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, 1998
/ / 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)
----------------------------------
IOWA 42-1073916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 N.W. 118TH ST
DES MOINES, IOWA 50325
(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 APRIL 30, 1998 WAS $39,864,000.
NUMBER OF SHARES OUTSTANDING AS OF APRIL 30, 1998: 14,556,192.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY STATEMENT TO BE FILED
FOR THE 1998 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 21
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 36
Part III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial
Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Part IV
Item 14. Exhibits, Financial Statements, Schedule, and
Reports on Form 8-K 38
Signatures 40
Index to Exhibits 42
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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 COMPANY'S ABILITY TO SUCCESSFULLY MARKET ITS PRODUCTS
IN THE TRADITIONAL EMBEDDED, COMMUNICATIONS, AND CONSUMER MARKETS AT WHICH
THE COMPANY'S PRODUCTS ARE TARGETED; THE CONTINUED GROWTH OF THOSE MARKETS;
THE COMPANY'S ABILITY TO ACHIEVE ITS FINANCIAL GOALS AND KEEP PACE WITH ITS
COMPETITION AND WITH RAPID TECHNOLOGICAL CHANGE; THE COMPANY'S ABILITY TO
MANAGE TURNOVER IN ITS SALES AND MARKETING AND OTHER PERSONNEL AND ATTRACT
AND MAINTAIN PERSONNEL GENERALLY; THE COMPANY'S ABILITY TO MANAGE ITS
INTERNATIONAL OPERATIONS; 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 1500 N.W. 118th Street, Des Moines, Iowa 50325 (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 the traditional embedded
systems, communications, and consumer products markets. 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 traditional embedded systems, including industrial automation,
transportation, medical, government/military, and networking systems;
communications infrastructure products, including ATM, ISDN, digital
subscriber loop, Ethernet and fast Ethernet, and custom connectivity
applications; and higher volume embedded systems for consumer and business
uses, such as digital television decoders, advanced wireless telephones and
pagers, and Internet appliances. In an effort to lessen the variability of
its quarterly operating results and attain profitability, Microware
substantially increased its emphasis on the traditional embedded and
communications markets during the past fiscal year. While Microware believes
all these markets present significant opportunities for growth, this change
in market emphasis, along with the Company's continued involvement on
emerging consumer products markets whose development is uncertain, exposes
Microware's business to significant risks and uncertainties.
INDUSTRY BACKGROUND
Real-time operating systems are significantly different from the
operating systems that run general-purpose desktop computers. Many
applications require a "real-time" capability that enables them to provide an
immediate, predictable response to external events. For example, an embedded
system that controls an anti-lock braking system in an automobile needs to
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react to external events such as pressure on the brake pedal, speed of the
automobile and road conditions, all within a fraction of a second. Similarly,
real-time systems are important to achieve "lip-sync" by simultaneously
decompressing and synchronizing digital streams of audio and video information.
Real-time systems are used to enhance performance, reduce manufacturing costs
and enable product customization and differentiation.
Real-time operating systems may be loaded from external media, or may
reside within a microprocessor as part of an embedded system. An embedded
system is comprised of a microprocessor and related software that are
dedicated to a specialized task or set of tasks, embedded within an
application specific industrial or consumer product. Examples of typical
products that have one or more microprocessors and embedded systems include
automatic teller machines, cellular telephones, pagers, copiers, facsimile
machines and automobiles. Many of these products require real-time embedded
systems that provide true multitasking, memory management and protection,
input-output systems and networking/telecommunication capabilities. Fueled
by declining costs and improving performance of 32/64 bit microprocessors,
embedded systems are becoming increasingly sophisticated and used in or with
a wider range of applications.
Demand for commercial real-time operating systems is driven by growth in
real-time embedded systems. The Company anticipates that organizations that
develop embedded systems will continue to migrate from internally developed
systems to cost-effective third party products. Companies that internally
develop application software for embedded systems are focused on maximizing
productivity, minimizing costs and reducing time to market while maintaining
flexibility. Thus, embedded systems applications developers seek to use a
fully integrated and open modular suite of software development tools and
real-time operating systems to allow software development to occur
concurrently with product development. With increased product complexity and
time to market pressures, organizations are relying more heavily on third
party specialized consulting services for product and system design and
development.
PRODUCTS AND SERVICES
Microware offers a broad range of software services based on the OS-9
real-time operating system that can be configured to suit a range of
applications in a variety of industries. These operating system products are
complemented by the Company's development tools and custom software
development services, which facilitate development of embedded OS-9
applications. 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.
OPERATING SYSTEM PRODUCTS:
Microware's operating system products are based on a variety of packages
of 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
markets.
OS-9 packages include those targeted at Original Equipment Manufacturers
("OEMs"), which include limited source code and enable OEMs to develop
customized versions of OS-9 for their specific embedded system application.
Current OEM packages include the following:
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Microware OS-9 for Embedded Systems
Microware OS-9 for Communications
Microware OS-9 for Digital TV (also known as DAVID)
Microware OS-9 for Smart Phones
Microware OS-9 for Wireless Applications
Microware's operating system products are licensed to OEMs 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. OEM licenses are generally bundled with end-
user licenses of related development tools.
Microware's OEM products are licensed on a processor-specific basis.
Microware OS-9 OEM licenses are available for a variety of 32-bit CPU
families, including the Motorola 68xxx (680x0, 683xx), Intel/AMD x86/Pentium
(386/486/586/Pentium), Motorola/IBM PowerPC (4xx, 6xx, 7xx, 8xx), Hitachi
SuperH (SH-3), Digital/Cirrus Logic ARM (SA-1100, PS711x), and other
processor families. The Company also provides engineering and training
services to support its OEMs' development efforts.
All of Microware's operating system products are also available as
board-level products through end-user license agreements which grant
licensees the right to embed copies of the software in a fixed number of
single-board computers. Microware OS-9 board-level products are available
for several popular single-board computers, including the Motorola MVME and
MBX platforms, PC/AT-compatible computers, and Digital StrongARM reference
platforms.
Other OS-9 board-level products are also available through third party board-
level vendors.
ADDITIONAL OPERATING SYSTEM PRODUCT COMPONENTS:
Microware also offers its customers a wide array of software product
components providing additional functionality as needed for their specific
embedded system application. Certain of these products include technologies
licensed from third parties. These additional product components include the
following:
- mwMAUI Graphical Environment, which provides a robust graphical
environment for applications in a small memory footprint. mwMAUI supports
numerous I/O devices including greyscale and color LCD panels, SVGA/VGA
graphics terminals, touch screens, mouse, and keyboards. mwMAUI has a
modular architecture designed to be easily scaled to specific system needs,
and is interoperable across graphics and sound processor platforms.
- mwSoftStax Communications Framework, which provides integrated
communications and control for communications devices.
- Microware OS-9 for Communications LAN Pak, which provides local area
connectivity support for mwSoftStax.
- Microware OS-9 for Communications X.25 Pak, which enables networked
embedded systems to communicate over X.25 packet topologies and custom
networks.
- Microware OS-9 for Communications ISDN Pak, which enables networked
embedded systems to communicate over Basic Rate ISDN network topologies.
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- Third party Communications Paks for Microware OS-9, including ATM
signaling, Universal Serial Bus (USB), Serial Network Management Protocol
(SNMP), and Infrared Data Association (IrDA) support packages.
- Microware Java and PersonalJava for OS-9, which enable Java- and
PersonalJava-compatibility in OS-9 environments.
Microware is also negotiating a license of Hewlett-Packard's embedded
virtual machine technology, which if successfully developed will provide an
alternative package for OEMs seeking to develop Java-compatible OS-9-based
embedded systems.
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.
Microware's principal development tool is the FasTrak integrated
development environment, which integrates Microware's Ultra C and C++
compilers, Source Level Debugger, and OS-9 Utility Set with supporting
functions into a comprehensive automation, management and development
environment.
Microware has developed a new integrated development environment,
Microware Hawk, currently scheduled for commercial release in the summer of
calendar 1998. Microware Hawk is designed as an all-in-one development suite
to enable seamless editing, debugging and compilation of C and C++ code;
management of complex software build scenarios; management of solo- or team-
based changes to source code with version control and access to on-line
support to provide immediate assistance for every function. Microware Hawk
is being established as an open development environment which will be
interoperable with a wide variety of third party development tools. [See
markets - traditional embedded systems business]
Microware's development tools are generally sold under end-user licenses
which enable customers to install and use the tools at a fixed number of
development seats.
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 on a rate per hour, per project basis.
SOFTWARE TECHNICAL SUPPORT AND UPGRADE SERVICES:
Licenses of Microware's operating system and tools products are
typically sold together with maintenance support contracts that provide
updates of the licensed software and routine technical support. The
Company's technical support staff assists licensees 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 OEMs generally offer first
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level customer support to their end-user customers and rely on the Company for
additional support.
Each Microware software product currently includes a 30-day technical
support registration card for assistance with the installation and use of
Microware software products. Microware also offers extended software support
and maintenance services on a per-product basis for a fee. Licensees who
purchase extended service are entitled to technical support services and
software product updates during the service period.
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 and maintain OS-9
as a leading operating environment for embedded systems. To achieve this
goal, Microware focuses its marketing and product development efforts on
those sectors of the embedded systems market it believes have the greatest
potential to increase Microware's future revenue: (i) traditional embedded
systems such as industrial automation, transportation, medical,
government/military, and network devices, (ii) communications infrastructure
devices and equipment, and (iii) consumer products such as digital television
decoders, wireless telephones, and Internet appliances. In product
development, the Company endeavors to provide comprehensive solutions for
these diverse markets by supporting market-leading embedded processors and
developing new modules providing specialized functionality for those markets.
For example, Microware provides specialized telecommunications protocol
support for communications infrastructure products, 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 and
Nortel in the wireless products market or Zenith in the digital television
market, and working closely with the providers of complementary technologies.
TRADITIONAL EMBEDDED SYSTEMS BUSINESS
The traditional real-time embedded system software market is the core 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 believes that the
market for its operating 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.
In fiscal 1998, Microware increased its emphasis on the traditional
embedded systems business by re-emphasizing its support for board-level
products, developing its relationships with leading embedded systems
distributors and resellers, and hiring new sales personnel with substantial
embedded systems experience. While the Company believes that its proven
technology and long-standing presence in this rapidly growing market will
enable it to substantially increase its revenues from this market, its
ability to do so is subject to significant risks and uncertainties,
particularly the Company's ability to rapidly develop its internal and third
party sales and marketing channels in the embedded systems marketplace.
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COMMUNICATIONS INFRASTRUCTURE DEVICES MARKET
The networked embedded systems marketplace is rapidly growing.
According to Electronic Trends Publications, in 1996 the telecommunications
industry accounted for $1.2 billion of revenue in the real-time operating
system industry, with an increase to $2 billion projected by the year 2001.
The percentage of equipment using a commercial real-time operating system is
projected to increase from 12 percent to 24 percent in the same period. At
the same time, the Company believes that technological demands of these
systems are evolving rapidly, as the bandwidth of digital networks expands
simultaneously with the integration of greater multimedia functionality
driven by applications such as telecommuting, Internet access, and video
delivery. The Company believes this growth and trend toward licensing of
third party operating systems creates a substantial opportunity for targeted
packages of OS-9 products.
