<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____.
COMMISSION FILE NUMBER 0-27988
MICROWARE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1073916
(State of incorporation) (I.R.S. Employer Identification No.)
1500 N.W. 118TH STREET. DES MOINES, IOWA 50325
(Address of principal executive office)
(515) 223-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK: 14,949,042 SHARES OUTSTANDING AS OF SEPTEMBER 30, 1999
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MICROWARE SYSTEMS CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial statements
Consolidated Statements of Operations for the six
month periods ended September 30, 1999 and 1998.
Consolidated Balance Sheets as of September 30, 1999
and March 31, 1999.
Consolidated Statements of Cash Flows for the six
month periods ended September 30, 1999 and 1998.
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risks
PART II - OTHER INFORMATION
ITEM 1. Legal Procedings
ITEM 2. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports of Form 8-K
SIGNATURES
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MICROWARE SYSTEMS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying financial information is unaudited but, in the opinion of
management, reflects all adjustments (which include only normally recurring
adjustments) necessary for a fair presentation of the results for the periods
shown. The unaudited consolidated financial statements and analyses should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended March 31, 1999 included in the Annual Report on Form
10-K previously filed with the Securities and Exchange Commission.
The results for the quarter ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
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MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Product $ 2,595 $ 3,330 $ 4,975 $ 6,930
Services 1,065 868 1,502 2,479
---------- ----------- ---------- ---------
3,660 4,198 6,477 9,409
---------- ----------- ---------- ---------
COST OF REVENUES:
Product 479 661 1,067 1,283
Services 406 602 698 1,307
----------- ----------- ----------- ---------
885 1,263 1,765 2,590
----------- ----------- ---------- ---------
GROSS PROFIT 2,775 2,935 4,712 6,819
OPERATING EXPENSES:
Research and development 1,500 1,778 3,018 3,516
Sales and marketing 2,621 2,807 4,904 5,572
General and administrative 800 1,136 1,541 1,789
---------- ---------- ----------- ---------
TOTAL OPERATING EXPENSES 4,921 5,721 9,463 10,877
---------- ---------- ---------- ---------
OPERATING LOSS (2,146) (2,786) (4,751) (4,058)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Foreign currency gain, net 338 102 253 73
Interest income 54 134 122 292
Interest expense (129) (134) (259) (268)
----------- ----------- ----------- -----------
263 102 116 97
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (1,883) (2,684) (4,635) (3,961)
Income tax expense 13 79 90 190
------------ ------------ ----------- ----------
NET LOSS $ (1,896) $ (2,763) $ (4,725) $ (4,151)
============ ============ =========== ==========
Loss per share $ (0.13) $ (0.19) $ (0.32) $ (0.28)
========== ============ =========== ==========
Shares used in per share calculation - basic 14,948 14,617 14,943 14,593
========== ============ =========== ==========
Diluted loss per share $ (0.13) $ (0.19) $ (0.32) $ (0.28)
========== ============ =========== ==========
Shares used in per share calculation - diluted 14,948 14,617 14,943 14,593
========== ========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
September 30, 1999 March 31, 1999
------------------- --------------
CURRENT ASSETS: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,180 $ 2,840
Short-term investments 2,713 4,687
Trade receivables, net of allowance for doubtful
accounts of $398 and $485, respectively 2,502 3,593
Income taxes receivable 120 122
Inventories 50 71
Prepaid expenses and other current assets 472 438
Deferred tax assets 403 473
---------------- -------------
TOTAL CURRENT ASSETS 8,440 12,224
PROPERTY AND EQUIPMENT:
Land and improvements 2,004 2,004
Building 8,426 8,426
Furniture, fixtures & equipment 3,632 3,647
Research and development equipment 2,642 2,806
Leasehold improvements 135 49
---------------- -------------
16,839 16,932
Accumulated depreciation and amortization 4,878 4,416
---------------- ------------
NET PROPERTY AND EQUIPMENT 11,961 12,516
OTHER ASSETS:
Intangible assets, net of amortization 1,450 2,007
Deposits and other 923 787
---------------- -------------
TOTAL OTHER ASSETS 2,373 2,794
---------------- -------------
$ 22,774 $ 27,534
================ =============
</TABLE>
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MICROWARE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
LIABILITIES
September 30, 1999 March 31, 1999
------------------ ----------------
CURRENT LIABILITIES: (Unaudited)
<S> <C> <C>
Notes payable to banks $ - $ 253
Current portion of long-term debt 74 71
Accounts payable 1,142 927
Accrued expenses 2,231 2,140
Deferred revenues 881 812
Income taxes payable 195 113
---------------- ---------------
TOTAL CURRENT LIABILITIES 4,523 4,316
Long-term debt, less current installments 6,809 6,847
Deferred income taxes 403 428
---------------- ---------------
TOTAL LIABILITIES 11,735 11,591
---------------- ---------------
SHAREHOLDERS' EQUITY
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; 15,174,142 and
15,154,992 shares issued; 14,949,042 and 14,929,892
shares outstanding 37,086 37,065
Accumulated deficit (24,520) (19,795)
Accumulated other comprehensive loss (750) (550)
---------------- ----------------
11,816 16,720
Less cost of common shares acquired for the treasury,
225,100 and 225,100 shares 777 777
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 11,039 15,943
---------------- ----------------
$ 22,774 $ 27,534
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
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MICROWARE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998
---------------- ----------------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (4,725) $ (4,151)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,444 1,415
Gain on sale of assets 11 -
Deferred income taxes 45 163
Change in assets and liabilities:
Trade receivables, net 949 (204)
Inventories 21 (1)
Prepaid royalties - 127
Other current assets (29) 82
Income taxes receivable 3 3
Other assets (245) (381)
Accounts payable 179 (537)
Accrued expenses 79 118
Deferred revenues 44 (204)
Income taxes payable 80 66
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (2,144) (3,504)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (146) (646)
Purchase of short-term investments (5,025) (1,008)
Maturities of short-term investments 7,000 6,935
---------------- ----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,829 5,281
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable to banks and long-term debt (295) (33)
Proceeds from issuance of common stock 21 100
Cost of issuance of common stock - (5)
---------------- ----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (274) 62
---------------- ----------------
Effect of foreign currency exchange rate changes on cash (71) (43)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (660) 1,796
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,840 2,009
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,180 $ 3,805
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 258 $ 260
================ ================
Cash paid for taxes $ 9 $ 26
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
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MICROWARE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with the rules and regulations of the Securities and Exchange
Commission, the preceding unaudited financial statements omit or condense
certain information and footnote disclosure normally required for complete
financial statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (which include
reclassifications and normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September 30,
1999 and for all periods presented, have been made. The consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the fiscal year ended March 31, 1999 included
in Microware's annual report on Form 10-K.
2. REVENUE RECOGNITION
Microware adopted the provisions of Statement of Position (SOP) 97-2,
"Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2", effective April 1, 1998.
SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supercede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4
did not have a material impact on Microware's current licensing or revenue
recognition practices. 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 mastercopy. 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,
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.
