.
ARTICLE 9
DISCOUNTS, REBATES AND REFUNDS
9.1 Cash discounts obtained on payments made by the Contractor shall accrue
to the Owner if (1) before making the payment, the Contractor included them in
an application for Payment and received payment therefor from the Owner, or
(2) the Owner has deposited funds with the Contractor with which to make
payments; otherwise, cash discounts shall accrue to the Contractor. Trade
discounts, rebates, refunds and amounts received from sales of surplus
materials and equipment shall accrue to the Owner, and the Contractor shall
make provisions so that they can be secured.
9.2 Amounts which accrue to the Owner in accordance with the provisions of
Paragraph 9.1 shall be credited to the Owner as a deduction from the Cost of
the Work.
ARTICLE 10
SUBCONTRACTS AND OTHER AGREEMENTS
10.1 Those portions of the Work that the Contractor does not customarily
perform with the Contractor's own personnel shall be performed under
subcontracts or by other appropriate agreements with Contractor. The
Contractor shall obtain bids from Subcontractors and from suppliers of
materials or equipment fabricated especially for the Work and shall deliver
such bids to the Architect. The Owner will then determine, with the advice of
the Contractor and subject to the reasonable objection of the Architect, which
bids will be accepted. The Owner may designate specific persons or entities
from whom the Contractor shall obtain bids; however, if a Guaranteed Maximum
Price has been established, the Owner may not prohibit the Contractor from
obtaining bids from others. The Contractor shall not be required to contract
with anyone to whom the Contractor has reasonable objection.
10.2 If a Guaranteed Maximum Price has been established and a specific bidder
among those whose bids are delivered by the Contractor to the Architect (1) is
recommended to the Owner by the Contractor; (2) is qualified to perform that
portion of the Work; and (3) has submitted a bid which conforms to the
requirements of the Contract Documents without reservations or exceptions, but
the Owner required that another bid be accepted; then the Contractor may
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require that a Change Order be issued to adjust the Guaranteed Maximum Price
by the difference between the bid of the person or entity recommended to the
Owner by the Contractor and the amount of the subcontract or other agreement
actually signed with the person or entity designated by the Owner.
10.3 Subcontracts or other agreements shall conform to the payment provisions
of Paragraph 12.7 and 12.8, and shall not be awarded on the basis of cost plus
a fee without the prior consent of the Owner.
10.4 The Owner, Project Consultant, Architect, and Contractor team shall
jointly determine accepted subcontractor and supplier bidder's lists prior to
release of specific bid packages. The Contractor shall prepare initial lists
for approval/revisions by the team.
ARTICLE 11
ACCOUNTING RECORDS
11.1 The Contractor shall keep full and detailed accounts and exercise such
controls as may be necessary for proper financial management under this
Contract; the accounting and control systems shall be satisfactory to the
Owner. The Owner and the Owner's accountants shall be afforded access to, and
can request copies of, the Contractor's records, books, correspondence,
instructions, drawings, receipts, subcontracts, purchase orders, vouchers,
memoranda and other data relating to this Contract, and the Contractor shall
preserve these for a period of three years after final payment, or for such
longer period as may be required by law.
ARTICLE 12
PROGRESS PAYMENTS
12.1 Based upon Applications for Payment submitted to the Architect by the
Contractor and Certificates for Payment issued by the Architect, the Owner
shall make progress payments on account of the Contract Sum to the Contractor
as provided below and elsewhere in the Contract Documents.
12.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:
12.3 Provided and Application for Payment is received by the Architect not
later than the first day of a month, the Owner shall make payment to the
Contractor not later than the twenty-fifth day of the same month. If an
Application for Payment is received by the Architect after the application
date fixed above, payment shall be made by the Owner not later than twenty-
five days after the Architect receives the Application for Payment.
12.4 With each Application for Payment, the Contractor shall submit
supporting records and other evidence as mutually agreed between the Owner or
Architect and Contractor to demonstrate expenditures incurred. Additional
information will be provided to the Owner and Architect by the Contractor, if
requested.