Microware's solution for the communications infrastructure device market
is to provide an embedded operating system platform which includes a
simplified, integrated communications environment interoperable across
telecommunications protocols and high performance with minimal memory and CPU
utilization. The Microware OS-9 for Communications product line is based on
the mwSoftStax framework. mwSoftStax is an open architecture designed to be
interoperable with the leading communications protocols and third party
communications infrastructure products.
Microware believes the technological sophistication and openness of its
architecture will enable it to establish a revenue base in the communications
infrastructure market. It should be noted, however, that Microware's
emphasis on communications as a distinct product market is relatively new.
The communications infrastructure embedded systems software market is highly
fragmented, very competitive, and technically demanding. As such, there can
be no assurance that Microware will be able to successfully attain
significant revenues from the communications infrastructure, or to recoup its
investment in that market.
CONSUMER MARKETS
Microware's efforts in the market for consumer and business embedded
systems devices have focused on three select categories which Microware
believes represent significant market opportunities for the Company: the
digital television market, the wireless phone market, and the Internet
telephone market.
DIGITAL TELEVISION MARKET
Since 1993 Microware has offered an OS-9 operating system configuration
targeted at the emerging digital television business. Microware OS-9 for
Digital TV is designed to operate the digital decoders that turn standard
televisions into smart clients on new digital television networks under
development by telephone companies, cable companies, and direct broadcast
satellite providers with interactive processing, graphics, video and audio
functionality. Microware OS-9 for Digital TV has emerged as a leading
operating system for digital decoders, having been licensed by over 20 set-
top box manufacturers and used in trial and commercial deployments around the
world. Microware OS-9 for Digital TV set-top boxes manufactured under license
by NEC Corporation of Japan are currently deployed in Hong Kong in an
interactive television network operated by Hongkong Telecom IMS Ltd.
A streamlined configuration of Microware OS-9 for Digital TV is targeted
at digital-video broadcast products for existing cable systems, new
multichannel multipoint distribution systems ("MMDS") and DBS networks.
Microware OS-9 for Digital TV-based digital decoders manufactured by Zenith
Electronics Corporation have been contracted for procurement by Americast, a
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digital television technology consortium of Ameritech, SBC, Bell South, GTE,
and Disney, and are currently deployed by Bell South in New Orleans.
To date, most of the Company's digital television revenues have been
from Microware OS-9 for Digital TV license agreements and custom contract
engineering with digital decoder OEMs and network operators. The Company's
current activities relating to its new media markets remain focused upon
licensing Microware OS-9 for Digital TV for digital television uses. The
Company has increasingly focused its marketing efforts in the digital
television business on the development of strategic marketing alliances which
will enable the Company to leverage the market position of Microware OS-9 for
Digital TV into additional OEM licenses.
In February, 1998, the Company announced that it had entered into a
letter of intent with OpenTV, a joint venture of Sun Microsystems, Inc. and
Thomson Consumer Electronics of France which has developed a competing
digital television decoder platform, to jointly develop and market an
interoperable version of Microware OS-9 for Digital TV and the OpenTV
architecture. Microware believes that the relationship with OpenTV will
better position the Company to realize opportunities in the European digital
decoder market. However, OpenTV and Microware have not consummated a
definitive agreement regarding their relationship, and there can be no
assurance that they will do so or that, if they do, the relationship will
have a positive impact on the Company's digital television business in Europe
and elsewhere.
While the Company has received significant revenues in the past from
development licenses, non-refundable pre-paid royalties and custom contract
engineering work sold to digital television decoder OEMs, only a small
proportion of the Company's digital television licensees are actually
manufacturing digital decoders. There can be no assurance that the Company
will be able to achieve significant new digital decoder OEM design wins and
development license revenues, 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 Microware OS-9 for Digital TV is well positioned as a solution
for the digital television market, the Company believes the digital
television market remains at an 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 have eroded Microware OS-9 for Digital TV's early market
advantage to the benefit of the Company's competitors. It is therefore
difficult to make reliable estimates of the size of the digital television
market or the Company's likely market share.
WIRELESS AND INTERNET PRODUCTS BUSINESS
Since 1996 Microware has marketed a configuration of OS-9 targeted at
the manufacturers of wireless hand-held communications devices and Internet-
based telephones. The current product configurations, Microware OS-9 for
Wireless and Microware OS-9 for Smart Phones, combine OS-9 with the mwMAUI
graphics API and new software modules created for key wireless functions such
as power management, Java-compatibility and Internet access.
Microware believes there is an emerging market for new categories of
wireless communications devices combining the small size and low cost of
traditional pagers and mobile telephones with the more advanced
interactivity, graphical user interface, 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
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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. Microware has developed such
strategic licensing relationships with, among others, Motorola, Northern
Telecom Ltd., and Ericsson, Inc., all of whom have been developing next
generation wireless communications devices using OS-9.
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. Motorola's PageWriter two-way pager, currently
being marketed through the SkyTel paging network, is based on a customized
version of OS-9 jointly developed by Microware and Motorola. 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, of which the initial
warrant to purchase 277,496 shares expires on July 31, 1998. 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 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. Moreover, the Company's wireless strategy is
highly dependent on its ability to develop and market Java-compatible
versions of its products. There can be no assurance that Java will continue
to be a popular platform for wireless communications device OEMs, that
Microware will be able to maintain Java-compatibility on competitive terms
under its license with Sun Microsystems, or that Microware will be able to
keep pace with the rapid technological change in this market.
SALE OF INVESTMENT IN UNWIRED PLANET
In March, 1998, Microware consummated the sale of its $5.0 million
equity investment Unwired Planet, Inc. ("Unwired Planet"), a privately held
Delaware corporation, for approximately $5,938,090, initially purchased on
October 15, 1996 for $5,000,000. The Company believed the investment in
Unwired Planet had not contributed as significantly as originally anticipated
to the furtherance of the Company's efforts to establish OS-9 as a standard
operating systems for wireless devices, and that the amount of the investment
would be better applied to other corporate purposes.
INTERNET PHONE BUSINESS
The Company believes there is an emerging market for smart land-line
telephones designed for home and business use which integrate Internet access
and other computing functionality such as electronic mail, Internet access,
and personal information management with traditional telephony and answering
machine services. A study by Paul Kagan and Associates estimates that the
market for these "smart phones" will grow from 800,000 units in 1997 to 6.3
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million units in 2000. During the same time, the average selling price of
these products is estimated to fall from $445.00 a unit to $225.00 a unit.
Microware has licensed OS-9 to a number of these "smart phone" OEMs,
including Uniden America Corporation ("Uniden"). Uniden's AXIS telephone, an
OS-9-based cordless telephone combined with a small computer terminal which
allows users to send and receive electronic mail, is currently available in
retail outlets. While Microware has had early successes in this sector, the
market is still at an early stage and is not well-defined, and there can be
no assurance that Microware will continue to receive significant revenues
from licenses to smart phone OEMs, or that there will be customer acceptance
and demand for such products.
SOFTWARE DEVELOPMENT QUALITY ASSURANCE
The reliability of Microware's technology is reflected in and supported
by the Company's software development methodologies. Microware has elected
to improve its quality assurance methodology through pursuing the Capability
Maturity ModelSM for Software (SW-CMM) developed by the Software Engineering
Institute (SEI), and has elected to suspend any outside quality certification
program under ISO 9001. Microware believes the SEI model will better promote
a controlled and measured process as the foundation for continuous
improvement in quality.
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.
All of the Company's 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 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 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, Microsoft and Wind River.
Many of the Company's digital television competitors have substantially
greater technical, sales, marketing and financial resources than the Company.
The Company expects that as the embedded systems market continues to
evolve, additional competitors will seek to enter these markets.
The Company believes that its ability to effectively compete in the
embedded systems market 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
11
<PAGE>
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.
MARKETING, SALES AND DISTRIBUTION
Microware markets and licenses its products principally through its
direct sales force. Microware currently uses a direct sales force in North
America, Europe and Japan. The Company has numerous sales offices in the
U.S. International offices are located in the United Kingdom, Germany,
France and Japan. Distributors and sales representatives are used in certain
countries. Direct sales representatives are supported by field application
engineers who are experienced in the embedded market and the Company's
products and technologies. International sales accounted for approximately
67%, 50% and 59% of total revenues in fiscal 1996, 1997, and 1998
respectively.
The Company generates new business opportunities in its target markets
through direct marketing, advertising, press releases, trade shows, user
group meetings, telemarketing, direct mailings and through its strategic
alliances.
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, 1998, the Company
employed 82 product development engineers. Of these, 67 engineers were based
in Des Moines, Iowa and 15 were based in Tokyo, Japan.
During fiscal 1996, 1997, and 1998 research and development expenses
amounted to $5.0 million, $7.2 million, and $7.2 million respectively,
excluding capitalized software development costs. For the above periods,
research and development expenses represented 21%, 27%, and 41% of the
Company's total revenues, respectively. For the same periods, software
development costs capitalized totaled $150,000, $81,000, and $215,000,
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.
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.
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
12
<PAGE>
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 $2,240,000 as of
March 31, 1998 and $2,206,000 as of March 31, 1997.
EMPLOYEES
As of March 31, 1998, the Company employed 201 people, including 67 in
marketing, sales and support services, 104 in engineering and product
development and 30 in operations, finance and administration. Of these
employees, 135 are located in the United States, and 66 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
PersonalJava are trademarks of Sun Microsystems, Inc. All other marks are
trademarks or registered trademarks of their respective holders.
ADDITIONAL RISK FACTORS
In addition to the other risk factors contained herein, the Company
believes the following additional risk factors should be taken into
consideration in evaluating its business.
HISTORY OF OPERATING LOSSES; VARIABILITY OF QUARTERLY OPERATING RESULTS.
The Company has experienced significant operating losses for the past two
fiscal years. While the Company has taken a number of measures to increase
its revenues, decrease its operating expenses, and attain profitability,
there can be no assurance that these measures will succeed or that the
Company will become profitable. Furthermore, the Company's revenues and
operating results have varied substantially from quarter to quarter, remain
difficult to foresee due to the nature of the embedded systems market and the
Company's business, and should not be relied upon as an indication of future
performance.
MARKET RISKS. The Company has invested substantial resources in the
development of emerging markets, in particular the digital television and
wireless and Internet communications devices markets. While the Company has
achieved a substantial number of OEM licenses in these markets and a number
of the devices are currently in commercial deployment, these markets remain
at an early stage and are increasingly competitive, and there can be no
assurance that the Company will receive substantial revenues or earnings from
products or services in these markets.
The Company has in the past fiscal year re-emphasized its focus on the
traditional embedded systems business in an effort to lessen the variability
of its quarterly operating results and attain profitability. The traditional
embedded systems business is diverse and increasingly competitive, and there
can be no assurance that the Company will be able to substantially increase
its revenues from that market. Moreover, there is a risk that the shift in
market emphasis will weaken the Company's position in the consumer markets.
The communications infrastructure device market is a new area of
emphasis for the Company, and is highly fragmented, very competitive, and
technically demanding. While Microware believes the technological
sophistication and openness of its product architecture for the market will
enable it to establish a substantial revenue base in the communications
infrastructure market, there can be no assurance that the Company will be
able to do so.