In December 1998, the AICPA released SOP 98-9, "Modification of SOP 97-2,
`Software Revenue Recognition with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple
element arrangements by means of the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all the undelivered
elements that are not accounted for by means of long-term contract accounting
(2) vendor-specific objective evidence of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria
of SOP 97-2 (other than the requirement for vendor-specific objective
evidence of the fair value of each delivered element) are satisfied. The
provisions of SOP 98-9 extend the deferral of certain paragraphs of SOP 97-2
and became effective December 15, 1998. These deferred paragraphs of SOP 97-2
and SOP 98-9 will be effective for transactions that are entered into in
fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. The effects of these statements are not expected to have a
material impact on Microware's operating results, financial position or cash
flows.
3. COMPUTATION OF NET LOSS PER SHARE
Basic earnings (loss) per share (EPS) has been computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during the periods presented. Diluted EPS has been computed by dividing net
earnings (loss) by the weighted average 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.
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4. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
For Microware, the primary difference between net income and comprehensive
income results from foreign currency translation adjustments.
Comprehensive loss for the three and six months ended September 30, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Net loss $(1,896) $(2,763) $(4,725) $(4,151)
Foreign currency translation adjustment (196) 21 (200) 34
---------- ---------- --------- ---------
Total comprehensive loss $(2,092) $(2,742) $(4,925) $(4,117)
========== ========== ========= =========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION IS SUBJECT TO UNCERTAINTY This discussion and
analysis of Microware's financial condition and results of operations
includes forward-looking statements that involve risk and uncertainty,
including management's expectations for fiscal 2000 and known trends and
uncertainties in the business. Words such as "expects", "anticipates",
"intends", "believes", "plans", "seeks", "estimates" and similar expressions
or variations of these words are intended to identify forward-looking
statements, but are not the only means of identifying forward-looking
statements. Additionally, statements that refer to Microware's estimated or
anticipated future results, sales or marketing strategies, new product
development or performance or other non-historical facts are forward-looking
and reflect Microware's current perspective of existing information.
Forward-looking statements are inherently subject to risks and uncertainties
that cannot be predicted or quantified, and actual results and outcomes may
differ materially from the results and outcomes discussed in the
forward-looking statements depending on a variety of factors, including the
volume and timing of orders received during the quarter, the Company's
ability to successfully market its products, the Company's ability to keep
pace with its competition and with rapid technological change, and the
Company's ability to manage turnover in its sales and marketing and other
personnel and to attract and maintain personnel generally, as well as other
risk factors mentioned throughout this Form 10-Q and in Microware's other
filings with the Securities and Exchange Commission. Readers are urged not to
place undue reliance on forward-looking statements and Microware disclaims
any obligation to update any of the forward-looking statements contained in
this Form 10-Q to reflect any future events or developments. Microware's
operating results have varied significantly from quarter to quarter in the
past, and the future operating results of Microware may fluctuate as a result
of the above and other risk factors detailed in this Form 10-Q and other
documents filed by Microware with the Securities and Exchange Commission. Due
to all of the foregoing factors, Microware 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, Microware's actual financial performance has not always met market
expectations and Microware has experienced significant quarterly losses. It
is likely that, in some future quarter, Microware'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 microprocessors.
The OS-9 product family includes options for programming languages,
networking, graphical interfaces and productivity tools. Substantially all of
Microware's revenues in the last and current fiscal years have been derived
from licenses and related services from the OS-9 product family.
Microware 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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A key element of Microware's long-term strategy is to develop products that
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 Microware's successful negotiation of license run-time royalties and on
the successful commercialization by Microware's customer of the underlying
product. To date, Microware has been negatively impacted by target markets,
such as certain types of digital 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 Microware will
be successful when the markets, for which its products are targeted, emerge.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL 2000 COMPARED TO THE SECOND QUARTER OF FISCAL 1999
REVENUES
Total revenues decreased 13% or $538,000 from $4.2 million in the second
quarter of fiscal 1999 to $3.7 million in the second quarter of fiscal 2000.
Product revenues decreased 22% or $735,000 from $3.3 million in the second
quarter of fiscal 1999 to $2.6 million in the second quarter of fiscal 2000.
The decrease in product revenues between periods resulted primarily from a
reduction in distribution royalties for the Company's OS-9 for Digital TV
(DAVID). Services revenues increased 23% or $197,000 from $868,000 in the
second quarter of fiscal 1999 to $1.1 million in the second quarter of fiscal
2000. The increase in services revenues between periods resulted primarily
from an increase in support fees received under a software license and custom
contract engineering agreement with Motorola to develop various modular
software solutions for a number of Motorola personnel wireless communications
devices.
International revenues represented 57% or $2.4 million and 61% or $2.2
million of total revenues in the second quarter of fiscal 1999 and 2000,
respectively. The reduction in international revenues, in real dollars,
resulted primarily from an overall decrease in European revenues in the
second quarter of fiscal 2000. The Company expects international sales to
continue to represent a significant portion of its revenues, although the
percentage may fluctuate significantly from period to period. In Europe and
Japan, revenues and expenses are primarily denominated in local currencies.
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.
COST OF REVENUES
Cost of product revenues includes direct and indirect costs for production
quality, 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.
Cost of revenues decreased 30% or $378,000 from $1.3 million in the second
quarter of fiscal 1999 to $885,000 in the second quarter of fiscal 2000. As a
percentage of product revenues, the cost of product revenues was 20% and 19%
for the second quarters of fiscal 1999 and 2000, respectively. The slight
decrease as a percentage of product revenues was principally due to a
reduction in the amortization of prepaid royalties between periods. Cost of
services revenues decreased 33% or $196,000 from the second quarter of fiscal
1999 to the second quarter of fiscal 2000, and decreased as a percentage of
services revenues from 69% in the second quarter of fiscal 1999 to 38% in the
second quarter of fiscal 2000. The reduction in costs and increase in gross
margins on services work primarily resulted from fewer engineers providing
support and custom engineering for higher margin customers in the second
quarter of fiscal 2000 as compared to the second quarter of fiscal 1999.
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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 decreased 16% or $278,000 from $1.8 million in the second
quarter of fiscal 1999 to $1.5 million in the second quarter of fiscal 2000.
Research and development expense decreased primarily as a result of
reductions in engineering staff and software maintenance expense, however
these reductions were partially offset by increases in salaries and
consulting services utilized by the Company between periods. Microware has
made substantial investments in product development and believes 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. Consequently, Microware 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 7% or $186,000
from $2.8 million in the second quarter of fiscal 1999 to $2.6 million in the
second quarter of fiscal 2000. The reduction in sales and marketing expense
between periods primarily resulted from a reduction in personnel. Microware
continues to work towards developing a small, focused and efficient sales and
marketing team. Microware expects to continue investing strategically in
sales and marketing over the remainder of fiscal 2000 to expand its customer
base and to market its products.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses consist primarily of personnel related
costs for administration, finance, human resources and facilities management,
as well as legal, auditing and certain recruiting and relocation expenses.
General and administrative expenses decreased 30% or $336,000 from $1.1
million to $800,000 in the second quarters of fiscal 1999 and 2000,
respectively. The decrease in the second quarter of fiscal 2000 resulted from
the absence of costs incurred from organizational changes made in the
Company's operations during the second quarter of fiscal 1999.
OTHER INCOME (EXPENSE)
Other income (expense) increased from $102,000 to $263,000 in the second
quarters of fiscal 1999 and 2000, respectively. Overall, the increase is
attributable to an increase in foreign exchange gains resulting primarily
from the strengthening of the Japanese Yen and German Mark against the U.S.
Dollar. Offsetting the increase in foreign exchange gains was a reduction in
interest income due to cash used in operations.
