SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
December 31, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____ to ____.
Commission file number 0-27988
MICROWARE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1073916
(State of incorporation) (I.R.S. Employer Identification No.)
1900 N.W. 114TH ST. DES MOINES, IOWA 50325
(Address of principal executive office)
(515) 223-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK: 13,933,961 SHARES OUTSTANDING AS OF DECEMBER 31, 1996
<PAGE>
MICROWARE SYSTEMS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying financial information is unaudited but, in the opinion
of management, reflects all adjustments (which include only normally
recurring adjustments) necessary for a fair presentation of the results
for the periods shown. The audited financial statements and notes
thereto for the year ended March 31, 1996 are included in the Form 10-K
Annual Report previously filed with the Securities and Exchange
Commission.
The results for the quarter ended December 31, 1996, are not
necessarily indicative of the results to be expected for the entire
year.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DEC. 31, ENDED DEC. 31,
----------------- -----------------
1995 1996 1995 1996
------- ------- ------- -------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Product $3,943 $4,129 $11,560 $12,050
Services 1,774 1,745 5,313 7,931
------- ------- ------- -------
5,717 5,874 16,873 19,981
------- ------- ------- -------
Cost of revenues:
Product 438 851 1,736 2,098
Services 856 1,081 1,889 2,801
------- ------- ------- -------
1,294 1,932 3,625 4,899
------- ------- ------- -------
Gross profit 4,423 3,942 13,248 15,082
Operating expenses:
Research & development 1,204 1,748 3,791 5,170
Sales & marketing 2,101 2,488 5,671 7,261
General & administrative 875 861 2,983 2,478
------- ------- ------- -------
Total operating expenses 4,180 5,097 12,445 14,909
------- ------- ------- -------
Operating profit 243 (1,155) 803 173
------- ------- ------- -------
Other income and (expense):
Foreign currency gains
(losses), net (45) 44 38 65
Interest expense (21) (26) (92) (60)
Interest income 177 265 269 946
------- ------- ------- -------
Total other 111 283 215 951
------- ------- ------- -------
Earnings (loss) before
income tax expense(benefit) 354 (872) 1,018 1,124
Income tax expense (benefit) 38 (257) 123 225
------- ------- ------- -------
Net earnings (loss) $316 ($615) $895 $899
======= ======= ======= =======
Net earnings (loss) per share $0.02 ($0.04) $0.07 $0.06
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 13,431 13,859 12,906 15,981
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, Dec. 31,
1996 1996
(unaudited)
--------- ---------
( $ in thousands, except
per share amounts)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,337 $5,096
Short-term investments - 15,432
Trade receivables, net of allowance
for doubtful accounts of
$366 and $389, respectively 4,946 8,553
Income taxes receivable 211 110
Inventories 39 96
Prepaid royalties - 908
Prepaid expenses and other current assets 226 407
Deferred tax assets 518 642
--------- ---------
Total current assets 18,277 31,244
--------- ---------
Investment, at cost - 5,004
Property and equipment:
Land and improvements 144 144
Building 2,017 2,017
Furniture, fixtures & equipment 3,316 4,044
R&D equipment 2,900 3,455
Leasehold improvements 102 126
Construction in progress 25 4,475
--------- ---------
8,504 14,261
Less accumulated depreciation
and amortization 4,502 5,223
--------- ---------
Net property and equipment 4,002 9,038
--------- ---------
Other assets:
Intangible assets, net 1,228 1,554
Deposits and other 1,431 763
--------- ---------
2,659 2,317
--------- ---------
$24,938 $47,603
========== =========
LIABILITIES
Current liabilities:
Notes payable to banks $873 $345
Current portion of long-term debt 39 41
Accounts payable 1,665 1,945
Accrued expenses 1,361 1,026
Deferred revenues 888 726
Income taxes payable 151 465
--------- ---------
Total current liabilities 4,977 4,548
Long-term debt, less current 1,188 5,479
Deferred income taxes 230 226
--------- ---------
Total liabilities 6,395 10,253
--------- ---------
SHAREHOLDERS' EQUITY
Series A preferred stock, $14.71 par
value; 340,000 shares authorized,
issued and outstanding 5,001 -