13
<PAGE>
ABILITY TO KEEP PACE WITH COMPETITION AND RAPID TECHNOLOGY CHANGE. The
embedded systems markets are highly diverse and devoid of established
technology standards. A majority of embedded operating systems and
applications are developed in-house by OEMs, and no single processor platform
accounts for a majority or even a substantial minority of the embedded
systems under development. Moreover, the market is increasingly competitive,
with a number of industry leading companies with substantially greater
financial and technical resources than Microware devoting substantial
resources to the development of significant market share in the embedded
systems business. While the Company tries to support the industry-leading
32-bit microprocessors which it believes represent the best market
opportunities, and to offer the best possible array of incremental software
functionalities, there can be no assurance that the Company's current
products will meet the demands of the market in an environment of increasing
competition and rapid technology change.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND TRANSITIONS. The Company
has in the past experienced delays in software development, and there can be
no assurance that the Company will not experience such delays in the future.
Such delays, which can occur because of resource constraints, unforeseen
technological obstacles within or outside the Company's control, and changes
in market requirements, can have a material adverse effect on the Company's
business.
COMPETITION. The Company has attracted substantial competition in its
targeted markets. Many of the Company's traditional competitors have grown
substantially as a result of successful exploitation of growth in the
embedded systems market, and in some cases have expanded their businesses in
a manner which competes more directly with the Company. Microsoft has
devoted substantial resources to the development of the embedded operating
system business with its Windows CE product, which is attempting to capture a
significant market share in the handheld computer market. Sun Microsystems,
Inc. has developed an embedded operating system product called JavaOS which
it markets together with its Java technology, and has made a number of
business and technology acquisitions in the past fiscal year related to the
development of its embedded systems business. There can be no assurance the
Company will be able to successfully attain new market share or even maintain
its existing market share in this increasingly competitive market.
ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL. The Company's future
performance depends to a significant degree upon the continued contributions
of its key management, product development, marketing and sales personnel,
many of whom have joined the Company recently. The Company has experienced
significant turnover in personnel during the past fiscal year, much of which
was initiated by the Company. The Company's ability to execute its market
strategy will depend to a large degree upon its ability to integrate new
personnel into the Company. Competition for qualified personnel throughout
the software industry is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel.
INTERNATIONAL OPERATIONS. In the past three fiscal years, the Company
derived at least 50% of its total revenue from sales outside North America,
and this trend is anticipated to continue in the future. This dependence on
international operations subjects the Company to certain risks, including
difficulty in staffing and managing foreign subsidiary operations, difficulty
in managing distributors and resellers, foreign currency exchange exposure,
and other risks inherent in international business operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND RISK OF TECHNOLOGY LITIGATION.
Because substantially all of the Company's revenues are derived from OS-9 and
14
<PAGE>
related products, any impairment of OS-9 could have a material adverse impact
on Microware's business. The Company's business is therefore dependent on
the adequacy of the Company's intellectual property protection through
patents, copyrights, trade secrets, and license agreements; the adequacy and
continued availability of its licenses of integrated technology from third
parties; and the absence of any material technology litigation related to the
Company's products.
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 88,000 square feet. Annual mortgage payments for the
Company's main operating facility total approximately $588,000. The Company
also leases under cancelable terms approximately 7,400 square feet in Tokyo,
Japan for an annual rental payment of approximately $351,000. The Company
also leases 13 domestic and international sales and support offices for an
aggregate annual rental payment of approximately $433,000. The Company
believes that additional space will be available as needed.
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:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Kenneth B. Kaplan 45 President and Chief Executive Officer
M. Denis Connaghan 48 Executive Vice President and Chief
Operating Officer
Kent R. Kelderman 38 Executive Vice President, Treasurer,
and Chief Financial Officer
Stephen M. Bashada 42 Executive Vice President of Marketing
Derek B. South 45 Executive Vice President of Sales
Rebecca J. Duhaime 37 Executive Vice President of Engineering
Shigehiro Ishibashi 58 President and Representative Director,
Microware Systems Kabushiki Kaisha
(subsidiary)
Martin Allen 45 Managing Director European Operations
</TABLE>
Mr. Kaplan has served as President and Chief Executive Officer of the
Company since he co-founded it 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 boards 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. Bashada has served as Microware's Executive Vice President of
Marketing since September 1997. Prior to joining Microware, Mr. Bashada was
President of Tarkenton Net Ventures, an Internet start-up company, where he
developed an interactive multi-media educator and turnkey solution to help
businesses market themselves on the World Wide Web. From 1994 to 1995, he
19
<PAGE>
served as President of the application development division for Sterling
Software where he was involved in the Sterling Software acquisition of
KnowledgeWare Inc. From 1989 through 1994, he held numerous executive
positions at KnowledgeWare including Senior Vice President of Operations.
During that time, he was responsible for product development, marketing, and
customer support. Additionally, he held numerous management positions at
Amdahl Corporation, a computer products company. Mr. Bashada received his
bachelor's degree in business administration from Georgia State University in
1992.
Mr. South has been Executive Vice President of Sales at Microware since
September 1997. Prior to joining Microware, Mr. South served as President
and Co-founder of Automated Testing Solutions, Inc., a software company.
From 1990 to 1995, he served as Vice President of Sales for AutoTester, Inc.
where he was responsible for worldwide sales operations. Mr. South received
his bachelor's degree in electrical engineering from the University of
Virginia in 1975.
Ms. Duhaime has been Executive Vice President of Engineering at
Microware since October 1997. Prior to joining Microware, Ms. Duhaime was
Vice President at Sterling Software, Inc.'s Storage Management Division,
where she managed the client/server and mainframe storage management software
development labs. From 1985 to 1993, Ms. Duhaime held several management
positions at Systems Center, Inc., a software company, in the fields of
software development, technical services, product management and sales. She
received her bachelor's degree in political science from Bryn Mawr College in
1981 and her master's degree in computer science from George Washington
University in 1985.
Mr. Ishibashi has served as President and Representative Director of the
Company's Japanese subsidiary since January 1998. Prior to joining
Microware, Mr. Ishibashi served as President and Representative Director of
Autodesk Japan. There he developed Japan's first broad retail channel for
affordable CAD software. Prior to joining Autodesk Japan, Ishibashi held
various executive positions at Burr-Brown Japan, including Vice President,
Pan-Pacific Business Unit and President and Representative Director of Burr-
Brown Japan Ltd. Mr. Ishibashi is not an officer of the Company. However,
the nature of his duties with respect to the Company's subsidiary may mean he
is deemed to be an executive officer under applicable SEC rule.
Mr. Allen has served as Managing Director of European Operations since
January 1996 where he is responsible for overall business activities for the
United Kingdom, German, and French subsidiaries of Microware Systems
Corporation. From 1993 to 1995, he was Managing Director of Microware U.K.
Mr. Allen received his degree in business studies from Brookes University.
Mr. Allen is not an officer of the Company. However, the nature of his
duties with respect to the Company's subsidiary may mean he is deemed to be
an executive officer under applicable SEC rule.
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.
20
<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 closing price of the Company's common stock, no
par value (the "Common Stock"), as reported by the Nasdaq National Market as
of April 30, 1998 was $5.25 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
*from April 3,1996
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Low High
<S> <C> <C>
Quarter ended June 30, 1997 $ 6.188 $10.250
Quarter ended September 30, 1997 $ 4.875 $ 8.500
Quarter ended December 31, 1997 $ 3.500 $ 6.125
Quarter ended March 31, 1998 $ 4.130 $ 6.250
</TABLE>
As of April 30, 1998, there were approximately 300 shareholders of
record of the Company's Common Stock. Certain recordholders are brokers and
other institutions holding on behalf of shareholders. The Company has
estimated the total number of such shareholders to be 5,000.
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.
21
<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 thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues $14,887 $18,899 $23,655 $26,134 $17,724
Cost of revenues 3,927 3,755 5,100 6,969 5,946
-----------------------------------------------
Gross profit 10,960 15,144 18,555 19,165 11,778
Operating expenses:
Research & development 4,756 5,649 5,009 7,155 7,223
Sales & marketing 3,791 5,614 8,421 10,819 10,148
General & administrative 3,786 3,330 3,899 3,415 4,485
Special charges 530 166 - 438 940
-----------------------------------------------
12,863 14,759 17,329 21,827 22,796
-----------------------------------------------
Operating (loss) profit (1,903) 385 1,226 (2,662) (11,018)
Other income (expense):
Foreign currency gain
(loss), net 98 293 13 (30) (79)
Gain on sale of land
and building - - - - 215
Gain on sale of
investment - - - - 881
Interest (expense)
income, net (306) (132) 283 1,118 265
-----------------------------------------------
(208) 161 296 1,088 1,282
-----------------------------------------------
(Loss) earnings before
income taxes (2,111) 546 1,522 (1,574) (9,736)
Income tax expense
(benefit) 314 (375) 146 (3) 210
-----------------------------------------------
Net (loss) earnings ($2,425) $921 $1,376 ($1,571) ($9,946)
===============================================
Basic (loss) earnings
per share (1) ($0.25) $0.09 $0.12 ($0.11) ($0.69)
===============================================
Weighted average common
shares outstanding (1) 9,608 10,402 11,090 13,754 14,378
===============================================
Diluted (loss) earnings
per share (1) ($0.25) $0.08 $0.11 ($0.11) ($0.69)
===============================================
Weighted average common
and common equivalent
shares outstanding (1) 9,608 12,063 12,930 13,754 14,378
===============================================
22
<PAGE>
<CAPTION>
As of March 31,
-----------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash & short-term
investments $ 2,823 $ 1,516 $12,337 $19,962 $13,620
Working capital 1,374 1,479 13,300 23,024 14,414
Total assets 11,622 12,124 24,938 49,083 37,499
Total long-term debt (2) 1,949 1,446 1,227 8,076 6,984
Total shareholders'
equity 4,889 5,559 18,543 34,726 25,356
(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.
</TABLE>
23
<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 1999 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 in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998 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. In prior years, the Company's actual
financial performance has not always met market expectations. It is likely
that, in some future quarter, the Company's financial performance will again
fall below market expectations.
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 to a customer's product. Commonly, license
royalty fees follow the completion of these contracts and the successful
deployment of the customer's product. 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.
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<PAGE>
A key element of the Company's long-term strategy is to develop products
which can be embedded into successful, high volume customer products; thereby
significantly increasing license run-time royalty fees. Any increase in the
percentage of revenues attributable to license run-time royalties will depend
on the Company's successful negotiation of license run-time royalties and on
the successful commercialization by the Company's customer of the underlying
product. To date, the Company has been negatively impacted by target markets,
such as cellular phones, two-way paging, personal Internet devices and
digital and interactive television emerging much slower than anticipated. In
addition, there can be no assurances that the Company will be successful when
the markets, for which the Company products are targeted, emerge.
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 $1,805,000 and $614,000 resulted from contract engineering
services for Motorola in fiscal 1997 and 1998, respectively. In addition to
up-front development fees and future consulting and support activities, the
Company will receive a royalty for each pager or other wireless product using
OS-9 sold by Motorola or its sub-licensees. No development license fees or
run-time royalties resulted from this agreement in fiscal 1997 or 1998.
These revenues related to products under development which Motorola has not
yet begun to distribute. Motorola also acquired an equity position in the
Company as part of this strategic relationship. See Notes 2 and 13 of the
Notes to the Consolidated Financial Statements.
25
<PAGE>
RESULTS OF OPERATIONS
Amounts and percentage of revenues: The following table sets forth, for
the periods indicated, the amount and related percentage of the Company's
total revenues by each line item.