SIX MONTHS YEAR-TO-DATE OF FISCAL 2000 COMPARED TO SIX MONTHS YEAR-TO-DATE OF
FISCAL 1999
REVENUES
Total revenues decreased 31% or $2.9 million from $9.4 million for the
six-month period ended September 30, 1998 to $6.5 million for the six-month
period ended September 30, 1999. Product revenues decreased 28% or $1.9
million from $6.9 million for the six-month period ended September 30, 1998
to $5.0 for the six-month period ended September 30, 1999. The decrease in
product revenues stemmed primarily from a reduction in DAVID and Java
distribution license and non-refundable prepaid royalty fees. Services
revenues decreased 39% or $1.0 million from $2.5 million for the six-month
period ended September 30, 1998 to $1.5 million for the six-month period
ended September 30, 1999. The decrease in services revenues in the first six
months of fiscal 2000 as compared to the first six months of fiscal 1999
resulted from a significant reduction in custom contract work.
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COST OF REVENUES
Total cost of revenues decreased 32% or $825,000 from $2.6 million for the
six-month period ended September 30, 1998 to $1.8 million for the six-month
period ended September 30, 1999. As a percentage of product revenues, cost of
product revenues increased from 19% for the six-month period ended September
30, 1998 to 21% for the six-month period ended September 30, 1999, primarily
as a result of the reduction in product revenues between periods combined
with a certain level of fixed costs. As a percentage of services revenues,
cost of services revenues decreased from 53% for the six-month period ended
September 30, 1998 to 46% for the six-month period ended September 30, 1999.
The reduction in costs and increase in gross margins on services work
primarily resulted from fewer engineers providing support and custom
engineering for higher margin customers in the first six months of fiscal
2000 as compared to the first six months of fiscal 1999.
RESEARCH AND DEVELOPMENT
Research and development expense decreased 14% or $498,000 from $3.5 million
for the six-month period ended September 30, 1998 to $3.0 million for the
six-month period ended September 30, 1999. Research and development expense
fell due to reductions in engineering staff and in software support, however,
these reductions were partially offset by increases in salaries and
consulting services utilized by the Company between periods.
SALES AND MARKETING
Selling and marketing expense decreased 12% or $668,000 from $5.6 million to
$4.9 million in the six months ended September 30, 1998 and 1999,
respectively. The reduction in sales and marketing expense between periods
primarily resulted from a reduction in personnel. Microware continues to work
towards developing a small, focused and efficient sales and marketing team.
During the first six months of fiscal 2000 Microware continued to experience
turnover in its sales and marketing personnel, which has had, and may
continue to have, an interim adverse affect on our operations. While
Microware continues to invest substantial time, expense and resources in
recruiting and training certain sales personnel, many sales and marketing
positions that have been vacated will remain unfilled as the Company works
toward a smaller, more efficient organization.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses decreased 14% or $248,000 from $1.8
million for the six-month period ended September 30, 1998 to $1.5 million for
the six-month period ended September 30, 1999. The decrease between periods
resulted primarily from the absence of costs incurred from organizational
changes made in the Company's operations during the second quarter of fiscal
1999.
OTHER INCOME (EXPENSE)
Other income increased $19,000 from $97,000 for the six-month period ended
September 30, 1998 to $116,000 for the six-month period ended September 30,
1999. Overall, the increase is attributable to an increase in foreign
exchange gains resulting primarily from the strengthening of the Japanese Yen
and German Mark against the U.S. Dollar. Offsetting the increase in foreign
exchange gains was a reduction in interest income due to cash used in
operations.
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LIQUIDITY AND CAPITAL RESOURCES
Microware has historically funded its operations primarily through cash flows
from operations, the sale of common stock and, to a lesser extent, long term
debt. At September 30, 1999, Microware had approximately $3.9 million in
working capital and $4.9 million in cash and short-term investments as
compared to $7.9 million in working capital and $7.5 million in cash and
short term investments at March 31, 1999. The reduction in working capital
and cash and short term investments resulted principally from the use of cash
during the first and second quarters of fiscal 2000 for operating activities.
Net cash used in operating activities in the first six months of fiscal 1999
and 2000 totaled $3.5 million and $2.1 million, respectively. The net loss of
$4.2 million along with the reduction in accounts payable of $537,000 were
the primary reason for the cash used in operations in the first six months of
fiscal 1999. The net loss of $4.7 million, partially offset by a decrease in
trade receivables of $949,000, was the primary reason for the cash used in
operations in the first six months of fiscal 2000.
Net cash provided by investing activities in the first six months of fiscal
1999 and 2000 totaled $5.3 million and $1.8 million, respectively. Cash
provided by investing activities during the first two quarters of fiscal 1999
and 2000 resulted from net maturaties of short-term investments and were
partially offset by capital expenditures.
Net cash (used in) provided by financing activities in the first six months
of fiscal 1999 and 2000 totaled ($274,000) and $62,000, respectively. Cash
used for financing activities during the first six months of fiscal 2000
stemmed primarily from the retirement of a note payable to a bank associated
with Microware's Japanese subsidiary amounting to approximately $250,000.
As of September 30, 1999, Microware had approximately $6.9 million 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. In accordance with the
loan agreement, Microware has provided the lender an irrevocable standby
letter of credit in the amount of $724,000. In order to obtain the
irrevocable standby letter of credit, Microware has pledged a $724,000 U.S.
Treasury note, included in short-term investments, as collateral.
Management believes current working capital and its $1.0 million bank line of
credit will be adequate to meet Microware's future working capital, new
product development and capital expenditure needs at least through the end of
fiscal 2000.
Management does not believe that inflation has historically had a material
effect on Microware's results of operations.
Many of Microware'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 Microware revenues. Microware
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 while the gains reflected in
the second quarter of fiscal 2000 have benefited the Company, there can be no
assurance that Microware's future results of operations will not be adversely
affected by currency fluctuations.
Microware anticipates that international sales will continue to account for a
significant portion of net sales in the foreseeable future. This dependence
on international operations subjects Microware to certain risks, including
tariffs and other barriers, difficulty in staffing and managing foreign
subsidiary operations, difficulty in managing distributors and resellers,
difficulty in accounts receivable collection, foreign currency exposure and
adverse tax consequences. Microware is also subject to the risks associated
with the imposition of protective import or export legislation and
regulations by the United States or other countries. Microware cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented on its products in the future. There can be no assurance that
these factors or the adoption of restrictive policies will not have a
material adverse effect on Microware's business, financial condition and
results of operations.
14 of 22
<PAGE>
"YEAR 2000" ISSUES
Many currently installed computer systems and software products include
coding to accept only two-digit entries in the date code field instead of
four digit entries and therefore cannot distinguish dates prior to January 1,
2000 from dates on or after January 1, 2000. Systems and software that do not
properly recognize such information may generate erroneous data or fail. Such
systems need to be upgraded or replaced in order to function properly or, in
other words, be Year 2000 compliant. Significant uncertainty exists in the
computer systems and software industry concerning the potential effects
associated with non-compliance.
