SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1997
[ ] 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.)
1500 N.W. 118TH 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: 14,296,852 SHARES OUTSTANDING AS OF JUNE 30, 1997
<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 unaudited consolidated financial statements
and analyses should be read in conjuction with the audited consolidated
financial statements and notes thereto for the year ended March 31, 1997
included in the Annual Report on Form 10-K previously filed with the
Securities and Exchange Commission.
The results for the quarter ended June 30, 1997, are not necessarily
indicative of the results to be expected for the entire year.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1997 1996
--------- ---------
( $ in thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Product $2,711 $3,964
Services 1,368 2,846
--------- ---------
4,079 6,810
--------- ---------
Cost of revenues:
Product 578 568
Services 703 770
--------- ---------
1,281 1,338
--------- ---------
Gross profit 2,798 5,472
Operating expenses:
Research & development 1,881 1,694
Sales & marketing 2,431 2,280
General & administrative 812 768
Special charges - 75
--------- ---------
Total operating expenses 5,124 4,817
--------- ---------
Operating (loss) profit (2,326) 655
--------- ---------
Other income and (expense):
Foreign currency (loss) gain, net (13) 12
Interest income 221 324
Interest expense (30) (4)
--------- ---------
Total other 178 332
--------- ---------
(Loss) earnings before income tax
expense (2,148) 987
Income tax expense 34 240
--------- ---------
Net (loss) earnings ($2,182) $747
========== =========
(Loss) earnings per share ($0.15) $0.05
========== =========
Weighted average common and common
equivalent shares outstanding
(in thousands) 14,120 15,555
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
(unaudited)
--------- ---------
( $ in thousands, except
per share amounts)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,465 $ 6,758
Short-term investments 15,406 13,204
Trade receivables, net of allowance for
doubtful accounts of $604 and $635 4,732 7,014
Income taxes receivable 226 207
Inventories 91 96
Prepaid royalties 1,053 1,005
Prepaid expenses and other current assets 680 316
Deferred tax assets 488 507
--------- ---------
Total current assets 25,141 29,107
Investment, at cost 5,004 5,004
Property and equipment:
Land and improvements 144 144
Building 2,017 2,017
Furniture, fixtures & equipment 4,224 4,115
Research and development equipment 3,751 3,612
Leasehold improvements 123 123
Construction in progress 9,788 7,369
--------- ---------
20,047 17,380
Accumulated depreciation and amortization 5,855 5,463
--------- ---------
Net property and equipment 14,192 11,917
Other assets:
Intangible assets, net of amortization 2,578 1,675
Deposits and other 1,500 1,380
--------- ---------
Total other assets 4,078 3,055
--------- ---------
$48,415 $49,083
========== =========
Liabilities
Current liabilities:
Notes payable to banks $349 $323
Current portion of long-term debt 39 38
Accounts payable 1,930 2,559
Accrued expenses 2,261 2,194
Deferred revenue 983 867
Income taxes payable 82 102
--------- ---------
Total current liabilities 5,644 6,083
Long-term debt, less current installments 9,599 8,038
Deferred income taxes 275 236
--------- ---------
Total liabilties 15,518 14,357
--------- ---------
Shareholders' equity
Series A preferred stock, $14.71 par
value; 340,000 shares authorized;
none issued or outstanding - -
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;
14,521,952 and 14,190,561
shares issued, 14,296,852 and
13,965,461 shares outstanding 36,367 36,152
Retained (deficit) earnings (2,093) 89
Cummulative adjustment for foreign
currency translation (600) (738)
--------- ---------
33,674 35,503
Less cost of common shares acquired for the
treasury, 225,100 and 225,100 shares 777 777
--------- ---------
Total shareholders' equity 32,897 34,726
--------- ---------
$48,415 $49,083
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ($2,182) $747
Adjustments to reconcile net (loss)
earnings to net cash used in
operating activities:
Depreciation and amortization 491 306
Deferred income taxes 59 (73)
Change in assets and liabilities:
Trade receivables, net 2,373 (1,359)
Inventories 4 (39)
Prepaid royalties (48) -
Other current assets (361) (209)
Income taxes receivable (19) 242
Other assets (1,126) 206
Accounts payable (651) (214)
Accrued expenses 70 (279)
Deferred revenue 107 171
Income taxes payable (24) 172
--------- ---------
Net cash used in operating activities (1,307) (329)
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,595) (676)
Purchase of short-term investments (5,794) -
Maturities of short-term investments 3,592 -
Purchase of land - (2,163)
--------- ---------
Net cash used in investing activities (4,797) (2,839)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable
to banks and long-term debt (567) (509)
Proceeds from issuance of notes
payable to banks and long-term debt 2,129 -
Proceeds from issuance of common stock 249 18,605
Cost of issuance of common stock (34) (869)
--------- ---------
Net cash provided by financing activities 1,777 17,227
Effect of foreign currency exchange rate --------- ---------
changes on cash 34 (24)
--------- ---------
Net (decrease) increase in cash and
cash equivalents (4,293) 14,035
Cash and cash equivalents at beginning
of period 6,758 12,337
--------- ---------
Cash and cash equivalents at end of period $2,465 $26,372
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 141 $28
========== =========
Cash paid for taxes $ 27 $72
========== =========
</TABLE>
Supplemental disclosure of noncash financing activities:
In connection with the Company's initial public offering effective
April 2, 1996, the 340,000 shares of Series A Preferred Stock were
each converted into four shares of Common Stock.