($ in thousands)
Amounts and Percentage of Revenues
--------------------------------------------------
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Product $16,104 68% $16,586 64% $12,047 68%
Services 7,551 32 9,548 36 5,677 32
------- ---- ------- ---- ------- ----
23,655 100 26,134 100 17,724 100
------- ---- ------- ---- ------- ----
Cost of revenues:
Product 2,428 10 3,046 12 2,745 15
Services 2,672 11 3,923 15 3,201 18
------- ---- ------- ---- ------- ----
5,100 21 6,969 27 5,946 33
------- ---- ------- ---- ------- ----
Gross profit 18,555 79 19,165 73 11,778 67
------- ---- ------- ---- ------- ----
Operating expenses:
Research & development 5,009 21 7,155 27 7,223 41
Sales and marketing 8,421 36 10,819 41 10,148 57
General & administrative 3,899 17 3,415 13 4,485 25
Special charges - - 438 2 940 6
------- ---- ------- ---- ------- ----
17,329 74 21,827 83 22,796 129
------- ---- ------- ---- ------- ----
Operating profit
(loss) 1,226 5 (2,662) (10) (11,018) (62)
------- ---- ------- ---- ------- ----
Other income (expense):
Foreign currency gain
(loss), net 13 * (30) * (79) *
Gain on sale of land
and building - - - - 215 1
Gain on sale of
investment - - - - 881 5
Interest(expense)
income, net 283 1 1,118 4 265 1
------- ---- ------- ---- ------- ----
296 1 1,088 4 1,282 7
Earnings (loss)
before income tax
expense (benefit) 1,522 6 (1,574) (6) (9,736) (55)
Income tax expense
(benefit) 146 * (3) * 210 1
------- ---- ------- ---- ------- ----
Net earnings (loss) $1,376 6% $(1,571) (6)% $(9,946) (56)%
======= ==== ======= ==== ======= ====
*Insignificant
</TABLE>
26
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
REVENUES. Total revenues decreased 32.2% or $8.4 million, from $26.1
million in fiscal 1997 to $17.7 million in fiscal 1998. During fiscal 1998,
the Company experienced significant turnover in its sales force in North
American and Japan, which had, and may continue to have, an adverse effect on
the Company's operations. While the Company has made significant progress in
filling its vacated sales positions, the future effect of the turnover cannot
be presently determined. Product revenues decreased 27.4%, or $4.5 million,
from $16.6 million in fiscal 1997 to $12.1 million in fiscal 1998. The
decrease in product revenues from fiscal 1997 to fiscal 1998 stemmed from a
reduction in large OEM licenses along with a reduction in nonrefundable
prepaid royalties recognized from customers. The Company continues to be
negatively impacted by slower than anticipated emergence of various target
markets, such as cellular phones, two-way paging, personal Internet devices
and digital and interactive television. Product revenues from certain
strategic customers including Motorola, Northern Telecom, Ericsson and the
Company's DAVID licensees continued to fall below management expectations.
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 40.5%, or $3.9 million, from $9.5 million in
fiscal 1997 to $5.6 million in fiscal 1998. The decrease in services revenues
primarily resulted from a decrease in funded development of advanced
processor ports along with, to a lessor extent, a reduction in DAVID custom
services.
International revenues represented 67%, 50% and 59% of total revenues in
fiscal 1996, 1997 and 1998, respectively. The Company expects international
sales to continue to represent a significant portion of its revenues although
the percentage may fluctuate from period to period. In Europe and Japan,
revenues and expenses are primarily denominated in local currencies. In
fiscal 1997 and 1998, the U.S. dollar strengthened against many foreign
currencies which resulted in relatively lower revenues when translated into
U.S. dollars. The Company's operating and pricing strategies take into
account changes in exchange rates over time, however, the Company's results
of operations may be significantly affected in the short-term by fluctuations
in foreign currency exchange rates. In addition, in recent months the
currencies of many countries in the Asia Pacific region have lost significant
value against the U.S. dollar. As a result, revenue in this region could be
adversely affected in fiscal 1999. This overall general instability in the
Asian currency and stock markets adversely affects the economic health of the
entire region, which could negatively impact customer purchasing patterns.
COST OF REVENUES. Cost of product revenues includes direct and indirect
costs for documentation, production quality, 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 direct third party royalty expense and amortization
expense of purchased and capitalized software. Cost of services revenues
includes direct and indirect costs for technical phone support, training and
education, and custom engineering.
Total cost of revenues decreased 14.7%, or $1.0 million, from $7.0
million in fiscal 1997 to $6.0 million in fiscal 1998. Overall cost of
revenues decreased due to the reduction in total revenues. As a percentage
of product revenues, cost of product revenues increased from 18.4% in fiscal
1997 to 22.8% in fiscal 1998. Cost of product revenues increased as a
percentage of product revenues primarily as a result of an increase in
amortization expense relating to purchased software and an increase in direct
third party royalty expense. Amortization of capitalized software amounted
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to $201,000 and $151,000 in fiscal 1997 and 1998, respectively. As a
percentage of services revenues, cost of services revenues increased from
41.1% in fiscal 1997 to 56.4% in fiscal 1998. The percentage increase
between periods primarily resulted from small, lower margin custom contract
engineering work being performed during fiscal 1998 compared to large, higher
margin custom contract engineering work being performed in fiscal 1997.
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 remained at $7.2 million in
fiscal 1997 and 1998 although such expense constituted a greater percentage
of revenues in fiscal 1998 due to lower revenues. 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.
Sales and marketing expense also includes costs of advertising, public
relations and attendance at industry trade shows. Sales and marketing
expense decreased 6.2%, or $671,000, from $10.8 million in fiscal 1997 to
$10.2 million in fiscal 1998. The overall decrease was primarily
attributable to significant turnover in the Company's sales force in North
America and Japan. In fiscal 1999, the Company expects to continue investing
in the expansion of its sales force and the upgrading of its infrastructure
in addition to increasing marketing activity associated with the release of
new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses are
primarily related to finance and administrative functions. General and
administrative expenses increased 31.3%, or $1.1 million, from $3.4 million
in fiscal 1997 to $4.5 million in fiscal 1998. The increase in general
administrative expenses resulted from costs incurred due to organizational
changes in the Company's operations during fiscal 1998. These costs included
severance and related benefits associated with the elimination and
resignation of employees of approximately $175,000, moving costs to the
Company's new headquarters facility of approximately $80,000 and recruiting
and relocation costs associated with the hiring of new executive management
and sales personnel in the U.S. and Japan of approximately $700,000.
SPECIAL CHARGES. During the fiscal year ended March 31, 1998, the
Company determined that due to revised estimates of the marketability of
certain products under development, a special charge of $940,000 was
appropriate to more adequately reflect the residual value of certain
intangible assets. Included in this charge was approximately $566,000 of
deferred development costs in the form of prepaid royalties, approximately
$202,000 relating to goodwill associated with MicroMall, Inc., a subsidiary
of the Company, and approximately $172,000 relating to the write-off of
previously capitalized purchased technology.
OTHER INCOME (EXPENSE). Other income increased 17.8%, or $194,000, from
$1.1 million in fiscal 1997 to $1.3 million in fiscal 1998. The increase
between periods resulted from gains on the sale of the Company's interest in
Unwired Planet Inc. and its former headquarters facility of $881,000 and
$215,000, respectively. These increases were offset by a reduction of
interest income due to cash used in operations, and an increase in interest
expense related to the Company's long-term debt on its new headquarters
facility.
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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.
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SALES AND MARKETING. Sales and marketing expense consists primarily of
sales and marketing personnel related costs, including sales commissions.
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.
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 n 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.
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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, 1998, the Company had
approximately $14,414,000 in working capital and $13,620,000 in cash and
short-term investments as compared to $23,024,000 in working capital and
$19,962,000 in cash and short-term investments at March 31, 1997. The
decrease in working capital and cash and short-term investments resulted
principally from the use of cash during fiscal 1998 for operating activities.
Cash provided by (used in) operating activities amounted to $1,068,000,
($3,155,000) and ($8,859,000) for fiscal years 1996, 1997 and 1998,
respectively. 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. The cash used in operations in fiscal 1998 primarily resulted from
the net loss of $9,946,000. Additionally significant uses of cash resulted
from an increase in other assets (including purchased software) of $2,843,000
and a decrease in accounts payable of $1,144,000. These uses of cash in
fiscal 1998 were partially offset by a decrease in accounts receivable of
$2,836,000 and other reconciling items of $2,238,000.
Cash provided by (used in) investing activities was ($1,301,000),
($27,297,000) and $4,558,000 for fiscal years 1996, 1997 and 1998,
respectively. The uses of cash in fiscal 1996 were related primarily to the
purchase of computer and research equipment and furniture and fixtures. In
fiscal 1997, uses of cash resulted from approximately $7,300,000 of cash
being used to purchase land and construct the Company's new corporate
headquarters facility. In addition, an approximate net $13,200,000 of cash
was used to purchase of short-term investments and $5,000,000 was used to
purchase the equity investment in Unwired Planet Inc. In fiscal 1998, cash
provided by financing activities resulted principally due to proceeds from
the sale of the Company's equity investment in Unwired Planet Inc., and the
Company's former headquarters facility of $5,885,000 and $1,640,000,
respectively, offset principally by capital expenditures.
Cash provided by (used in) financing activities was $11,211,000,
$24,972,000 and ($508,000) for fiscal years 1996, 1997 and 1998,
respectively. The cash from financing activities in fiscal 1996 was
primarily due to the issuance of $12,100,000 of Common Stock. See Note 13 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 on its new head quarters facility. In fiscal
1998, cash used in financing activities primarily resulted from the payoff of
the Company's construction note, partially offset by proceeds received on the
Company's new long-term promissory note and the issuance of common stock
resulting from stock options exercised.
As of March 31, 1998, the Company had approximately $6,984,000 of long-
term debt, including current portion, outstanding relating to its
headquarters building. Monthly payments are $49,000, including interest at
7.46%, with the unpaid balance due January 1, 2008. 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
the end of fiscal 1999.
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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 by attempting to keep
intercompany balances current and minimizing assets in any one currency
denomination. However, due to recent losses, intercompany balances have
increased and 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130 "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments
and unrealized gains/losses on available for sale securities. The disclosure
prescribed by SFAS No. 130 must be made beginning with the first quarter of
fiscal 1999.
Additionally in June 1997, the FASB issued SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information". This statement
establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Company has not yet determined the impact, if
any, of adopting this new standard. The disclosures prescribed by SFAS No.
131 will be effective for the Company's consolidated financial statements for
the year ending March 31, 1999.
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It
also provides guidance on capitalization of the losses incurred for computer
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software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting this statement. The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31, 2000
consolidated financial statements.
In October 1997 and March 1998, the AICPA issued SOP 97-2, "Software
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" which the Company is
required to adopt for transactions entered into in the fiscal year beginning
April 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue
on software transactions and supercede SOP 91-1. The Company believes that
the adoption of SOP 97-2 and SOP 98-4 will not have a significant impact on
its current licensing or revenue recognition practices. However, should the
Company adopt new or change its existing licensing practices, the Company's
revenue recognition practices may be subject to change to comply with the
accounting guidance provided in SOP 97-2 and 98-4.
"YEAR 2000" ISSUES
The Company is aware of the numerous issues associated with the
programming code in existing computer systems as the year 2000 approaches.