Microware has conducted Year 2000 compliance reviews of current versions of
its products. The reviews include assessment, implementation, validation,
testing and contingency planning. Microware believes that all of its most
current product releases are Year 2000 compliant. However, there can be no
assurance that all of Microware's customers will implement these compliant
releases in a timely manner. This could lead to failure of customer systems
and product liability claims against Microware. While copies of old versions
of Microware's software may be embedded in deployed products, some of which
may be used in mission critical functions, Microware has made Year 2000
compliant upgrades commercially available to all of its past licensees, and
believes that the terms of its license agreements preclude any liability for
Year 2000 compliance-related failures in such products. However, even if
Microware products are Year 2000 compliant, Microware may be subject to
claims based on Year 2000 compliance issues in the products of other
companies or issues arising from the integration of multiple products within
a system. The costs of defending and resolving Year 2000 compliance-related
disputes, including consequential damages, could have a material adverse
effect on Microware's business, financial condition and results of operations.
As part of its compliance program, Microware has tested software obtained
from third parties which has been integrated with Microware products and in
addition has sought assurances from respective third parties that their
software is Year 2000 compliant. However, despite this testing by Microware
and assurances provided by third party suppliers, third party software may
not be Year 2000 compliant. Errors or defects in Microware or third party
products may result in loss of revenue, diversion of product development
resources or other damage to Microware which could have a material adverse
effect on Microware's business, financial condition and results of operations.
Microware has initiated an assessment of its worldwide business systems,
which include, product development, sales and marketing, finance, human
resources and order fulfillment systems. Microware is working with and
monitoring critical suppliers to determine that their products and/or
services are year 2000 compliant. Microware believes the software and
hardware it uses internally is presently Year 2000 compliant and is not aware
of any material operational issues or costs that will be incurred in the
future. However, Microware provides no assurance that it will not incur
materially adverse consequences caused by undetected Year 2000 compliant
errors or defects in its business systems.
All costs associated with Microware's Year 2000 compliance are expensed as
incurred and have not been accounted for separately. These costs to date have
not been material. Additional costs related to Year 2000 compliance are not
expected to be material. Microware is currently developing contingency plans
to be implemented as part of its Year 2000 compliance efforts. Depending on
the system in question, these plans could include accelerated replacement of
affected equipment, increased work hours for Company personnel or use of
contract personnel or possible manual workarounds, in addition to other
similar approaches. If Microware is required to implement contingency plans,
it could have a materially adverse effect on Microware's business, financial
condition and results of operations.
Microware's ability to achieve Year 2000 compliance, in all areas of its
business, could be adversely effected by, among other things, the
availability and cost of programming and testing resources, vendors' or
suppliers' ability to modify proprietary software and other unanticipated
problems identified in Year 2000 compliance reviews and assessments. Such
difficulties could have a material adverse effect on Microware's business,
financial condition and results of operations.
The foregoing is a Year 2000 readiness disclosure entitled to protection as
provided in the Year 2000 Information and Readiness Disclosure Act.
15 of 22
<PAGE>
"EURO" ISSUES
On January 1, 1999, the European Union ("EU") introduced a new currency (the
"Euro"). The Euro is intended to enable the EU to blend the economies of the
EU's member states into one large market with unrestricted and unencumbered
trade and commerce across borders. Eleven European countries are
participating in the first membership wave, namely the Netherlands, Belgium,
Luxembourg, Germany, France, Ireland, Finland, Austria, Italy, Spain and
Portugal. Other member states are expected to join in the years to come.
Legacy currencies will remain legal tender in the participating countries for
a transition period between January 1999 and January 2002. During the
transition period, non-cash payments can be made in the Euro, and parties can
elect to pay for goods and services and transact business using either the
Euro or a legacy currency. The Company does not presently expect that the
introduction and use of the Euro will have a material adverse effect on the
Company's financial position, results of operations or cash flows during the
transition period. The significant requirement of companies during the
transitionary period is the ability to invoice and accept payment in Euro
denominated transactions if a customer makes this request. The Company will
continue to evaluate issues involving the introduction of the Euro.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other risk factors contained herein and within other
filings with the Securities and Exchange Commission, Microware believes the
following additional risk factors should be taken into consideration in
evaluating its business:
VARIATION OF QUARTERLY OPERATING RESULTS
Microware's revenues and operating results have varied substantially from
quarter to quarter and should not be relied upon as an indication of future
performance. Microware believes its revenues may fluctuate from quarter to
quarter depending upon such factors as new product introductions by itself or
others, seasonality of customer buying patterns, Microware's sales commission
plan, renewals of product licenses by customers, product development and
marketing expenses, changes in Microware's 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. Microware 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 Microware's revenues in a quarter has been historically derived from
orders received in the last month of that quarter, which makes Microware's
financial performance more susceptible to an unexpected downturn in business
and makes quarterly results difficult to forecast. In addition, Microware's
expense levels are based on present expectations of future revenue levels,
and a shortfall in revenues could result in a disproportionate decrease in
net earnings. As the markets in which Microware 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 Microware's revenues and gross profit in any
period may increase in absolute terms, such an increase may result in lower
gross profit margin percentages.
HISTORY OF OPERATING LOSSES
Microware has experienced significant operating losses for the past three
fiscal years. While Microware 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 Microware will
become profitable.
16 of 22
<PAGE>
MARKET RISKS
Microware has invested substantial resources in the development of emerging
markets, in particular the digital television and wireless and Internet
communications devices markets. While Microware 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
Microware will receive substantial revenues or earnings from products or
services in these markets.
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 Micrwoare 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 Microware'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
Microware has in the past experienced delays in software development, and
there can be no assurance that Microware will not experience such delays in
the future. Such delays, which can occur because of resource constraints,
unforeseen technological obstacles within or outside Microware's control, and
changes in market requirements, can have a material adverse effect on
Microware's business.
COMPETITION
Microware has attracted substantial competition in its targeted markets. Many
of Microware'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 Microware. 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 and digital TV 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 years related to the development
of its embedded systems business. There can be no assurance Microware 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
Microware'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 us recently. Microware has
experienced significant turnover in personnel during the past fiscal year
including its Executive Vice President and Chief Operating Officer, Vice
President of Sales, Vice President of Marketing and Vice President of
Engineering. Microware'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 Microware will be successful in
attracting and retaining such personnel.
17 of 22
<PAGE>
INTERNATIONAL OPERATIONS
In the past three fiscal years, Microware 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
Microware to certain risks, including tariffs and other barriers, difficulty
in staffing and managing foreign subsidiary operations, difficulty in
managing distributors and resellers, difficulty in accounts receivable
collection, foreign currency exposure and adverse tax consequences. Microware
is also subject to the risks associated with the imposition of protective
import or export legislation and regulations by the United States or other
countries. We cannot predict whether quotas, duties, taxes or other charges
or restrictions will be implemented on our products in the future. There can
be no assurance that these factors or the adoption of restrictive policies
will not have a material adverse effect on Microware's business, financial
condition and results of operations.
YEAR 2000 ISSUES
Many currently installed computer systems and software products include
coding to accept only two-digit entries in the date code field instead of
four digit entries and therefore cannot distinguish dates prior to January 1,
2000 from dates on or after January 1, 2000. Systems and software that do not
properly recognize such information may generate erroneous data or fail. Such
systems need to be upgraded or replaced in order to function properly or, in
other words, be Year 2000 compliant. Significant uncertainty exists in the
computer systems and software industry concerning the potential effects
associated with non-compliance.