12.5 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
12.5.1 Each Application for Payment shall be based upon the most recent
schedule of values submitted by the Contractor in accordance with the Contract
Documents. The schedule of values shall allocate the entire Guaranteed
Maximum Price among the various portions of the Work, except that the
Contractor's Fee shall be shown as a single separate item. The schedule of
values shall be prepared in such form and supported by such data to
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substantiate its accuracy as the Architect may require. This schedule, unless
objected to by the Architect, shall be used as a basis for reviewing the
Contractor's Applications for Payment.
12.5.2 Applications for Payment shall show the percentage completion of each
portion of the Work as of the end of the period covered by the Application for
Payment. The percentage completion shall be the percentage of that portion of
the Work which has actually been completed.
12.5.3 Subject to other provisions of the Contract Documents, the amount of
each progress payment shall be computed as follows:
12.5.3.1 Take that portion of the Guaranteed Maximum Price properly allocable
to completed Work as determined by multiplying the percentage completion of
each portion of the Work by the share of the Guaranteed Maximum Price
allocated to that portion of the Work in the schedule of values. Pending
final determination of cost to the Owner of changes in the Work, amounts not
in dispute may be included as provided in Subparagraph 7.3.7 of the General
Conditions, even though the Guaranteed Maximum Price has not yet been adjusted
by the Change Order.
12.5.3.2 Add that portion of the Guaranteed Maximum Price properly allocable
to materials and equipment delivered and suitably stored at the site for
subsequent incorporation in the Work or, if approved in advance by the Owner,
suitably stored off the site at a location agreed upon in writing.
12.5.3.4 Subtract the aggregate of previous payments made by the Owner.
12.5.3.6 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment as provided in Paragraph 9.5 of the
General Conditions.
12.5.4 Additional retainage, if any, shall be as follows:
(If it is intended to retain additional amounts from progress payments to the
contractor beyond (1) the retainage from the Contractor's Fee provided in
Clause 12.5.3.3, (2) the retainage from Subcontractors provided in Paragraph
12.7 below, and (3) the retainage, if any, provided by other provisions of the
Contract, insert provision for such additional retainage here. Such
provision, if made, should also describe any arrangement for limiting or
reducing the amount retained after the Work reaches a certain state of
completion.)
12.6 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE
12.7 Except with the Owner's prior approval, payments to Subcontractors
included in the Contractor's Applications for Payment shall not exceed an
amount for each Subcontractor calculated as follows:
12.7.1 Take that portion of the Subcontract Sum properly allocable to
completed Work as determined by multiplying the percentage completion of each
portion of the Subcontractor's Work by the share of the total Subcontract Sum
allocated to that portion in the Subcontractor's schedule of values, less
retainage of five percent (5%). Pending final determination of amounts to be
paid to the Subcontractor for changes in the Work, amounts not in dispute may
be included as provided in Subparagraph 7.3.7 of the General Conditions even
though the Subcontract Sum has not yet been adjusted by Change Order.
12.7.2 Add that portion of the Subcontract Sum properly allocable to
materials and equipment delivered and suitably stored at the site for
subsequent incorporation in the Work or, if approved in advance by the Owner,
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suitably stored off the site at a location agreed upon in writing, less
retainage of five percent (5%).
12.7.3 Subtract the aggregate of previous payments made by the Contractor to
the Subcontractor.
12.7.4 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment by the Owner to the Contractor for reasons
which are the fault of the Subcontractor.
12.7.5 Add, upon Substantial Completion of the entire Work of the Contractor,
a sum sufficient to increase the total payments to the Subcontractor to one
hundred percent (100%) of the Subcontract Sum, less amounts, if any, for
incomplete Work and unsettled claims; and, if final completion of the entire
Work is thereafter materially delayed through no fault of the Subcontractor,
add any additional amounts payable on account of Work of the Subcontractor in
accordance with Subparagraph 9.10.3 of the General Conditions.
12.7.6 Upon written approval by the Owner, the Contractor will be paid for
and release to subcontractors retention on subcontracts which are completed to
the satisfaction of the Owner, Project Manager, Architect, and the Contractor.
(If it is intended, prior to Substantial Completion of the entire Work of the
Contractor, to reduce or limit the retainage from Subcontractors resulting
from the percentages inserted in Subparagraphs 12.7.1 and 12.7.2 above, and
this is not explained elsewhere in the Contract Documents, insert here
provisions for such reduction or limitation.)