The "Year 2000" problem is pervasive and complex, as many computer systems
will be affected in some way by the rollover of the two digit year value to
00. Systems that do not properly recognize such information may generate
erroneous data or cause a system to fail. The "Year 2000" issue creates
risk for the Company from unforeseen problems in its own computer systems and
from third parties with whom the Company deals worldwide. Failures in the
Company's and/or third party's computer systems could have a material adverse
impact on the Company's operations. To address this concern, the Company has
evaluated its products to assess their Year 2000 compliance. The Company
believes that the most current release of all of its products will not cease
to perform nor generate incorrect or ambiguous data or results solely due to
a change in date to or after January 1, 2000. The Company believes that the
current versions of its products are in material compliance with the Year
2000 papers by the British Standards Institute. While copies of old versions
of the Company's software may be embedded in deployed products developed by
OEM licensees, some of which may be used in mission critical functions, the
Company has made commercially available Year 2000 fixes to all of its past
licensees, and believes that the term of its license agreements preclude any
liability for Year 2000 related failures in such products. The Company is
also currently in the process of evaluating its infrastructure along with its
external suppliers for "Year 2000" compliance. Management believes its
internal infrastructure and external suppliers used will be compliant by the
year 2000. Management does not believe the costs related to achieving "Year
2000" compliance will be material. There can be no assurance that the
systems of other companies on which the Company relies have been or will be
accurately converted to be "Year 2000" compliant and will not have an adverse
effect on the Company's operations.
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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
34
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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."
35
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
36
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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 1998 Annual Meeting of Shareholders, expected to be filed
pursuant to Regulation 14A no later than 120 days following March 31, 1998.
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, 1997 and 1998
Consolidated Statements of Operations for the three years ended March 31,
1998
Consolidated Statements of Shareholders' Equity for the three years ended
March 31, 1998
Consolidated Statements of Cash Flows for the three years ended March 31,
1998
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.
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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, as amended.
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 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.
10.13 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.
10.14 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.
10.15 Commercial Note, Letter Agreement, and Security Agreement between the
Company and Norwest Bank Iowa, N.A., dated July 23, 1996, filed as
Exhibit 10.18 to the Form 10-K Report of the Company for the fiscal
year ended March 31, 1997.
10.16 Contract for Construction between the Company and The Weitz Company,
Inc., dated July 25, 1996, filed as Exhibit 10.19 to the Form 10-K
Report of the Company for the fiscal year ended March 31, 1997.
11 Statement Regarding Computation of Net Earnings (Loss) Per Share.
12 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K. On January 14, 1998 the Company filed a report on
Form 8-K to report a newly executed promissory note with GMAC Commercial
Mortgage. On March 9, 1998, the Company filed a report on Form 8-K to
report the consummation of a sale of shares of Series C Preferred Stock
of Unwired Planet, Inc.
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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 29th day of
June, 1998.
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 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
- ------------------------
Kenneth B. Kaplan Executive Officer (Principal June 29, 1998
Executive Officer)
/S/ M. DENIS CONNAGHAN Director, Executive Vice
- ------------------------
M. Denis Connaghan President & Chief Operating June 29, 1998
Officer
/S/ KENT R. KELDERMAN Chief Financial Officer,
- ------------------------
Kent R. Kelderman Executive Vice President & June 29, 1998
Treasurer (Principal Financial
& Accounting Officer)
/S/ ARTHUR DON
- ------------------------
Arthur Don Director June 29, 1998
40
<PAGE>
/S/ JAMES A. GORDON
- ------------------------
James A. Gordon Director June 29, 1998
/S/ ROBERT L. GROWNEY
- ------------------------
Robert L. Growney Director June 29, 1998
/S/ DANIEL P. HOWELL
- ------------------------
Daniel P. Howell Director June 29, 1998
/S/ DENNIS E. YOUNG
- ------------------------
Dennis E. Young Director June 29, 1998
41
<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, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended March 31,
1998. 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, 1997 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Des Moines, Iowa
April 24, 1998
F-1
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
------------------
Assets 1997 1998
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,758 $ 2,009
Short-term investments 13,204 11,611
Trade receivables, net of allowance
for doubtful accounts of $635
and $502 (notes 2 and 4) 7,014 4,064
Income taxes receivable 207 6
Inventories (note 4) 96 66
Prepaid royalties 1,005 370
Prepaid expenses and other current assets 316 780
Deferred tax assets (note 6) 507 465
-------- --------
Total current assets 29,107 19,371
-------- --------
Investment, at cost 5,004 -
-------- --------
Property and equipment, net (notes 3 and 5) 11,917 13,663
-------- --------
Other assets:
Intangible assets, net of amortization (notes 1 and 4 1,675 3,050
Deposits and other (note 4) 1,380 1,415
-------- --------
Total other assets 3,055 4,465
-------- --------
$ 49,083 $ 37,499
======== ========
</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 1997 1998
---------------------- -------- --------
<S> <C> <C>
Current liabilities:
Notes payable to banks (note 4) $ 323 $ 300
Current installments of long-term debt (note 5) 38 66
Accounts payable 2,559 1,386
Accrued expenses 2,194 2,317
Deferred revenues 867 832
Income taxes payable 102 56
-------- --------
Total current liabilities 6,083 4,957
Long-term debt, less current installments (note 5) 8,038 6,918
Deferred income taxes (note 6) 236 268
-------- --------
Total liabilities 14,357 12,143
-------- --------
Shareholders' equity (notes 7, 8 and 13):
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; 14,190,561 and 14,778,092
shares issued;13,965,461 and 14,552,992 shares
outstanding 36,152 36,735
Retained earnings (deficit) 89 (9,857)
Cumulative adjustment from foreign
currency translation (738) (745)
-------- --------
35,503 26,133
Less cost of common shares acquired for the treasury,
225,100 and 225,100 shares 777 777
-------- --------
Total shareholders' equity 34,726 25,356
-------- --------
Commitments (note 14)
$49,083 $ 37,499
======== ========
</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,
--------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues (notes 2 and 10):
Product $ 16,104 $ 16,586 $ 12,047
Services 7,551 9,548 5,677
--------- --------- ---------
23,655 26,134 17,724
--------- --------- ---------
Cost of revenues:
Product 2,428 3,046 2,745
Services 2,672 3,923 3,201
--------- --------- ---------
5,100 6,969 5,946
--------- --------- ---------
Gross profit 18,555 19,165 11,778
--------- --------- ---------
Operating expenses:
Research and development 5,009 7,155 7,223
Sales and marketing 8,421 10,819 10,148
General and administrative 3,899 3,415 4,485
Special charges (note 12) - 438 940
--------- --------- ---------
17,329 21,827 22,796
--------- --------- ---------
Operating profit (loss) 1,226 (2,662) (11,018)
--------- --------- ---------
Other income (expense):
Foreign currency gain (loss), net 13 (30) (79)
Gain on sale of land and building - - 215
Gain on sale of investment - - 881
Interest expense (151) (106) (465)
Interest income 434 1,224 730
--------- --------- ---------
296 1,088 1,282
--------- --------- ---------
Earnings (loss) before income
tax expense (benefit) 1,522 (1,574) (9,736)
Income tax expense (benefit) (note 6) 146 (3) 210
--------- --------- ---------
Net earnings (loss) (note 10) $ 1,376 $ (1,571) $ (9,946)
========= ========= =========
Basic earnings (loss) per share $ .12 $ (.11) $ (.69)
========= ========= =========
Shares used in per share
calculation - basic 11,090 13,754 14,378
========= ========= =========
Diluted earnings (loss) per share $ .11 $ (.11) $ (.69)
========= ========= =========
Shares used in per share
calculation - diluted 12,930 13,754 14,378
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
($ 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, 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
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
Issuance of common shares
of stock - 643 - - - 643
Legal and other fees incurred
for issuance of common shares
of stock - (60) - - - (60)
Net loss - - (9,946) - - (9,946)
Current translation adjustment - - - (7) - (7)
------- ------- ------- -------- ------- ---------
Balance at March 31, 1998 $ - $36,735 $(9,857) $ (745) $ (777) $ 25,356
======= ======= ======= ======== ======= =========
</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,
-----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,376 $ (1,571) $ (9,946)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,296 1,802 2,366
Gain on sale of land and building - - (215)
Write down of intangible and other assets - - 940
Gain on sale of investment - - (881)
Deferred income taxes (185) 17 74
(Increase) decrease in trade receivables, net (1,248) (2,288) 2,837
Decrease in income taxes receivable 111 4 201
Decrease (increase) in inventories 3 (58) 30
(Increase) decrease in prepaid royalties - (1,005) 69
Decrease (increase) in prepaid expenses
and other current assets 69 (95) (469)
Increase in other assets (726) (1,749) (2,843)
Increase (decrease) in accounts payable 547 942 (1,144)
(Decrease) increase in accrued expenses (333) 905 8
Increase (decrease) in deferred revenues 164 (9) 159
Decrease in income taxes payable (6) (50) (45)
-------- -------- --------
Net cash provided by (used in)
operating activities 1,068 (3,155) (8,859)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,320) (9,089) (4,559)
Proceeds from sale of property and equipment 19 - 1,640
Purchases of short-term investments - (39,417) (24,353)
Maturities of short-term investments - 26,213 25,945
Purchase of investment, at cost - (5,004) -
Proceeds from sale of investment, net - - 5,885
-------- -------- --------
Net cash (used in) provided by
investing activities (1,301) (27,297) 4,558
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable to banks
and long-term debt 3,142 7,901 10,702
Principal payments on notes payable to banks
and long-term debt (3,406) (1,553) (11,793)
Proceeds on issuance of common shares of stock 12,104 19,046 643
Cost of issuance of common stock (62) (422) (60)
Deferred offering costs (567) - -
-------- -------- --------
Net cash provided by (used in)
financing activities 11,211 24,972 (508)
-------- -------- --------
10,978 (5,480) (4,809)
Effect of foreign currency exchange rate
changes on cash (157) (99) 60
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 10,821 (5,579) (4,749)
Cash and cash equivalents at beginning of year 1,516 12,337 6,758
-------- -------- --------
Cash and cash equivalents at end of year 12,337 $ 6,758 $ 2,009
======== ======== ========
</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.; Microware Systems
Corporate Park, Inc.; 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.
F-7
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
-------------------------------------------------------------------------
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.
Investments
------------
In October of 1996, Microware purchased a preferred stock interest in
another company for $5,004. On February 20, 1998, the Company
received net proceeds of $5,885 from the sale of the preferred stock.
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, 1997 and 1998 consisted
of the following:
<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>
<TABLE>
<CAPTION>
1998
--------------------------------
Accumulated
Cost amortization Net
------- ------- -------
<S> <C> <C> <C>
Capitalized software
development costs $ 1,147 $ 888 $ 259
Purchased software 3,983 1,344 2,639
Goodwill 323 323 -
Patents, copyrights, and other 518 366 152
------- ------- -------
$ 5,971 $ 2,921 $ 3,050
======= ======= =======
</TABLE>
F-8
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ 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 $236, $201, and $151 for the years
ended March 31, 1996, 1997, and 1998, 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 not to exceed
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, 1996, 1997, and
1998 were $1,277, $764, and $687, respectively.
Revenue Recognition
-------------------
The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants'
(AICPA) Statement of Position (SOP) 91-1, "Software Revenue
Recognition". Product revenues primarily consist of software licenses
and development tool products sold and royalties earned from equipment
distributors. Software license fees are recognized as revenues upon
contract signing and shipment of the software master copy. Sales of
development tool products are recognized as revenues upon shipment.
Royalties earned from equipment distributors are recognized as
revenues when reported by the equipment distributors or upon written
agreement for non-refundable prepaid royalties.