Microware believes its most current releases of its products, including third
party software integrated into certain products, are Year 2000 compliant and
will neither cease to perform nor generate incorrect or ambiguous data or
results when processing dates on or after January 1, 2000. Microware believes
that its products will calculate any information dependent on such dates in
the same manner and with the same functionality, data integrity and
performance. However, Microware provides no assurance that its software
products contain all the necessary software routines and programs for the
accurate calculation, display, storage and manipulation of data involving
dates on or after January 1, 2000. Any non-compliance of Microware's software
products could have a material adverse effect on its business, financial
condition and results of operations.
Additionally, the majority of Microware's software products are combined by
its customers with non-Microware software programs or hardware devices. Such
non-Microware products could be non-compliant, causing Year 2000 compliance
issues for Microware's customers. Any such Year 2000 issues could affect
customers' demand for Microware products, which could have a material adverse
effect on Microware's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations, Year 2000 Issues".
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
Microware depends on its proprietary technology. Despite Microware's efforts
to protect its proprietary rights, it may be possible for unauthorized third
parties to copy Microware's products or to reverse engineer or obtain and use
information that Microware regards as proprietary. Policing and enforcing
unauthorized use of Microware's products is difficult and can be expected to
be a persistent problem, particularly as many countries have only limited or
evolving protection of intellectual property rights. Because substantially
all of Microware's revenues are derived from OS-9 and related products, any
impairment of OS-9 could have a material adverse impact on Microware's
business. See Part II - Other Information, Item 1. Legal Proceedings.
Microware's business is therefore dependent on the adequacy of its
intellectual property protection through patents, trademarks, 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 its products.
18 of 22
<PAGE>
VOLATILITY OF STOCK PRICE
The market price of Microware's common stock has fluctuated considerably in
the past, and is likely to fluctuate considerably in the future. Microware
believes that various factors, including quarterly fluctuations in results of
operations, announcements of new products or partners by Microware or by its
competitors, changes in the software industry in general, or general
economic, political and market conditions may significantly affect the market
price of its common stock. Following periods of significant volatility,
securities class action litigation may be initiated against Microware. Such
litigation, if initiated, could result in substantial costs and diversion of
management attention and resources, which could have a material adverse
effect on Microware's business.
FINANCIAL STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the recorded amounts of assets and liabilities at the date of the
financial statements and the recorded amounts of revenues and expenses during
the reporting period. A change in the facts and circumstances surrounding
these estimates could result in a change to the estimates and impact future
operating results.
19 of 22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
Microware's exposure to market risk associated with changes in interest rates
relates primarily to debt obligations as all financial assets are short term
in nature. Microware is exposed to changes in fair value of its long-term
debt, which carries a fixed interest rate. At September 30, 1999, Microware
had total long-term debt of $6,883,000.
FOREIGN CURRENCY RISK
Microware transacts business in various foreign currencies, primarily
Japanese yen and certain European currencies, as discussed within this Form
10-Q as well as the Annual Report on Form 10-K, and accordingly is exposed to
fluctuations in foreign currency markets. The Company does not enter into
foreign currency hedging transactions.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS.
On September 1, 1999, Microware filed suit in the United States District
Court for the Southern District of Iowa against Apple Computer, Inc.
("Apple"). The suit charges Apple with trademark infringement, false
designation of origin, unfair competition, and trademark dilution. Microware
believes that Apple's use of the trademark "MAC OS 9" to identify its
operating system software has, and will continue to, cause confusion in the
marketplace, and dilute the value and goodwill associated with Microware's
trademark and incontestably registration for the mark "OS-9". On October 6,
1999, Apple filed its answer and counterclaimed for the cancellation of
Microware's registration of the mark "OS-9", alleging that the mark is
generic and that Microware filed fraudulent affidavits with the Trademark
Office. On October 14, 1999, Microware filed a motion for preliminary
injunction, asking the court to order Apple to stop all use of the mark "MAC
OS 9". The parties have agreed to a schedule whereby the preliminary
injunction motion will be heard by the court in mid-December, 1999. While
Apple has yet to substantively respond to the charges, Microware and its
counsel believe the charges brought against Apple are well founded and
strongly supported by the facts and law as presently known and understood.
20 of 22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company was held on September 14,
1999. More than 91 percent of the holders of the Company's Common Stock were
represented at the meeting. Three issues were presented for consideration at
the meeting and were approved by the shareholders; 1) the election of three
Class I Directors to hold office until the 2002 Annual Meeting; 2) the
approval of the Microware Systems Corporation 1999 Stock Purchase Plan; and
3) the ratification of the selection of KPMG Peat Marwick LLP as independent
public accountants of the Company for the fiscal year ending March 31, 2000.
The results were as follows:
<TABLE>
<CAPTION>
1. Election of Class I Directors
Shares Entitled to Vote Votes at Meeting
-------------------------------- ----------------
<S> <C>
14,944,942 13,679,221
Name For Withhold Authority
---- ---------- ------------------
Kenneth B. Kaplan 13,519,783 159,438
Martin Allen 13,529,671 149,550
Daniel P. Howell 13,534,144 145,077
</TABLE>
2. Proposal to adopt the Company's 1999 Stock Purchase Plan.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-vote
------------ ---------- --------- ---------------
<S> <C> <C> <C>
13,388,182 272,226 18,813 -0-
</TABLE>
3. Ratification of Selection of KPMG Peat Marwick LLP as Independent
Public Accountants
<TABLE>
<CAPTION>
For Against Abstain Broker Non-vote
------------ -------- ------- ---------------
<S> <C> <C> <C>
13,618,059 51,536 9,626 -0-
</TABLE>
21 of 22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibits
10.10 Employment Agreement by and between George E. Leonard and
Microware
10.11 Severance Agreement and General Release by and between
M. Denis Connaghan and Microware
27 Financial Data Schedule (EDGAR version only).
(b.) None.
No other items.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
authorized.
MICROWARE SYSTEMS CORPORATION
Date: November 12, 1999 /S/ George E. Leonard
---------------------
George E. Leonard
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
Date: November 12, 1999 /S/ Kent E. Thompson
---------------------
Kent E. Thompson
Chief Accounting Officer,
Controller and Assistant
Treasurer and Assistant Secretary
22 of 22
<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") dated as of September
17, 1999 ("Effective Date") by and between George E. Leonard ("Employee") and
Microware Systems Corporation ("Company"). In consideration of the mutual
covenants contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT. Company agrees to continue to employ Employee on the
terms and conditions set forth below for the term of employment described
below and Employee accepts such employment.
2. POSITION. Subject to the control and direction of Company's Board
of Directors ("Board") and Company's President ("President"), Employee shall
perform all reasonable duties and services incident to his position as Chief
Financial Officer of Company, and such other reasonable duties and services
as may from time to time be assigned to him by the Board and the President
for the Company or any affiliated entity.
3. TERM. Employee's term of employment shall begin as of the
Effective Date and continue through March 31, 2001, which term shall be
extended automatically for additional one-year periods ending on March 31
unless either party gives written notice of termination of the agreement 60
days prior to such March 31, unless earlier terminated as provided in
Sections 6 through 8 below ("Term").
4. LOYALTY. Employee agrees that during the period of his employment
he will devote his full business time and attention to the business and
affairs of Company and its affiliated companies and will not, without the
prior permission of the Board or President, engage in any other business
enterprise which requires the personal time or attention of Employee. The
foregoing shall not prevent the purchase, ownership or sale by Employee of
investments or securities of any business which is not competitive and does
not have any business relations with Company or any affiliate of Company or
up to two percent of the outstanding publicly traded stock of any company,
provided the time or attention devoted to such activities does not interfere
with the performance of his duties hereunder. Employee further agrees that
during the period of his employment he agrees to accept such directorships,
executive offices and committee memberships in Company and its affiliated
companies to which he may from time to time be elected and will perform and
render the duties and the services incidental thereto.