The subcontract Sum is the total amount stipulated in the subcontract to be
paid by the Contractor to the Subcontractor for the Subcontractor's
performance of the subcontract.
12.8 Except with the Owner's prior approval, the Contractor shall not make
advance payments to suppliers for materials or equipment which have not been
delivered and stored at the site.
12.9 In taking action on the Contractor's Applications for Payment, the
Architect shall be entitled to rely on the accuracy and completeness of the
information furnished by the Contractor and shall not be deemed to represent
that the Architect has made a detailed examination, audit or arithmetic
verification of the documentation submitted in accordance with Paragraph 12.4
or other supporting data; that the Architect has made exhaustive or continuous
on-site inspections of that the Architect has made examinations to ascertain
how or for what purposes the Contractor has used amounts previously paid on
account of the Contract. Such examinations, audit and verifications, if
required by the Owner, will be performed by the Owner's accountants acting in
the sole interest of the Owner.
ARTICLE 13
FINAL PAYMENT
13.1 Final payment shall be made by the Owner to the Contractor when (1) the
Contract has been fully performed by the Contractor except for the
Contractor's responsibility to correct defective or nonconforming Work, as
provided in Subparagraph 12.2.2 of the General Conditions, and to satisfy
other requirements, if any, which necessarily survive final payment; (2) a
final Application for Payment and a final accounting for the Cost of the Work
have been submitted by the Contractor and reviewed by the Owner's accountants;
and (3) a final Certificate for Payment has then been issued by the Architect;
such final payment shall be made by the Owner not more than 30 days after the
issuance of the Architect's final Certificate for Payment, or as follows:
59
<PAGE>
13.2 The amount of the final payment shall be calculated as follows:
13.2.1 Take the sum of the Cost of the Work substantiated by the Contractor's
final accounting and the Contractor's Fee; but not more than the Guaranteed
Maximum Price, if any.
13.2.2 Subtract amounts, if any, for which the Architect withholds, in whole
or in part, a final Certificate for Payment as provided in Subparagraph 9.5.1
of the General Conditions or other provisions of the Contract Documents.
13.2.3 Subtract the aggregate of previous payments made by the Owner.
If the aggregate of the previous payments made by the Owner exceeds the amount
due the Contractor, the Contractor shall reimburse the difference to the
Owner.
13.3 The Owner's accountants will review and report in writing on the
Contractor's final accounting within 30 days after delivery of the final
accounting to the Architect by the Contractor. Based upon such Cost of Work
as the Owner's accountants report to be substantiated by the Contractor's
final accounting, and provided the other conditions of Paragraph 13.1 have
been met, the Architect will, within seven days after receipt of the written
report of the Owner's accountants, either issue to the Owner a final
Certificate for Payment with a copy to the Contractor, or notify the
Contractor and Owner in writing of the Architect's reasons for withholding a
certificate as provided in Subparagraph 9.5.1 of the General Conditions. The
time periods stated in this Paragraph 13.3 supersede those stated in
Subparagraph 9.4.1 of the General Conditions.
13.4 If the Owner's accountants report the Cost of the Work as substantiated
by the Contractor's final accounting to be less than the amount claimed by the
Contractor, the Contractor shall be entitled to demand arbitration of the
disputed amount without a further decision by the Architect. Such demand
arbitration shall be made by the Contractor within 30 days after the
Contractor's receipt of a copy of the Architect's final Certificate for
Payment; failure to demand arbitration within this 30-day period shall result
in the substantiated amount reported by the Owner's accountants becoming
binding on the Contractor. Pending a final resolution by arbitration, the
Owner shall pay the Contractor the amount certified in the Architect's final
Certificate for Payment.
13.5 If, subsequent to final payment and at the Owner's request, the
Contractor incurs costs described in Article 7 and not excluded by Article 8
to correct defective or nonconforming Work, the Owner shall reimburse the
Contractor such costs and the Contractor's Fee applicable thereto on the same
basis as if such costs had been incurred prior to final payment, but not in
excess of the Guaranteed Maximum Price, if any. If the Contractor has
participated in savings provided in Paragraph 5.2, the amount of such savings
shall be recalculated and appropriate credit given to the Owner in determining
the net amount to be paid by the Owner to the Contractor.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 Where reference is made in this Agreement to a provision of the General
Conditions or another Contract Document, the reference refers to that
provision as amended or supplemented by other provisions of the Contract
Documents.