<PAGE>
MICROWARE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with the rules and regulations of the Securities and
Exchange Commission, the preceding unaudited financial statements omit
or condense certain information and footnote disclosure normally
required for complete financial statements prepared in accordance with
generally accepted accounting principles. In the opinion of management,
all adjustments (which include reclassifications and normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows at June 30, 1997 and for all periods
presented, have been made.
2. NET (LOSS) EARNINGS PER SHARE
Net (loss) earnings per share is computed dividing net (loss) earnings
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.
3. STOCK OPTIONS
In May, 1997 the Company offered all recipients of stock option grants
made in October 1996 (totaling 353,100 shares) the right to cancel
those outstanding (and non-vested) options at the original exercise
price of $15.50 per share and receive new options dated May 1997 with a
new exercise price and revised vesting. The new exercise prices are
$10.00 per share for employees who were serving as executive officers at
the time of the original grant and $6.25 for all other employees. Both
exercise prices are equal to or in excess of the fair value of the
Company's common stock at the date of grant. While the original grants
had a vesting schedule of 25% on each anniversary of October 14, 1996,
the new grants have vesting of 10%, 20%, 30%, and 40% on each
anniversary of May 2, 1997. Vesting of grants accelerates in the event
of a change in control of the Company. The new grants all have an
expiration date of May 2, 2007.
<PAGE>
MICROWARE SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION IS SUBJECT TO UNCERTAINTY
Except for the historical information contained herein, the following
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 not
mentioned, 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 in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1997, and other documents filed by the Company with the Securities and
Exchange Commission. 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. For the fiscal year ended March 31,
1997 and the first quarter of fiscal 1998, the Company's actual
performance did not meet market expectations. 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
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 fees. 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. As a result the Company's product revenues have
demonstrated a proportionate increase in large account, vertical market
activities and related services, and a corresponding decrease in
traditional run-rate embedded systems business as a percentage of total
revenues. 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, has increased the quarterly variability
of the Company's financial results.
Subsequent to the end of the first quarter ended June 30, 1997, the
Company accepted the resignations of one executive vice president,
Michael J. Burgher, who had been serving as the Company's Chief
Technology Officer, along with two other vice presidents responsible for
North American sales and professional services, respectively. The
Company also eliminated 13 non-officer positions, and accepted the
resignations of certain additional sales representatives. Severance and
related benefits associated with eliminations and resignations of
employees will approximate $200,000 in the second quarter of fiscal
1998. The Company anticipates that the eliminations and resignations
may have an interim adverse effect on the Company's revenues and
earnings until such time as successors are named.
As a result of the above factors management anticipates that 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 the second
quarter of fiscal 1998.
RESULTS OF OPERATIONS
First Quarter of Fiscal 1998 Compared to the First Quarter of Fiscal
1997
Revenues
Total revenues decreased 40% or $2.7 million from $6.8 million in the
first quarter of fiscal 1997 to $4.1 million in the first quarter of
fiscal 1998. Product revenues decreased 32% or $1.3 million from $4.0
million in the first quarter of fiscal 1997 to $2.7 million in the first
quarter of fiscal 1998. The decrease in product revenues from the first
quarter of fiscal 1997 to the same period in fiscal 1998 was primarily
due to a reduction in nonrefundable prepaid royalties recognized from
customers. In addition, the initial license fees from new accounts in
the Internet and wireless vertical markets did not meet management
expectations in the current quarter. 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. Services
revenues decreased 52% or $1.5 million from $2.8 million in the first
quarter of fiscal 1997 to $1.4 million in the first quarter of fiscal
1998. The decrease from the first quarter of fiscal 1997 to the same
period in fiscal 1998 primarily resulted from a decrease in funded
development of advanced processor ports.
Cost of Revenues
Total cost of revenues was $1.3 million for both the first quarter of
fiscal 1997 and 1998. The Company's cost of product revenues as a
percentage of product revenues increased from 14% in the first quarter
of fiscal 1997 to 21% in the first quarter of fiscal 1998. This
increase primarily resulted from increased amortization of purchased
software, product warranty reserves and third party royalty expense.
Cost of services revenues increased as a percentage of services revenues
from 27% to 51% in the first quarters of fiscal 1997 and 1998,
respectively. The percentage increase resulted from lower margins
achieved on advanced processor ports and other custom contract work.
Research and Development
Research and development expenses increased 11% or $187,000 from $1.7
million in the first quarter of fiscal 1997 to $1.9 million in the first
quarter of fiscal 1998. The increase in overall dollars resulted
primarily from additional technical staff along with associated costs
from the first quarter of fiscal 1997 to the first quarter of fiscal
1998.