Service revenues are derived primarily from custom contract engineering
work, postcontract customer support (maintenance) agreements, and
training and consulting services. Revenues from custom contract
engineering work are recognized using the percentage of completion
method. Maintenance revenues, including maintenance bundled with
software license fees, are recognized ratably over the term of the
related agreements. Revenues from training and consulting services
are recognized as the services are rendered.
F-9
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
-------------------------------------------------------------------------
Revenue Recognition, Continued
------------------------------
In October 1997 and March 1998, the AICPA issued SOP 97-2, "Software
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition" which the
Company is required to adopt for transactions entered into in the
fiscal year beginning April 1, 1998. SOP 97-2 and SOP 98-4 provide
guidance on recognizing revenue on software transactions and supercede
SOP 91-1. The Company believes that the adoption of SOP 97-2 and SOP
98-4 will not have a significant impact on its current licensing or
revenue recognition practices. However, should the Company adopt new
or change its existing licensing practices, the Company's revenue
recognition practices may be subject to change to comply with the
accounting guidance provided in SOP 97-2 and 98-4.
Computation of Net Earnings (Loss) Per Share
--------------------------------------------
Net earnings (loss) per share is calculated in accordance with the
provisions of SFAS No. 128, "Earnings per Share" which was required
to be adopted in the quarter ended December 31, 1997. SFAS No. 128
establishes new standards for computing and presenting earnings per
share (EPS) on a basis that is more comparable to international
standards and provides for the presentation of basic and diluted EPS.
Basic EPS has been computed by dividing net earnings (loss) by the
weighted average number of common shares common and convertible
preferred stock (as if converted to common stock on the original date
of issuance) outstanding during the periods presented. Diluted EPS
has been computed by dividing net earnings (loss) by the weighted
average common and convertible preferred stock (as if converted to
common stock on the original date of issuance) and, when dilutive,
common equivalent shares outstanding during the periods presented.
Dilutive common equivalent shares are calculated using the treasury
stock method and consist of common stock issuable upon the exercise of
options and warrants. All prior period EPS calculations have been
restated.
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. 98 (SAB No. 98), all stock
issued and warrants and options to purchase shares of common stock
granted by the Company for normal consideration preceding the initial
public offering date are included in the EPS calculations in a manner
similar to a stock split or stock dividend. SAB No. 98 revised the
calculation of the pre-initial public offering common and common stock
equivalent shares previously governed by SAB No. 83. The Company has
retroactively applied SAB No. 98. In fiscal year 1996, basic EPS was
calculated based upon 11,090,000 weighted-average common shares and
the effect of the dilutive EPS was 1,840,000 shares.
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:
F-10
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
-------------------------------------------------------------------------
Fair Value of Financial Instruments, Continued
----------------------------------------------
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.
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 granted.
Compensation cost for stock options, if any, is recognized 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 proforma disclosures as required under SFAS No.
123, "Accounting for Stock-Based Compensation" (see note 8).
Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and displaying comprehensive
income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during
a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains/losses
on available for sale securities. The disclosure prescribed by SFAS No.
130 must be made beginning with the first quarter of fiscal 1999.
Additionally in June 1997, the FASB issued SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information". This
statement establishes standards for reporting information about
operating segments in annual financial statements. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not
yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS No. 131 will be effective for the
Company's consolidated financial statements for the year ending March
31, 1999.
F-11
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(1) Summary of Significant Accounting Policies and Related Matters, Continued
-------------------------------------------------------------------------
Recent Accounting Pronouncements, Continued
-------------------------------------------
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance for determining whether computer software is
internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on
capitalization of the losses incurred for computer software developed
or obtained for internal use. The Company has not yet determined the
impact, if any, of adopting this statement. The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31,
2000 consolidated financial statements.
(2) Trade Receivables
------------------
At March 31, 1997, the Company had one customer whose trade receivable
balance exceeded 10 percent of consolidated trade receivables. Trade
receivables at March 31, 1997 for this customer were $704 and revenues
for the year ended March 31, 1997 totaled approximately $2,279. This
customer is also a shareholder of the Company (see note 13).
At March 31, 1998, the Company had one customer whose trade receivable
balance exceeded 10 percent of consolidated trade receivables. Trade
receivables at March 31, 1998 for this customer were $663 and revenues
for the year ended March 31, 1998 totaled approximately $667.
The activity in the Company's allowance for doubtful accounts for the
years ended March 31, 1996, 1997, and 1998 consisted of the following:
<TABLE>
<CAPTION>
Balance at Additions Deductions,
beginning charged to net of Balance at
of year expenses recoveries end of year
---------- ---------- ---------- -----------
<C> <S> <S> <S> <S>
Year ended March 31, 1996 $ 78 $ 367 $ 79 $ 366
===== ===== ===== =====
Year ended March 31, 1997 $ 366 $ 754 $ 485 $ 635
===== ===== ===== =====
Year ended March 31, 1998 $ 635 $ 587 $ 720 $ 502
===== ===== ===== =====
</TABLE>
(3) Property and Equipment
-----------------------
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Land and improvements $ 144 $ 2,529
Building 2,017 8,426
Furniture, fixtures, and equipment 4,115 3,264
Research and development equipment 3,612 2,571
Leasehold improvements 123 49
Construction in progress 7,369 -
------- -------
17,380 16,839
Accumulated depreciation
and amortization 5,463 3,176
------- -------
$11,917 $13,663
======= =======
</TABLE>
F-12
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(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, 1998
and is renewable annually. Funds advanced are secured by Microware's
trade receivables, inventories, and intangible assets. There were no
borrowings outstanding at March 31, 1997 or 1998.
Microware Systems K.K. has credit agreements with various maturities
with two Japanese banks. Outstanding balances at March 31, 1997 and
1998 totaled $323 and $300, respectively. The weighted average
interest rate was 2.125 percent at March 31, 1998. The credit
agreements are secured by Microware Systems K.K.'s deposit for office
space in the amount of $450 at March 31, 1998.
(5) Long-term Debt
---------------
Long-term debt at March 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Mortgage note (A) $ 193 $ -
Mortgage note with bank (B) 997 -
Construction note (C) 6,886 -
Promissory note (D) - 6,984
------- -------
8,076 6,984
Less current installments 38 66
------- -------
Long-term debt, excluding
current installments $ 8,038 $ 6,918
======= =======
</TABLE>
(A) In conjunction with the sale of the Company's former headquarters
building, this note was paid off in November 1997.
(B) In conjunction with the sale of the Company's former headquarters
building, this note was paid off in December 1997.
(C) The construction note was paid off in December 1997.
(D) On December 30, 1997, the Company, through its newly organized
wholly owned subsidiary Microware Systems Corporate Park, Inc.
executed a promissory note with GMAC Commercial Mortgage Corporation
in the amount of $7,000. The note is secured by the Company's
headquarters facility and associated real estate. Monthly payments
are $49, including interest at 7.46 percent, with the unpaid balance
due January 1, 2008.
F-13
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(5) Long-term Debt (continued)
--------------------------
The aggregate maturities of long-term debt for each of the five years
ending March 31, 2003 and thereafter are as follows:
1999 66
2000 71
2001 76
2002 82
2003 89
Thereafter 6,600
-------
$ 6,984
=======
The carrying amount of the Company's long-term debt approximates the fair
value as of March 31, 1998.
(6) Income Taxes
------------
The provision for income taxes is based on earnings (loss) before income
tax expense (benefit) as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
United States $ (234) $ (1,404) $ (7,940)
Foreign 1,756 (170) (1,796)
-------- -------- --------
$ 1,522 $ (1,574) (9,736)
======= ======== ========
</TABLE>
Components of income tax expense (benefit) for the years ended March 31,
1996, 1997, and 1998 consist of the following:
<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>
<TABLE>
<CAPTION>
1998
-------------------------------
Domestic Foreign
income income Total
--------- ----------- -----
<S> <C> <C> <C>
Current $ 121 $ 15 $ 136
Deferred 74 - 74
------ ----- ------
$ 195 $ 15 $ 210
====== ===== ======
</TABLE>
F-14
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(6) Income Taxes, Continued
-----------------------
Income tax expense (benefit) for the years ended March 31, 1996, 1997,
and 1998 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>
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 517 $ (535) $(3,310)
Increase (decrease) in taxes resulting from:
U.S. losses without current benefit - 660 2,682
Foreign losses without current benefit - 209 743
Utilization of foreign net
operating loss carryforwards (208) (457) -
Foreign taxes - 99 77
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (173) - -
Other 10 21 18
------ ------ -------
$ 146 $ (3) $ 210
====== ====== =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at March 31, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
March 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards $ 1,400 $ 7,048
Foreign net operating loss carryforwards 445 1,042
Post contract customer support unearned revenue 161 189
Compensation/benefits 43 33
Inventories 54 54
Allowance for doubtful accounts 214 178
Warranty reserve - 54
Other 95 43
------- -------
Total gross deferred tax assets 2,412 8,641
Less valuation allowance 1,845 8,090
------- -------
Total deferred tax assets 567 551
------- -------
Deferred tax liabilities:
Capitalized software costs 70 93
Property and equipment 226 261
------- -------
Total deferred tax liabilities 296 354
------- -------
Net deferred tax assets $ 271 $ 197
======= =======
</TABLE>
The net deferred tax assets at March 31, 1997 and 1998, are composed of
current deferred tax assets of $507 and $465, respectively, and
noncurrent deferred tax liabilities of $236 and $268, respectively.
F-15
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(6) Income Taxes, Continued
------------------------
The net change in the total valuation allowance for the years ended
March 31, 1997 and 1998 was an increase of $1,085 and $6,245,
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, 1998, the Company has U.S. net
operating loss carryforwards for federal income tax purposes of
approximately $19,500 (including approximately $8,500 from tax
benefits related to employee stock options) which are available to
offset future federal taxable income, if any, expiring as follows:
$8,500 in 2012 and $11,000 in 2013. The foreign net operating loss
carryforwards expire as follows: $599 in 1999, $150 in 2000, $1,597 in
2003, and $550 in 2004.
(7) 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 retroactively to give effect to the
share dividend. Additionally, the 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 $17,600 after
deducting underwriting discounts and commissions and offering
expenses.
(8) Stock Options
--------------
The Company has established 1989, 1991, 1992 and 1995 Stock Option Plans
(the Plans) and granted options to certain officers, directors, and
employees to purchase shares of common stock. The options granted
under the Plans expire 10 years from the date such option is granted.
Options vest over a two to five year period and are exercisable under
conditions specified in the Plans' agreements.
The 1989, 1991, 1992 and 1995 Plans had available 1,200,000, 512,000,
496,000 and 1,720,000 total shares of common stock subject to option,
respectively.
F-16
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(8) Stock Options, Continued
------------------------
In May 1997, the Company offered all recipients of stock options grants
made in October 1996 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 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 (the closing price of the common stock on the date of
grant) for all other employees. While the original grants had a
vesting schedule of 25% on each anniversary of October 14, 1996, the
new grants have a vesting of 10%, 20%, 30% and 40% on each anniversary
of May 2, 1997. Vesting of all 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.