60
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14.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof, at
the legal rate prevailing from time to time at the place where the Project is
located.
(Insert rate of interest agreed upon, in any.)
6% per annum
(Usury laws and requirements under the Federal Truth in Lending Act, similar
state and local consumer credit laws and other regulations at the Owner's and
Contractor's principal places of business, the location of the Project and
elsewhere may affect the validity of this provision. Legal advice should be
obtained with respect to deletions or modifications, and also regarding
requirements such as written disclosures or waivers.)
14.3 Other provisions:
14.3 The Owner hereby designates Ken Kaplan or other designees as its
representative, with authority to approve changes in the Work. Such
representative shall be reasonably available and, in all cases, such
representative's signature shall be final and binding on the Owner.
14.4 Notices required or desired to be made under this Agreement shall, if
mailed, be mailed to the party at the address set forth above.
ARTICLE 15
TERMINATION OR SUSPENSION
15.1 The Contract may be terminated by the Contractor as provided in Article
14 of the General Conditions; however, the amount to be paid to the Contractor
under Subparagraph 14.1.2 of the General Conditions shall not exceed the
amount the Contractor would be entitled to receive under Paragraph 15.3 below,
except that the Contractor's Fee shall be calculated as if the Work had been
fully completed by the Contractor, including a reasonable estimate of the Cost
of the Work for Work not actually completed.
15.2 If a Guaranteed Maximum Price is established in Article 5, the Contract
may be terminated by the Owner for cause as provided in Article 14 of the
General Conditions; however, the amount, if any, to be paid to the Contractor
under Subparagraph 14.2.4 of the General Conditions shall not cause the
Guaranteed Maximum Price to be exceeded, nor shall it exceed the amount the
Contractor would be entitled to receive under Paragraph 15.3 below.
15.3 If no Guaranteed Maximum Price is established in Article 5, the Contract
may be terminated by the Owner for cause as provided in Article 14 of the
General Conditions; however, the Owner shall then pay the Contractor an amount
calculated as follows:
15.3.1 Take the Cost of the Work incurred by the Contractor to the date of
termination.
15.3.2 Add the Contractor's Fee computed upon the Cost of the Work to the
date of termination at the rate stated in Paragraph 5.1 or, if the
Contractor's Fee is stated as a fixed sum in that Paragraph, an amount which
bears the same ratio to that fixed-sum Fee as the Cost of the Work at the time
of termination bears to a reasonable estimate of the probable Cost of the Work
upon its completion.
15.3 Subtract the aggregate of previous payments made by the Owner.
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The Owner shall also pay the Contractor fair compensation, either by purchase
or rental at the election of the Owner, for any equipment owned by the
Contractor which the Owner elects to retain and which is not otherwise
included in the Cost of the Work under Subparagraph 15.3.1. To the extent
that the Owner elects to take legal assignment of subcontracts and purchase
orders (including rental agreements), the Contractor shall, as a condition of
receiving the payments referred to in this Article 15, execute and deliver all
such papers and take all such steps, including the legal assignment of such
subcontracts and other contractual rights of the Contractor, as the Owner may
require for the purpose of fully vesting in the Owner the rights and benefits
of the Contractor under such subcontracts or purchase orders.
15.4 The Work may be suspended by the Owner as provided in Article 14 of the
General Conditions; in such case, the Guaranteed Maximum Price, if any, shall
be increased as provided in Subparagraph 14.3.2 of the General conditions
except that the term "cost of performance of the Contract" in that
Subparagraph shall be understood to mean the Cost of the Work and the term
"profit" shall be understood to mean the Contractor's Fee as described in
Paragraphs 5.1 and 6.3 of this Agreement.
ARTICLE 16
ENUMERATION OF CONTRACT DOCUMENTS
16.1 The Contract Documents, except for Modifications issued after execution
of this Agreement, are enumerated as follows:
16.1.1 The Agreement is this executed Standard Form of Agreement Between
Owner and Contractor, AIA Document A111, 1987 Edition.