Series I preferred stock, no par
value; 500,000 shares authorized;
none issued or outstanding - -
Common stock, voting, no par value;
50,000,000 shares authorized;
10,439,552 and 14,159,061 shares
issued, 10,214,452 and 13,933,961
shares outstanding 13,094 36,103
Retained earnings 1,660 2,559
Cumulative adjustment for foreign
currency translation (435) (535)
--------- ---------
19,320 38,127
Less cost of common shares acquired
for the treasury, 225,100 and
225,100 shares 777 777
--------- ---------
Total shareholders' equity 18,543 37,350
--------- ---------
$24,938 $47,603
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DEC. 31,
---------------------------
1995 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $895 $899
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 829 1,216
Deferred income taxes (61) (156)
Change in assets and liabilities:
Trade receivables, net (752) (3,556)
Inventories (50) (117)
Prepaid royalties - (848)
Other current assets (158) (186)
Income taxes receivable 61 132
Other assets (313) (703)
Accounts payable (234) 293
Accrued expenses (276) (320)
Deferred revenues 953 (161)
Income taxes payable 39 273
--------- ---------
Net cash provided by (used in)
operating activities 933 (3,234)
--------- ---------
Cash flows from investing activities:
Capital expenditures (695) (5,840)
Purchases of short-term investments - (25,900)
Sales of short-term investments - 10,468
Purchase of investment, at cost - (5,004)
--------- ---------
Net cash used in investing activities (695) (26,276)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable
to banks and long-term debt 2,157 4,744
Principal payments on notes payable
to banks and long-term debt (2,912) (950)
Proceeds from issuance of common stock 12,100 18,984
Cost of issuance of common stock (61) (410)
Deferred offering costs (406) -
--------- ---------
Net cash provided by
financing activities 10,878 22,368
--------- ---------
Effect of foreign currency exchange
rate changes on cash (194) (99)
--------- ---------
Net increase (decrease) in cash
and cash equivalents 10,922 (7,241)
Cash and cash equivalents
at beginning of period 1,516 12,337
--------- ---------
Cash and cash equivalents
at end of period $12,438 $5,096
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $106 $163
========== =========
Cash paid for taxes $6 $225
========== =========
</TABLE>
Supplemental disclosure of non-cash financing activities:
In connection with the Company's initial public offering effective
April 2, 1996, the 340,000 shares of Series A Preferred Stock were
each converted into 4 shares of Common Stock.
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31,1996 AND 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with the rules and regulations of the Securities and
Exchange Commission, the preceding unaudited financial statements omit
or condense certain information and footnote disclosure normally
required for complete financial statements prepared in accordance with
generally accepted accounting principles. In the opinion of management,
all adjustments (which include reclassifications and normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows at December 31, 1996 and for all periods
presented, have been made.
2. NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of common and, when dilutive,
common equivalent shares outstanding during the period. Dilutive
common equivalent shares are calculated using the treasury stock method
and consist of common stock issuable upon the exercise of options and
warrants.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Except for the historical information contained herein, the following
discussion may contain forward looking statements regarding the
Company's business and financial performance that involve risks and
uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in
this section, as well as in the Company's Registration Statement on Form
S-1, Form 10-K Annual Report for the fiscal year ended March 31, 1996
and the Company's other filings with the SEC.
The Company typically charges a one-time fee for a development license
and a run-time royalty fee for each copy of the Company's operating
system embedded in the customer's product. A key component of the
Company's strategy is to increase revenue through run-time royalty fees.