Activity for the Company's Plans is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------- ------------------------- ------------------------
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 1,520,000 $0.50-1.3125 2,250,200 $0.50-3.125 2,060,691 $0.50-15.50
Issued 784,400 $3.125 373,100 $10.00-15.50 978,250 $4.375-10.00
Exercised 4,000 $.9375 391,009 $0.50-3.125 587,531 $0.50-3.125
Canceled 50,200 $.9375-3.125 171,600 $3.125 443,100 $3.125-15.50
--------- --------- ---------
Ending
balance 2,250,200 $0.50-3.125 2,060,691 $0.50-15.50 2,008,310 $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, 1997 and 1998: risk free interest
rates of 6.0%, 6.25% and 6.0%, respectively; expected volatility of
0.00%, 80.89% and 88.40%, respectively; an expected option life of
5.75 years, 6.0 years, and 6.0 years, respectively; and no expected
dividends for any year. As the Company was a nonpublic entity until
April 2, 1996, it is permitted under SFAS No. 123 to use the "minimum
value" method to value stock options granted prior to 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, 1997, and 1998 were
$0.82, $10.80 and $4.90, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair-value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of its
stock options.
F-17
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(8) 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,
1997, and 1998 would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss):
As reported $ 1,376 $ (1,571) $ (9,946)
Proforma $ 1,215 $ (2,763) $ (10,954)
Net earnings (loss)
per share:
As reported
Basic $ 0.12 $ (0.11) $ (0.69)
Diluted $ 0.11 $ (0.11) $ (0.69)
Proforma
Basic $ 0.11 $ (0.20) $ (0.76)
Diluted $ 0.09 $ (0.20) $ (0.76)
</TABLE>
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, 1998:
<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 - 1.55 635,010 2.7 $ 0.8973 635,010 $ 0.8973
$3.10 - 4.65 410,600 7.0 $ 3.1996 195,600 $ 3.1250
$4.66 - 6.20 238,500 9.5 $ 5.7372 - $ -
$6.21 - 7.75 674,300 9.2 $ 6.6743 - $ -
$9.30 - 10.85 25,000 7.3 $ 10.00 5,000 $ 10.00
$13.95 - 15.50 24,900 8.5 $ 15.50 6,225 $ 15.50
--------- ---------
2,008,310 6.7 $ 4.1768 841,835 $ 1.5769
========= === ======== ========= ========
</TABLE>
(9) Profit Sharing Plan
--------------------
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, 1996, 1997, and
1998 amounted to $88, $131, and $175, respectively.
F-18
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(10) Foreign Operations
-------------------
A summary of the Company's domestic and foreign operations as of and for
the years ended March 31, 1996, 1997, and 1998 is presented below:
<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>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Elimin-
U.S U.K. Japan France Germany ations Total
-------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $10,882 $ 2,692 $ 4,197 $ 1,053 $1,827 $(3,068) $ 17,724
======= ======= ======= ======= ====== ======= ========
Operating (loss) profit $(9,268) $ (74) $(1,558) $ (211) $ 93 $ - $(11,018)
======= ======= ======= ======= ====== ======= ========
Net (loss) earnings $(8,135) $ (81) $(1,554) $ (262) $ 76 $ - $ (9,946)
======= ======= ======= ======= ====== ======= ========
Total assets $41,105 $ 1,047 $ 1,632 $ 550 $ 744 $(7,579) $ 37,499
======= ======= ======= ======= ====== ======= ========
Total liabilities $10,258 $ 1,479 $ 1,421 $ 1,105 $ 948 $(3,068) $ 12,143
======= ======= ======= ======= ====== ======= ========
</TABLE>
Included in U.S. revenues are foreign export sales, of approximately
$2,324, $1,226, and $690 during the years ended March 31, 1996, 1997,
and 1998, respectively. Revenue eliminations represent primarily
intercompany sales between the U.S. and foreign operations and
royalties paid to the U.S. by foreign subsidiaries.
F-19
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(11) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
During the years ended March 31, 1996, 1997, and 1998, the Company paid
interest of approximately $124, $262, and $701, respectively.
Income taxes paid during the years ended March 31, 1996, 1997, and 1998
amounted to approximately $168, $242, and $95, respectively.
(12) Special Charges
----------------
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 costs and lease termination costs for restructuring
operations in Europe.
During the year ended March 31, 1998, the Company determined that due to
revised estimates of the marketability of certain products under
development, a special charge of $940 was appropriate to more
adequately reflect the residual value of certain intangible assets.
Included in this charge was approximately $566 of deferred development
costs in the form of prepaid royalties, approximately $202 relating to
goodwill associated with MicroMall, Inc., a subsidiary of the Company,
and $172 relating to the write-off of previously capitalized purchased
technology.
(13) 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 and expire at certain 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).
(14) Commitments
-----------
The Company leases certain domestic and foreign facilities under
noncancelable operating leases. Minimum annual rental commitments at
March 31, 1998 under all noncancelable operating leases are as
follows:
1999 $ 337
2000 $ 238
2001 $ 152
2002 $ 147
2003 $ 147
Thereafter $ 754
F-20
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except per share amounts)
(14) Commitments, continued
-----------------------
Rental expense under cancelable and noncancelable operating leases was
$950, $922, and $785 during the years ended March 31, 1996, 1997, and
1998, respectively.
F-21
<PAGE>
EXHIBIT INDEX
Description Page
10.8 1995 Stock Option Plan of the Company, as amended 43
11 Statement Regarding Computation of Net Earnings
(Loss) Per Share 50
21 Subsidiaries of the Registrant 51
23 Consent of Independent Accountants 52
27 Financial Data Schedule (Edgar Version Only)
42
<PAGE>
Exhibit 10.8
MICROWARE SYSTEMS CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Stock Option Plan (the "Plan") is to
enable Microware Systems Corporation (the "Company") to attract and
retain people of initiative and ability as employees, advisors and
directors and to provide additional incentives to these individuals.
Reference hereinafter to "employee" shall also include advisors and non-
employee directors. Reference to "employment" shall also include service
as an advisor or member of the board of directors of the Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below and
in Paragraph 7, the shares to be offered under the Plan shall consist of
Common Stock of the Company ("Shares"). The total number of Shares that
may be issued under the Plan shall not exceed 1,720,000 (determined as of
July 14, 1997) Shares. If an option right granted under the Plan
expires, terminates or is canceled, the unissued Shares subject to such
option shall again be available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a)Effective Date. The Plan shall become effective as of April 1,
1995. However, no option granted under the Plan shall become
exercisable until the Plan is approved by the affirmative vote of
the holders of a majority of the Common Stock of the Company
represented at a shareholders' meeting at which a quorum is
present; any awards under the Plan prior to such approval shall be
conditioned on and subject to such approval. Subject to this
limitation, options may be granted under the Plan at any time after
the Effective Date and before termination of the Plan.
(b)Duration. The Board of Directors may at any time suspend or
terminate the Plan. Unless previously terminated by the Board, this
Plan shall terminate on March 31, 2005. The rights and obligations
under any option granted while the Plan is in effect shall not be
altered or impaired by suspension or termination of the Plan, except
by the consent of the person to whom the option was granted.
4. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"),
who, during the one-year period prior to the time of exercising
discretion in administering the Plan (but only after the Company first
registers its Common Stock under the Exchange Act) and during the one-
year period after exercising such discretion (but only after the Company
first registers its Common Stock under the Exchange Act), have not
received awards under the Plan. The Committee shall determine and
designate from time to time the employees to whom awards shall be made,
the amount of the awards and the other terms and conditions of the
awards, except that only the Board of Directors may amend or terminate
the Plan as provided in Paragraphs 3 and 10. Subject to the provisions
of the Plan, the Committee may from time to time adopt and amend rules
and regulations relating to administration of the Plan, advance the lapse
of any waiting period, accelerate any exercise date, waive or modify any
restriction applicable to Shares (except those restrictions imposed by
law) and make all other determination in the judgment of the Committee
necessary or desirable for the administration of the Plan. The
43
<PAGE>
interpretation and construction of the provisions of the Plan and related
agreements by the Committee shall be final and conclusive. The Committee
may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any related agreement in the manner and
to the extent it shall deem expedient to carry the Plan into effect, and
it shall be the sole and final judge of such expediency.
5. ELIGIBILITY. Any awards may be made to employees of the Company,
including advisors and directors of the Company; provided, however, no
member of the Committee shall be eligible for selection as a person to
whom awards may be made. The Committee shall select the employees to
whom awards shall be made. The Committee shall specify the action taken
with respect to each employee to whom an award is made under the Plan. At
the discretion of the Committee, an employee may be given an election to
surrender an award in exchange for the grant of a new award.
The number of Shares underlying options granted in a fiscal year to each
executive officer whose compensation is subject to reporting on the
Company's annual proxy statement (an "Executive Officer") shall not exceed
200,000 shares for any fiscal year during which he or she becomes or
serves as an Executive Officer.
6. OPTION GRANT.
(a)Grant. The Committee has the authority and discretion to grant
options under the Plan. With respect to each option grant, the
Committee shall determine the number of Shares subject to the
option, the option price, the period of the option, and the time or
times at which the option may be exercised. In addition, the
Committee may provide for any further restrictions or provisions in
the option agreement which it deems appropriate. Options shall be
either Incentive Stock Options or Nonstatutory Stock Options.
Incentive Stock Options shall meet all of the requirements of this
Paragraph 6. Nonstatutory Options shall meet the requirements of
Subparagraphs (c) through (g) of this Paragraph 6.
(b)Incentive Stock Option. Incentive Stock Options ("ISOs") shall be
subject to the following terms and conditions. (For the purposes of
this Subparagraph 6(b), references to "employee" shall not include
advisors or non-employee directors; only common law employees may
receive ISOs.)
(i)ISOs may be granted under the Plan to an employee possessing more
than 10% percent, directly or by attribution, of the total
combined voting power of all classes of stock of the Company only
if the option price is at least 110% of the fair market value of
the Shares subject to the option on the date it is granted, as
described in Subparagraph 6(b)(iii), and the option by its terms
is not exercisable after the expiration of five years from the
date it is granted.
44
<PAGE>
(ii) Subject to the Subparagraph 6(b)(i) and 6(c), ISOS granted
under the Plan shall continue in effect for the period fixed by
the Committee, except that no ISO shall be exercisable after the
expiration of ten years from the date it is granted.
(iii) The option price per shall be determined by the Committee at
the time of grant. Subject to Subparagraph 6(b)(i), the option
price shall not be less than 100% of the fair market value of the
Shares covered by the ISO at the date the option is granted. The
fair market value shall be determined by the Committee, or
procedures established by the Committee.
(iv) No ISO shall be granted on or after the tenth anniversary of
the Effective Date of the Plan.
(c)Exercise of Options. Except as provided in Subparagraph 6(f), no
option granted under the Plan may be exercised unless at the time of
such exercise the optionee is employed by the Company and shall have
been so employed continuously since the date such option was
granted. Absence on leave or on account of illness or disability
under rules established by the Committee shall not, however, be
deemed an interruption of employment for this purpose. Except as
provided in Subparagraphs 6(f), 6(h) and 6(i), and Paragraphs 7 and
8, options granted under the Plan may be exercised from time to time
over the period stated in each option in such amounts and at such
times as shall be prescribed by the Committee, provided that options
shall not be exercised for fractional shares. Unless otherwise
determined by the Committee, if the optionee does not exercise an
option in any one year with respect to the full number of Shares to
which the optionee is entitled in that year, the optionee's rights
shall be cumulative and the optionee may purchase those Shares in
any subsequent year during the term of the option.