Sales and Marketing
Sales and marketing expense increased 7% or $151,000 from $2.3 million
in the first quarter of fiscal 1997 to $2.4 million in the first quarter
of fiscal 1998. The overall increase is primarily attributable to the
opening of a branch office in Munich, Germany.
General and Administrative Expense
General and administrative expenses increased modestly from $768,000 to
$812,000 in the first quarters of fiscal 1997 and 1998, respectively.
The increase in general and administrative expenses resulted from the
creation of a new executive position.
Liquidity and Capital Resources
At June 30, 1997, the Company had working capital of $19.5 million, and
approximately $17.9 million in cash, cash equivalents and short-term
investments. Of the $17.9 million, approximately $8.4 million of the
Company's short-term investments are pledged as security for the
construction note on the Company's new headquarters facility. The
Company is currently reviewing long-term financing options for the
facility.
Net cash used in operating activities totaled $329,000 and $1.3 million
in the first quarter of fiscal 1997 and 1998, respectively. The
increase in cash used in operating activities from the first quarter of
fiscal 1997 to the first quarter of fiscal 1998 primarily resulted from
the change in net earnings (loss) from $747,000 to ($2.2) million offset
by net changes in other reconciling items.
Net cash used in investing activities totaled $2.8 million and $4.8
million in the first quarter of fiscal 1997 and 1998, respectively.
Uses of cash in the first quarter of fiscal 1997 resulted from the
purchase of land to construct the Company's new headquarters facility
along with purchases of computer and research equipment. Uses of cash
in the first quarter of fiscal 1998 resulted primarily from construction
expenditures made on the Company's new headquarters facility along with
net purchases of short-term investments.
Net cash provided by financing activities totaled $17.2 million and $1.8
million in the first quarter of fiscal 1997 and 1998, respectively. The
cash provided to the Company for the first quarter of fiscal 1997
resulted primarily from the issuance of approximately $17.6 million in
common stock in connection with the Company's initial public offering.
The cash provided to the Company for the first quarter of fiscal 1998
resulted primarily from proceeds received on the Company's construction
loan for its new headquarters facility.
The Company believes that the existing cash and short-term investments
along with other working capital will be sufficient to meet its
operating and capital expenditure needs through fiscal 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material litigation and is not
aware of any pending or threatened litigation that would have a
material adverse effect on the Company or its business.
ITEM 2. CHANGES IN SECURITIES.
(a.) None.
(b.) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Subsequent to the end of the fiscal quarter ended June 30,
1997, the Company accepted the resignations of one executive
vice president, Michael J. Burgher, who had been serving as the
Company's Chief Technology Officer, along with two other vice
presidents responsible for North American sales and
professional services. The Company also eliminated 13 non-
officer positions, and accepted the resignations of certain
additional sales representatives, respectively.
Effective August, 1997, the Company's principal offices are
located at 1500 N.W. 118th Street, Des Moines, Iowa 50325.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibit 11 - Computation of Net Earnings (Loss) per
Share.
Exhibit 27 - Financial Data Schedule (EDGAR version
only).
(b.) None.
No other items.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto authorized.
MICROWARE SYSTEMS CORPORATION
Date: August 14, 1997 /s/ KENT R. KELDERMAN
-----------------------
Kent R. Kelderman
Chief Financial Officer,
Executive Vice President-
& Treasurer (Principal
Financial & Accounting
Officer)
Exhibit 11
Microware Systems Corporation
Computation of Net Earnings (Loss) per Share (1)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months ended June 30,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net (loss) earnings ($2,182) $747
========= =========
Reconciliation of weighted average
number of shares outstanding
to amount used in net (loss)
earnings per share computation:
Weighted average number of
common shares outstanding 14,120 13,075
Dilutive effect of warrants - 469
Dilutive effect of options - 2,011
--------- ---------
14,120 15,555
========= =========
Net (loss) earnings per share ($0.15) $0.05
========= =========
</TABLE>
(1) See Note 1 of Notes to the Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 6/30/97 and Consolidated Statement of
Operations for the quarter ended 6/30/97 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,465
<SECURITIES> 15,406
<RECEIVABLES> 5,336
<ALLOWANCES> 604
<INVENTORY> 91
<CURRENT-ASSETS> 25,141
<PP&E> 20,047
<DEPRECIATION> 5,855
<TOTAL-ASSETS> 48,415
<CURRENT-LIABILITIES> 5,644
<BONDS> 0
0
0
<COMMON> 36,367
<OTHER-SE> (3,470)
<TOTAL-LIABILITY-AND-EQUITY> 48,415
<SALES> 2,711
<TOTAL-REVENUES> 4,079
<CGS> 578
<TOTAL-COSTS> 1,281
<OTHER-EXPENSES> 5,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> (2,148)
<INCOME-TAX> 34
<INCOME-CONTINUING> (2,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,182)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