5. COMPENSATION. For the full, prompt and faithful performance of
all of the duties and services to be performed by Employee hereunder, Company
agrees to pay, and Employee agrees to accept, the amounts set forth below:
(a) BASE SALARY. Employee shall receive a salary at a rate in the
gross amount of $150,000.00 per year, subject to such increases as the Board
may, in its sole discretion, from time to time determine ("Base Salary").
Employee's Base Salary shall be payable in accordance with Company's policies
regarding payment of salary to executive employees generally.
<PAGE>
(b) BENEFITS. Employee shall also receive such fringe benefits as
are made available to Company's executives generally. In addition, Employee
may participate in any retirement, profit sharing, incentive, insurance,
major medical, health and hospitalization or similar benefits which may from
time to time be available to Company's executives generally. Employee's
participation, including eligibility and level of benefits, in all benefit
programs shall be controlled by plan documents, where applicable, or
Company's policies, practices and procedures where no plan documents exist.
Nothing in this agreement is intended to limit or modify Employee's rights
under COBRA.
(c) EXPENSES. Company agrees to reimburse Employee for all
reasonable expenses incurred by him in providing services under this
Agreement in accordance with its policies and practices regarding expense
reimbursement then in effect.
(d) VACATION. Employee shall be entitled to such annual vacation as
provided by the Company's vacation policy applicable to its executives
generally, which shall be taken at such time or times as shall be mutually
determined by Company and Employee.
(e) MISCELLANEOUS. Employee shall not be precluded from receiving a
bonus granted to Employee by the Board.
6. TERMINATION FOR DEATH, DISABILITY OR CAUSE. Company may terminate
this Agreement and Employee's employment as follows:
(a) DEATH. In the event of the death of Employee, this Agreement
shall terminate as of the date of death, and Company's sole obligation will
be to pay to the estate of Employee Employee's Base Salary then unpaid and
accrued benefits (including accrued vacation) through his last day worked.
(b) DISABILITY. In the event that Employee shall, because of
physical or mental illness or incapacity, be unable to perform the duties and
services to be performed by him under this Agreement for a period of three
months (whether consecutive or not) in any 12-month period ("Disability"),
Company shall not be obligated to pay to Employee any compensation or
benefits beyond the date of Disability or may, in its sole discretion,
terminate this Agreement without any further obligation. The Company agrees
that it will not seek repayment of any salary paid to employee during a
period of disability prior to termination.
(c) TERMINATION FOR CAUSE. Company may terminate Employee's
employment for Cause and, in such event, Company's sole obligation shall be
to pay Employee's Base Salary through his last day worked. "Cause" shall be
defined as: (i) Employee's theft or embezzlement or attempted theft or
embezzlement of money or tangible or intangible assets or property of the
Company or its employees or business relations; (ii) any act or acts of moral
turpitude by Employee which negatively affects the interest, property,
operations, business or reputation of the Company; (iii) Employee's violation
of a federal, state or local law or regulation which negatively affects the
interest, property, operations, business or reputation of the Company; (iv)
gross negligence or willful misconduct in the performance of Employee's
duties; (v) Employee's failure to perform any of Employee's material duties
under this Agreement; and/or (vi) a material breach of this Agreement.
2
<PAGE>
7. TERMINATION RELATING TO A CHANGE IN CONTROL. Following a Change
in Control (as defined below), in the event that (i) Employee's employment is
terminated by the Company (other than for death, Disability or Cause), (ii)
Employee is not offered continued employment by the Company or its successor
on terms no less favorable than immediately prior to the Change in Control,
or (iii) Employee terminates his employment for Good Reason (as defined
below), Employee shall be entitled to receive the Change in Control Payment
(as defined below) within thirty (30) days of his last day worked.
(a) TERMINATION FOR GOOD REASON. Termination by Employee of his
employment for "Good Reason" shall mean a termination by Employee, within
three (3) months after a Change in Control, based on the occurrence, without
Employee's express written consent, of any of the following events:
(i) Any reduction by Company in Employee's Base Salary as
in effectimmediately prior to the Change in Control;
(ii) The failure by Company to continue in effect any bonus,
benefit or compensation plan or arrangement, stock ownership plan, stock
purchase plan, stock option plan, life insurance plan, medical, health,
dental, accident and disability plan in which Employee is participating at
the time of the Change in Control, or plans providing Employee with
substantially similar benefits (collectively, the "Benefit Plans"), or the
taking of any action by Company which would materially adversely affect
Employee's participation in or materially reduce Employee's benefits under
any of such Benefit Plans, if such failure or action results in a 20%
reduction of the present value of Employee's entire compensation package
(i.e. Base Salary and welfare benefits); provided, however, that the
amendment, modification or termination of any Benefit Plan as in effect at
the time of a Change in Control on a basis which does not discriminate
against Employee, or a class of employees of which Employee is a member (as
opposed to all participants in such Benefit Plan), shall not constitute "Good
Reason" for the termination by Employee of his employment pursuant to the
terms of this Section 7;
(iii) Any material breach by Company of any provision of
this Agreement;
(iv) The failure by Company to obtain the assumption of
this Agreement by any successor or assign of Company; or
(v) Any requirement by the Company that Employee relocate
to a location more than 100 miles from the Company's current executive
offices.
(b) CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events:
(i) a sale of assets representing fifty percent (50%) or
more of the net book value and of the fair market value of the Company's
consolidated assets (in a single transaction or in a series of related
transactions);
(ii) a liquidation or dissolution of the Company;
3
<PAGE>
(iii) a merger or consolidation involving the Company or
any subsidiary of the Company after the completion of which: (A) in the case
of a merger (other than a triangular merger) or a consolidation involving the
Company, the shareholders of the Company immediately prior to the completion
of such merger or consolidation beneficially own (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or comparable successor rules), directly or indirectly,
outstanding voting securities representing less than fifty percent (50%) of
the combined voting power of the surviving entity in such merger or
consolidation, and (B) in the case of a triangular merger involving the
Company or a subsidiary of the Company, the shareholders of the Company
immediately prior to the completion of such merger beneficially own (within
the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rules), directly or indirectly, outstanding voting securities
representing less than fifty percent (50%) of the combined voting power of
the surviving entity in such merger and less than fifty percent (50%) of the
combined voting power of the parent of the surviving entity in such merger;
(iv) an acquisition by any person, entity or "group"
(within the meaning of Section 13(d) or 14(d) of the Exchange Act or any
comparable successor provisions), other than any employee benefit plan, or
related trust, sponsored or maintained by the Company or an affiliate of the
Company and other than in a merger or consolidation of the type referred to
in clause "(iii)" of this Section 7(b), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rules) of outstanding voting securities of the Company representing
more than forty percent (40%) of the combined voting power of the Company (in
a single transaction or series of related transactions); or
(v) in the event that the individuals who, as of the
Effective Date, are members of the Board (the "Incumbent Board"), cease for
any reason to constitute at least fifty percent (50%) of the Board. (If the
election, or nomination for election by the Company's shareholders, of any
new member of the Board is approved by a vote of at least fifty percent (50%)
of the Incumbent Board, such new member of the Board shall be considered as a
member of the Incumbent Board.)