Any increase in the percentage of revenues attributable to run-time
royalties will depend on the Company's successful negotiation of run-
time royalty agreements and on the successful commercialization by the
Company's customers of the underlying products. In addition, the
Company has experienced significant period-to-period fluctuations in
revenues and operating results and anticipates that such fluctuations
will continue. These fluctuations have been caused by a number of
factors, including but not limited to, customer buying patterns, product
development cycles, delays in completion of custom contract work and the
timing of sales of the Company's products. The Company typically
recognizes a substantial portion of its revenues in the last month of a
quarter, with revenues frequently concentrated in the last weeks of a
quarter, which heightens the risk of quarterly variability in results.
RESULTS OF OPERATIONS
Third Quarter of Fiscal 1997 Compared to
- -----------------------------------------
the Third Quarter of Fiscal 1996
---------------------------------
Revenues
Total revenues increased 2.7 percent or $157,000 from $5.7 million in
the third quarter of Fiscal 1996 to $5.9 million in the third quarter of
Fiscal 1997. Product revenues increased 4.7 percent or $186,000 from
$3.9 million in the third quarter of Fiscal 1996 to $4.1 million in the
third quarter of Fiscal 1997. The increase in product revenues resulted
primarily from an increase in run-time royalties combined with an
increase in development licenses. Services revenue remained relatively
constant at $1.8 million and $1.7 million for the third quarters ended
December 31, 1995 and 1996, respectively.
Cost of Revenues
Total cost of revenues increased 49.3 percent or $638,000 from $1.3
million in the third quarter of Fiscal 1996 to $1.9 million in the third
quarter of Fiscal 1997. Cost of product revenues increased $413,000
from $438,000 in the third quarter of Fiscal 1996 to $851,000 in the
third quarter of Fiscal 1997. Cost of product revenues increased
primarily due to the costs of third party software being bundled with
OS-9 products. Cost of services revenue increased $225,000 from
$856,000 in the third quarter of Fiscal 1996 to $1.1 million in the
third quarter of Fiscal 1997. The increase in cost of services revenue
is primarily attributable to lower margins achieved on custom contract
work.
Research and Development
Research and development expenses increased 45.2 percent or $544,000
from $1.2 million in the third quarter of Fiscal 1996 to $1.7 million in
the third quarter of Fiscal 1997. This increase primarily resulted from
an increase of approximately 30 people, along with associated costs, in
the Company's technical staff from the third quarter in Fiscal 1996 to
the third quarter in Fiscal 1997. Additional technical staff was added
primarily to support additional Internet, wireless and digital
television product offerings.
Sales and Marketing
Sales and marketing expense increased 18.4 percent or $387,000 from $2.1
million in the third quarter of Fiscal 1996 to $2.5 million in the third
quarter of Fiscal 1997. The overall increase is primarily attributable
to costs associated with the opening of a branch office in Munich,
Germany, a sales office in Osaka, Japan, new sales personnel in Paris,
France and organizational changes in responsibilities from general
management duties to sales and marketing more directly related to
revenue production.
General and Administrative
General and administrative expense declined modestly between quarters
from $875,000 to $861,000 for the third quarters of Fiscal 1996 and
Fiscal 1997, respectively.
Nine Months Year-to-Date of Fiscal 1997 Compared to
- --------------------------------------------------
the Nine Months Year-to-Date of Fiscal 1996
--------------------------------------------
Revenues
Total revenues increased 18.4 percent or $3.1 million from $16.9 million
for the nine month period ended December 31,1995 to $20.0 million for
the nine month period ended December 31,1996. Product revenues
increased 4.2 percent or $490,000 from $11.6 million in the nine month
period ended December 31, 1995 to $12.1 million in the nine month period
ended December 31, 1996. The increase in product revenues from the
nine month period ended December 31,1995 to the nine month period ended
December 31,1996 results primarily from an increase in initial
development license fees from key wireless and Internet customers.
Services revenues increased 49.3 percent or $2.6 million from $5.3
million in the nine month period ended December 31, 1995 to $7.9 million
in the nine month period ended December 31, 1996. Services revenues
increased from the nine month period ended December 31,1995 to the nine
month period ended December 31 ,1996 primarily as a result of the
Company engaging in the development of new processor ports. In
addition, services revenue increased as a result of the Company adapting
certain third party software to OS-9 for key wireless, Internet and
DAVID customers.