16.1.2 The General Conditions are the General Conditions of the Contract for
Construction, AIA Document A201, 1987 Edition.
16.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated , and are as follows:
Document Title Pages
To be Amended to this Contract.
16.1.4 The Specifications are those contained in the Project Manual dated as
in Paragraph 16.1.3, and are as follows:
(Either list the Specifications here or refer to an exhibit attached to this
Agreement.)
Section Title Pages
To be Amended to this Contract.
16.1.5 The Drawings are as follows, and are dated unless a different date
is shown below:
(Either list the Drawings here or refer to an exhibit attached to this
Agreement.)
Number Title Date
To be Amended to this Contract.
16.1.6 The Addenda, if any, are as follows:
Number Date Pages
62
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To be Amended to this Contract.
Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in this
Article 16.
16.1.7 Other Documents, if any, forming part of the Contract Documents are as
follows:
(List here any additional documents which are intended to form part of the
Contract Documents. The General Conditions provide that bidding requirements
such as advertisement or invitation to bid, Instructions to Bidders, sample
forms and the Contractor's bid are not part of the Contract Documents unless
enumerated in the Agreement. They should be listed here only if intended to
be part of the Contract Documents.)
This Agreement is entered into as of the day and year first written above and
is executed in at least three original copies of which one is to be delivered
to the Contractor, one to the Architect for use in the administration of the
Contract, and the remainder to the Owner.
OWNER CONTRACTOR
MICROWARE SYSTEMS CORPORATION THE WEITZ COMPANY, INC.
/S/ KENNETH B. KAPLAN /S/ JAMES P. SIMMONS
- ------------------------------ -----------------------------
(Signature) (Signature)
James P. Simmons
President, Iowa Division
(Printed name and title)
(Printed name and title)
63
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Microware Systems Corporation
Computation of Net Earnings (Loss) per Share (1)
(Amounts in thousands, except per share amounts)
Year ended March 31,
----------------------------
1995 1996 1997
----- ------ -------
Net earnings (loss) $921 $1,376 ($1,571)
===== ====== ======
Reconciliation of weighted average
number of shares outstanding
to amount used in net earnings
(loss) per share computation:
Weighted average number of
common shares outstanding 8,729 9,730 13,754
Weighted average number of
convertible Series A Preferred
Stock 1,360 1,360 -
Common stock issued below the
initial public offering price
and within twelve months
preceding the initial public
offering 316 100 -
Dilutive effect of warrants - - -
Dilutive effect of options 1,658 1,840 -
------ ------ ------
12,063 13,030 13,754
====== ====== ======
Net earnings (loss) per share $0.08 $0.11 ($0.11)
====== ====== ======
(1) See Note 1 of Notes to the Consolidated Financial Statements.
64
<PAGE>
Independent Auditors' Consent
The Board of Directors
Microware Systems Corporation
We consent to incorporation by reference in the registration statement
(No.333-11061) on Form S-8 of Microware Systems Corporation of our report
dated April 24, 1997, except for the last sentence of Note 5 (c) which is as
of June 18, 1997, relating to the consolidated balance sheets of Microware
Systems Corporation and subsidiaries as of March 31, 1996 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997,
which report appears in the March 31, 1997 Form 10-K of Microware Systems
Corporation.
KPMG Peat Marwick LLP
Des Moines, Iowa
June 27, 1997
65
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations
found in item 14(a) of the Company's form 10-k for the year-to-date, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,758
<SECURITIES> 13,204
<RECEIVABLES> 7,649
<ALLOWANCES> 635
<INVENTORY> 96
<CURRENT-ASSETS> 29,107
<PP&E> 17,380
<DEPRECIATION> 5,463
<TOTAL-ASSETS> 49,083
<CURRENT-LIABILITIES> 6,083
<BONDS> 0
0
0
<COMMON> 36,152
<OTHER-SE> (1,426)
<TOTAL-LIABILITY-AND-EQUITY> 49,083
<SALES> 16,586
<TOTAL-REVENUES> 26,134
<CGS> 3,046
<TOTAL-COSTS> 6,969
<OTHER-EXPENSES> 21,827
<LOSS-PROVISION> 754
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> (1,574)
<INCOME-TAX> (3)
<INCOME-CONTINUING> (1,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,571)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