(c) CHANGE IN CONTROL PAYMENT. For purposes of this Agreement,
"Change in Control Payment" shall mean a lump sum payment in a gross amount
equal to Employee's Base Salary for one year plus Employee's Base Salary then
unpaid and accrued benefits (including accrued vacation) through his last day
worked (minus all lawful deductions).
(d) NO MITIGATION. Employee shall not be required to mitigate the
amount of any payment contemplated by this Section 7 (whether by seeking new
employment or in any other manner), nor shall any such payment be reduced by
any earnings that Employee may receive from any other source.
8. NOTICES. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when received at the address specified herein. In the case of Employee,
notices shall be delivered to him personally or at the home address which he
has most recently communicated to Company in writing. In the case of Company,
notices shall be delivered to its corporate headquarters, and all notices
shall be directed to the attention of its President.
4
<PAGE>
9. MODIFICATION AND WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge
is agreed to in writing and signed by Employee and by an authorized officer
of Company (other than Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision
or of the same condition or provision at another time.
10. COMPLETE AGREEMENT. This Agreement supersedes all previous
agreements between Company and Employee; provided however that the following
agreements between the parties that predate the Effective Date shall remain
in full force and effect: Microware Systems Corporation 1995 Stock Option
Plan Incentive Stock Option Agreement, dated August 31, 1998 and Agreement to
Protect Confidential Information from Competitive Disclosure, dated August
31, 1998. No agreements, representations or understandings (whether oral or
written and whether expressed or implied) which are not expressly set forth
in this Agreement have been made or entered into by either party with respect
to the subject matter hereof. This Agreement may be executed in one (1) or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one (1) and the same instrument.
11. SUCCESSORS AND ASSIGNS. The Company may assign this Agreement to
any successor or affiliated entity.
12. GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with and subject to, the laws of the
State of Iowa applicable to Agreements made and to be performed entirely
within such State.
13. SEVERABILITY. If any provision of this Agreement is declared
void, unenforceable or against public policy, such provision shall be deemed
severable and severed from this Agreement and the balance of this Agreement
shall remain in full force and effect.
14. ARBITRATION. Except as otherwise provided above, any dispute or
controversy arising under or in connection with this Agreement or relating in
any manner to Employee's employment by the Company shall be settled
exclusively by arbitration in Des Moines, Iowa or such other location
mutually agreed upon by the parties. Selection of the arbitrator and conduct
of the arbitration shall be in accordance with the employment arbitration
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded. Each party shall bear its own costs and legal
fees in any arbitration. The cost of the arbitrator and related expenses
shall be shared equally by the parties.
15. WITHHOLDING. All payments made pursuant to this Agreement will
be subject to withholding of applicable taxes and other deductions required
or permitted by law.
16. NO CONFLICTING CONTRACTS. Employee represents and warrants that
he is not subject to any non-compete covenant in any contract and no
contractual or other commitment or covenant exists which would prevent the
Employee's full performance of his duties and responsibilities under this
Agreement.
5
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of Company by its duly authorized officer, as of the day and year
first above written.
MICROWARE SYSTEMS CORPORATION GEORGE E. LEONARD
By: /s/ Kenneth B. Kaplan /s/ George E. Leonard
Title: CEO
6
<PAGE>
EXHIBIT 10.11
SEVERANCE AGREEMENT AND GENERAL RELEASE
THIS AGREEMENT is made and entered into this 16 day of July, 1999, by and
between M. DENIS CONNAGHAN, Social Security No. ###-##-#### (hereinafter
"CONNAGHAN"), and MICROWARE SYSTEMS CORPORATION, an Iowa corporation with its
principal place of business in Clive, Iowa (hereinafter "MICROWARE").
W I T N E S S E T H:
WHEREAS, CONNAGHAN was employed by MICROWARE from on or about May 19, 1997,
through July 21, 1999, when he resigned his employment with MICROWARE; and
WHEREAS, CONNAGHAN acknowledges that in conjunction with the severance of the
employment relationship he has been tendered and hereby acknowledges receipt
of all "wages" (as that term is defined in Chapter 91A, Code of Iowa) which
are due him including payments for accrued wages through July 21, 1999, and
payments for accrued but unused vacation (4 weeks or 20 days), and further
acknowledges that he has been provided those benefits which are mandated by
state or federal law including the option to continue group health insurance,
transfer/continuation/ conversion of certain life insurance policies, all of
which are outside of this Agreement; and
WHEREAS, MICROWARE and CONNAGHAN, and each of them, desire to conciliate,
compromise, and settle, fully and finally, any and all differences and
disputes between them and others herein identified, including all claims and
causes of action of any kind or description,
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<PAGE>
whether known or unknown, which settlement constitutes a good faith settlement
of such claims;
NOW, THEREFORE, in consideration of the premises and mutual promises herein
contained, it is agreed as follows:
FIRST. CONNAGHAN and MICROWARE agree that CONNAGHAN voluntarily resigns all
officer, director and other positions held with MICROWARE or any of its
affiliated entities effective July 21, 1999, by his voluntary resignation.
(CONNAGHAN agrees to execute resignation letters for MICROWARE and its
affiliates in the form attached hereto as Attachment A confirming his
resignation.)
SECOND. Neither this Agreement nor the making of the offer for it is, and
neither shall in any way be construed as, an admission by MICROWARE, or any
of its past or present directors, officers, agents, employees or
representatives, or any person or entity within the definition of "RELEASEES"
herein, that any of the RELEASEES violated any federal, state or local law or
is in any way liable to CONNAGHAN. MICROWARE specifically disclaims any
liability to CONNAGHAN or any other person, on the part of itself, its
directors, officers, agents, employees or representatives or any of the
RELEASEES. Similarly, neither this Agreement nor the acceptance of the offer
for it is, and neither shall in any way be construed as, an admission by
CONNAGHAN that he is in any way liable to MICROWARE. CONNAGHAN specifically
disclaims any liability to MICROWARE or any other person. The parties have
entered into this Agreement for the sole purpose of resolving all claims and
charges to avoid the burden, expense, delay and uncertainties of litigation,
and to further their mutual goals of an amicable severance of their
relationship.
2
<PAGE>
THIRD. CONNAGHAN represents and covenants that he has not heretofore
assigned, transferred, or purported to assign or transfer, to any person or
entity any claim or portion thereof or interest therein, which is the subject
of this Agreement.
FOURTH. The parties hereto recognize that this Agreement may be subject to
the Older Worker Benefit Protection Act amendments to the federal Age
Discrimination in Employment Act. It is their mutual intent that this
Agreement be construed so as to conform with that law to the extent that it
may be found by a court of competent jurisdiction to be applicable.
Regardless of that applicability, CONNAGHAN represents, warrants and
covenants:
a. That he has been given at least twenty-one (21) calendar days
from the date of delivery to him to consider the offer embodied by this
Agreement prior to its execution, and is under no compulsion from MICROWARE
to execute this document within a lesser time period, and has taken such time
as he feels appropriate to consider this document.
b. That he has been advised by MICROWARE to consult with his own
lawyer prior to the execution of this Agreement and has availed himself of
that right to the extent that he thought appropriate.
c. That the consideration called for by this Agreement arises
solely as a result of this Agreement, and that he is not now or will not in
the future be otherwise entitled to the same pursuant to any prior contract,
promise or representation.
d. That he understands that notwithstanding any provision of this
Agreement to the contrary, the Release herein does not apply to any alleged
violation of the Age Discrimination Employment Act (to the extent that it may
be applicable) which occurs after this Agreement has become final.
e. That this Agreement is written in such a manner that CONNAGHAN
understands its provisions.