Cost of Revenues
Total cost of revenues increased 35.1 percent or $1.3 million from $3.6
million in the nine month period ended December 31, 1995 to $4.9 million
in the nine month period ended December 31, 1996. Cost of product
revenues increased from $1.7 million in the nine month period ended
December 31, 1995 to $2.1 million in the nine month period ended
December 31, 1996. Cost of product revenues increased primarily due to
the cost of third party software being bundled with OS-9 products. Cost
of services revenue increased from $1.9 million in the nine month period
ended December 31, 1995 to $2.8 million in the nine month period ended
December 31, 1996. The increase in cost of services revenue is
attributable to lower margins achieved on custom contract work performed
in the third quarter of Fiscal 1997.
Research and Development
Research and development expenses increased 36.4 percent or $1.4 million
from $3.8 million in the nine month period ended December 31, 1995 to
$5.2 million in the nine month period ended December 31, 1996. This
increase primarily resulted from an increase of approximately 30 people,
along with associated costs, in the Company's technical staff from the
nine month period ended December 31, 1995 to the nine month period ended
December 31, 1996.
Sales and Marketing
Sales and marketing expense increased 28.0 percent or $1.6 million from
$5.7 million in nine month period ended December 31, 1995 to $7.3
million in the nine month period ended December 31, 1996. The overall
increase is primarily attributable to costs associated with the opening
of a branch office in Munich, Germany, a sales office in Osaka, Japan,
new sales personnel in Paris, France and organizational changes in
responsibilities from general management duties to sales and marketing
more directly related to revenue production.
General and Administrative
General and administrative expense decreased 16.9 percent or $505,000
from $3.0 million in the nine month period ended December 31, 1995 to
$2.5 million in the nine month period ended December 31, 1996. 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.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1996, the Company had working capital of $26.7 million,
and approximately $20.5 million in cash, cash equivalents and short-term
investments.
On May 9, 1996, the Company purchased approximately 17.5 acres of land
for approximately $2.1 million on which the Company is currently
constructing an 88,000 square foot office building to consolidate all
Des Moines, Iowa operations. The estimated cost of the project is
approximately $9.0 - $10.0 million (including associated land) and is
financed by a $10.0 million line of credit secured by short-term
investments, land and building.
On October 16, 1996, the Company made an approximately $5.0 million
equity investment in Unwired Planet, Inc., a privately-held Delaware
corporation based in Redwood Shores, California.
Management believes that the Company's working capital and borrowing
capacity are sufficient to meet the Company's financial needs through
the end of Fiscal 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material litigation and is not
aware of any pending or threatened litigation that would have a material
adverse effect on the Company or its business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibits 27 - Financial Data Schedule (EDGAR version
only).
(b.) Reports on Form 8-K: On October 31, 1996, the Company
filed a Report on Form 8-K to report its equity
investment in Unwired Planet, Inc., a privately-held
Delaware corporation based in Redwood Shores, California.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto authorized.
MICROWARE SYSTEMS CORPORATION
Date: February 14, 1997 /s/ KENT R. KELDERMAN
-----------------------
Kent R. Kelderman
Chief Financial Officer,
Executive Vice President - Finance
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 12/31/96 and the Statement of Consolidated
Earnings for the nine months ended 12/31/96 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5096
<SECURITIES> 15432
<RECEIVABLES> 8942
<ALLOWANCES> 389
<INVENTORY> 96
<CURRENT-ASSETS> 31244
<PP&E> 14261
<DEPRECIATION> 5223
<TOTAL-ASSETS> 47603
<CURRENT-LIABILITIES> 4548
<BONDS> 0
0
0
<COMMON> 36103
<OTHER-SE> 1247
<TOTAL-LIABILITY-AND-EQUITY> 47603
<SALES> 12050
<TOTAL-REVENUES> 19981
<CGS> 2098
<TOTAL-COSTS> 4899
<OTHER-EXPENSES> 14909
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</TABLE>