(d)Nontransferability. Each stock option granted under the Plan by its
terms shall be nonassignable and nontransferable by the optionee,
either voluntarily or by operation of law, except by will or by the
laws of descent and distribution of the state or country of the
optionee's domicile at the time of death, and each option by its
terms shall be exercisable during the optionee's lifetime only by
the optionee.
(e)Vesting. Options granted under the Plan shall vest according to
such schedule as the Committee may prescribe at the time of grant,
which may include full and immediate vesting. Reference to "option"
in this Plan means all vested and non-vested options.
(f)Termination of Employment or Death.
With respect to ISOs.
(i) Subject to Subparagraphs 6(h) and 6(i), if the employment of an
employee is terminated, any then outstanding stock option held by
the employee shall be exercisable, in accordance with the
provision of the stock option agreement, by such employee at any
time prior to the expiration date of such stock option or within
three months after the date of termination of employment,
whichever is the shorter period.
(ii) Subject to Subparagraph 6(i), and notwithstanding the
provisions of (f)(i), if the employee's employment is terminated
because of a disability described in Section 422(c)(6) of the
Internal Revenue Code ("Disability"), any then outstanding stock
option held by the employee shall be exercisable, in accordance
with the stock option agreement, by such employee at any time
45
<PAGE>
prior to the expiration of such option agreement or within one
year after the date of termination of employment, whichever is
the shorter period. Whether an optionee has a Disability shall
be determined in each case, in its discretion, by the Committee,
and any such determination by the Committee shall be final and
binding.
(iii) Notwithstanding the provisions of (f)(i), if the employee
dies, any then outstanding stock option held by such employee on
the date of death shall be exercisable, in accordance with the
provisions of the stock option agreement, by the duly appointed
representative of the employee's estate at any time prior to the
expiration of such option agreement or within one year after the
date of death, whichever is the shorter period.
If a termination under (f)(d) or (iii) occurs, any unvested portion
of the option held by the employee shall become vested, provided that
the aggregate value of Shares with respect to which any ISO first
becomes exercisable in the calendar year of the termination of
employment does not exceed $100,000. If the value of Shares that
become fully vested under an ISO exceed $100,000, the excess shall be
treated as stock subject to a Nonstatutory Stock Option. For
purposes of the $100,000 limitation, the fair market value of the
Shares on the date the ISO was granted shall be used in determining
the value of the Shares.
With respect to Nonstatutory Options:
The Committee may specify in the option agreement what restrictions
will apply in the event of termination of employment.
For all options issued hereunder, to the extent that the option of
any deceased optionee or any optionee whose employment terminates is
not exercised within the applicable period, all further rights to
purchase Shares pursuant to such option shall cease and terminate.
(g)Purchase of Shares. Unless the Committee determines otherwise,
Shares may be acquired pursuant to an option granted under the Plan
only upon receipt by the Company of notice in writing from the
optionee of the optionee's intention to exercise, specifying the
number of Shares as to which the optionee desires to exercise the
option and the date on which the optionee desires to complete the
transaction, and if required in order to comply with the Securities
Act of 1933, as amended, containing a representation that it is the
optionee's present intention to acquire the Shares for investment and
not with a view toward distribution. Unless the Committee determines
otherwise, on or before the date specified for completion of the
purchase of Shares pursuant to an option, the optionee must have paid
the Company the full purchase price of such shares in cash. No
Shares shall be issued until full payment therefor has been made. If
the Company is required to withhold on account of any of any present
or future tax imposed as a result of an exercise, the Company shall
so notify the optionee and the optionee shall be required to pay all
such withholding in cash as a condition to the receipt of shares.
The Shares shall contain any restrictions required by the option
agreement unless the Committee determines otherwise.
(h)Termination For Cause. For all options issued hereunder, if the
Company terminates the employment of an optionee for cause, all
46
<PAGE>
outstanding stock options held by the optionee at the time of such
termination shall automatically terminate unless the Committee
notifies the optionee that the options will not terminate. A
termination "for cause" shall be defined under each written option
agreement. Whether and when a termination of employment is a
termination "for cause" shall be determined in each case, in its
discretion, by the Committee, and any such determination by the
Committee shall be final and binding.
(i)Violation of Other Agreement. For all options issued hereunder,
if an optionee violates any confidentiality, non-solicitation or
non-competition agreement with the Company, all outstanding stock
options held by the optionee at the time of such violation shall
automatically terminate unless the Committee notifies the optionee
that the options will not terminate. Whether and when any such
agreement is violated shall be determined in each case, in its
discretion, by the Committee, and any such determination by the
Committee shall be final and binding.
7. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common Stock
of the Company are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Company or of another corporation by reason of any reorganization,
merger, consolidation, plan of exchange, recapitalization,
reclassification, stock split, combination of shares or dividend payable
in shares, appropriate adjustment shall be made by the Committee in the
number and kind of shares available for awards under the Plan, provided
that this Paragraph 7 shall not apply with respect to transactions
referred to in Paragraph 8. In addition, the Committee shall make
appropriate adjustment in the number and kind of shares as to which
outstanding options, or portions thereof then unexercised, shall be
exercisable, to the optionee's proportionate interest is maintained as
before the occurrence of such event. The Committee may also require that
any securities issued in respect of or exchange for Shares issued
hereunder that are subject to restrictions be subject to restrictions.
Notwith-standing the foregoing, the Committee shall have no obligation to
effect any adjustment that would or might result in the issuance of
fractional shares, and any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by
the Committee. Any such adjustments made by the Committee shall be
conclusive.
47
<PAGE>
8. SPECIAL ACCELERATION IN CERTAIN EVENTS.
(a)Special Acceleration. Notwithstanding any other provisions of the
Plan, option agreements issued under the Plan may (but need not)
provide for a special acceleration ("Special Acceleration") of
options outstanding under such agreement with the effect set forth
in Subparagraph 8(b) at any time when the shareholders of the
Company approve one of the following ("Approved Transactions"):
(i) Any consolidation, merger, plan of exchange, or transaction
involving the Company ('Merger') in which the Company is not the
continuing or surviving corporation or pursuant to which the
Common Stock of the Company would be converted into cash,
securities or other property, other than a Merger involving the
Company in which the holders of the Common Stock of the Company
immediately prior to the Merger have the same proportionate
ownership of common stock of the giving corporation after the
Merger; or
(ii) Any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company or the adoption of
any plan or proposal for the liquidation or dissolution of the
Company.
In addition, option agreements issued under the Plan may (but need not)
provide for a Special Acceleration in the event a "person", within the
meaning of Section 13(d) of the Exchange Act, becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, in one or more transactions, of shares of Common Stock of
the Company representing 50% or more of the total number of votes that
may be cast by all stockholders of the Company voting as a single
class, without the approval or consent of the Board of Directors.
(b)Effect on Outstanding Options. Except as provided below in this
Subparagraph 8(b), upon a Special Acceleration pursuant to Subparagraph
8(a), all options then outstanding under the Plan and subject to such
acceleration shall immediately become exercisable in full during the
remainder of their terms; provided, the Committee may, in its sole
discretion, provide a 30-day period prior to an Approved Transaction
during which such optionees shall have the right to exercise options,
in whole or in part, without any limitation on exercisability, and upon
the expiration of such 30-day period all such unexercised options shall
immediately terminate.
9. CORPORATE MERGERS, ACQUISITIONS, ETC. The Committee may also grant
options under the Plan having terms, conditions and provisions that vary
from those specified in this Plan, provided that any such awards are
granted in substitution for, or in connection with the assumption of,
existing options, issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, plan of
exchange, acquisition of property or stock, separation, reorganization or
liquidation to which the Company is a party.
10. AMENDMENT OF PLAN. The Board of Directors may at any time, and from time
to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or
for any other reason. Except as provided in Subparagraphs 6(f), 6(g),
6(h) or 6(i), or Paragraphs 7 and 8, however, no change is an award
48
<PAGE>
already granted shall be made without the written consent of the holder
of such award.
11. APPROVALS. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to
take steps required by state and federal law or applicable regulations,
including rules and regulations of the Securities and Exchange Commission
and any stock exchange or trading system on which this Company's shares
may then be listed or admitted for trading, in connection with grants
under the Plan. The foregoing notwithstanding, the Company shall not be
obligated to issue or deliver Common Stock under the Plan if such
issuance or delivery would violate applicable state or federal securities
laws.
12. EMPLOYMENT RIGHTS. Nothing in the Plan or any award pursuant to the Plan
shall confer upon any employee any right to continued service with the
Company or shall interfere in any way with the right of the Company to
terminate such employee's service at anytime, for any reason, with or
without cause, or to increase or decrease such employee's compensation or
benefits.
13. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall
have no rights as a shareholder with respect to any Shares until the date
of issue to the recipient of a stock certificate for such shares. Except
as otherwise provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
49
<PAGE>
7
Exhibit 11
Microware Systems Corporation
Computation of Net Earnings (Loss) per Share (1)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) $1,376 ($1,571) ($9,946)
======== ======== ========
Shares used in per share
calculation-basic 11,090 13,754 14,378
======== ======== ========
Basic earnings (loss) per share $0.12 ($0.11) ($0.69)
======== ======== ========
Diluted EPS:
Net earnings (loss) $1,376 ($1,571) ($9,946)
======== ======== ========
Shares used in per share
calculation-diluted
Basic shares 11,090 13,754 14,378
Options (2) 1,840 - -
Warrants (2) - - -
-------- -------- --------
12,930 13,754 14,378
======== ======== ========
Diluted earnings (loss) per share $0.11 ($0.11) ($0.69)
======== ======== ========
</TABLE>
(1) See Note 1 of Notes to the Consolidated Financial Statements.
(2) Warrants and options are not assumed exercised in loss periods as they
would be antidilutive.
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 3/31/98 and Consolidated Statement of
Operations for the year ended 3/31/98 and is qualified in its entirety by
reference to such financial statements.
50
<PAGE>
Exhibit 21
Microware Systems Corporation
Subsidiaries of the Registrant
State or Jurisdiction
of Incorporation
Name or Organization
-------------------------------------- ----------------------
Microware Systems Corporate Park, Inc. Iowa
MicroMall, Inc. Iowa
MSC Toolco, Inc. Delaware
Microware Systems Ltd. United Kingdom
Microware Systems France S.A.R.L. France
Microware Systems K.K. Japan
51
<PAGE>
Exhibit 23
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, 1998, relating to the consolidated balance sheets of Microware
Systems Corporation and subsidiaries as of March 31, 1997 and 1998, 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, 1998,
which report appears in the March 31, 1998 Annual Report on Form 10-K of
Microware Systems Corporation.
KPMG Peat Marwick LLP
Des Moines, Iowa
June 25, 1998
52
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 03/31/98 and Consolidated Statement of
Operations for the year ended 03/31/98 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,009
<SECURITIES> 11,611
<RECEIVABLES> 4,566
<ALLOWANCES> 502
<INVENTORY> 66
<CURRENT-ASSETS> 19,371
<PP&E> 16,839
<DEPRECIATION> 3,176
<TOTAL-ASSETS> 37,499
<CURRENT-LIABILITIES> 4,957
<BONDS> 0
0
0
<COMMON> 36,735
<OTHER-SE> (11,379)
<TOTAL-LIABILITY-AND-EQUITY> 37,499
<SALES> 12,047
<TOTAL-REVENUES> 17,724
<CGS> 2,745
<TOTAL-COSTS> 5,946
<OTHER-EXPENSES> 22,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> (9,736)
<INCOME-TAX> 210
<INCOME-CONTINUING> (9,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,946)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