3
<PAGE>
f. That he has been advised that, notwithstanding anything in this
Agreement to the contrary, he has a period of seven (7) calendar days
following the date of his initial execution of this Agreement to change his
mind and revoke the Agreement. The parties hereto agree and understand that
the provisions of this Agreement shall become effective and final on the
eighth calendar day after CONNAGHAN's initial execution, provided that he
does not revoke prior to that time.
FIFTH. As a material inducement to MICROWARE to enter into this Agreement:
a. CONNAGHAN hereby irrevocably and unconditionally releases, acquits
and forever discharges MICROWARE and any affiliated organization, and any
predecessor or successor organization and each and every one of its or their
past or present agents, directors, officers, employees, stockholders,
representatives -- whether acting individually or in that capacity -- and its
and their predecessors, successors, heirs, executors, administrators and
assigns, and all persons acting by, through, under or in concert with them or
any of them (collectively "RELEASEES"), or any of them, of and from (i) any
and all actions, causes of actions, suits, debts, charges, complaints,
claims, liabilities, obligations, promises, agreements, controversies,
damages, and expenses (including attorney's fees and costs actually
incurred), of any nature whatsoever, in law or equity, which he ever had, or
hereafter may have against each or any of the RELEASEES, arising from or
related to any activity or action of RELEASEES during or related to
CONNAGHAN's employment by MICROWARE; and (ii) any claims, demands or causes
of action relating to or arising out of CONNAGHAN's recruitment, hiring,
employment, separation from employment with MICROWARE including the making of
any announcements regarding that separation, including any claims arising
from any alleged violation by RELEASEES of any federal or state constitution,
statute, ordinance or common law, including, without limitation, any claims,
demands or causes of action arising under Title VII of the Civil Rights Act
of 1964, as
4
<PAGE>
amended, 42 U.S.C. Section 2000e, ET SEQ.; the federal Americans With
Disabilities Act; the federal Age Discrimination in Employment Act, as
amended, 29 U.S.C. Section 621 ET SEQ.; the Consolidated Omnibus Budget
Reconciliation Act; the Fair Labor Standards Act of 1938, as amended, 29
U.S.C. Section 201 ET SEQ.; the Iowa Civil Rights Act, Iowa Code Chapter 216;
federal or state common law (including, but not limited to, any claims for
wrongful discharge, for violation of public policy, for violation of express
or implied contract, breach of a covenant of good faith and fair dealing, for
infliction of emotional distress or for punitive damages); federal or state
administrative regulations; or any other local, state or federal statutory
provisions.
b. As a further material inducement to MICROWARE to enter into this
Agreement, CONNAGHAN further agrees, promises and covenants that neither he
nor any person, organization or any other entity acting on his behalf will
file, charge, claim, sue or cause or permit to be filed, charged or claimed,
any action for damages or other relief (including injunctive, declaratory,
monetary relief or other) against MICROWARE, or its officers, directors,
employees, agents and representatives or any other of the RELEASEES, their
agents or representatives, any claims, demands, causes of action,
obligations, damages or liabilities which are the subject of Subparagraph (a)
of paragraph Fifth of this Agreement. Nothing in this Agreement is intended,
nor shall it be construed, to preclude any action based on this Agreement.
c. CONNAGHAN agrees and recognizes that his employment relationship
with MICROWARE has been permanently and irrevocably severed, and that
MICROWARE has no obligation, contractual or otherwise, to rehire, reemploy,
recall, or hire him in the future.
d. Upon MICROWARE's request CONNAGHAN can be available to MICROWARE
on a:
- Full-time, on call basis through August 27, 1999.
- Part-time, scheduled basis through September 30, 1999.
- As available basis through December 31, 1999.
5
<PAGE>
CONNAGHAN acknowledges that he has and reaffirms that he will comply
with his continuing obligations under the "AGREEMENT TO PROTECT CONFIDENTIAL
INFORMATION FROM COMPETITIVE DISCLOSURE" which CONNAGHAN signed on September
19, 1997 and the "AGREEMENT ON NON-DISCLOSURE OF TRADE SECRETS AND
CONFIDENTIAL INFORMATION AND THE OWNERSHIP OF WORK PRODUCT" which CONNAGHAN
signed on May 21, 1997 which are attached to this agreement as Exhibit 1 and
Exhibit 2.
CONNAGHAN further agrees and acknowledges that any and all work
product developed during the course of CONNAGHAN's employment with MICROWARE,
including programs, software, architecture, techniques, manuals,
documentation, correspondence, business plans, internal memoranda, and any
other material protected or protectable under the applicable laws regarding
copyrights, patents, trade secrets, trade dress and other proprietary rights
constitute works-made-for hire and belong solely and exclusively to
Microware.
CONNAGHAN further acknowledges that in his capacity as an executive
officer of MICROWARE, he was privy to confidential technical and business
information, including but not limited to trade secrets (as defined in the
Uniform Trade Secrets Act, Iowa Code Ch. 550) and financial information,
relating to MICROWARE and/or its products, customers, etc., including all
material described in the preceding paragraph, and CONNAGHAN covenants to
continue to treat such information as confidential and not to disclose or use
such information in the future for his own benefit or for the benefit of any
third party, or reveal to any third party and trade secret or confidential
information belonging to Microware absent advance written permission of
Microware.
CONNAGHAN represents and warrants that he has delivered, or will
with all deliberate speed deliver, to MICROWARE any and all MICROWARE-related
materials or documents he may currently have in his possession.
6
<PAGE>
d. CONNAGHAN further agrees that from the date of this Agreement
until one (1) year from the date CONNAGHAN's employment has been voluntarily
terminated, CONNAGHAN shall not interfere with or disrupt, or attempt to
interfere with or disrupt, the relationship between MICROWARE, its present or
future employees, customers and business partners. This provision also means
that CONNAGHAN will not hire present or future MICROWARE employees for a
period of one (1) year from above mentioned date.
SIXTH. In consideration of the promises and representations in Paragraph
FIFTH, when and if this agreement becomes "final," MICROWARE agrees to pay
CONNAGHAN, as severance pay, through February 29, 2000, the total gross sum
of One Hundred Twenty Two Thousand, Three Hundred and Eight Dollars
($122,308), less applicable federal and state withholding. This sum shall be
paid periodically to CONNAGHAN on regularly scheduled MICROWARE paydays
beginning on the first regularly scheduled payday after this Agreement
becomes effective and final as defined in Paragraph FOURTH(f). In addition,
MICROWARE will:
- Pay CONNAGHAN's COBRA payments for seven (7) months.
- Supply office space through February 29, 2000. This will be arranged by
MICROWARE's Corporate Services group.
- Allow CONNAGHAN to retain his current computer equipment (laptop computer).
- Allow CONNAGHAN to retain access to his business voicemail through August
27, 1999.
The severance pay, and the above items will cease once CONNAGHAN begins work
in an equivalent position as that held at MICROWARE. In the case of a change
of control of MICROWARE, all outstanding and due monies (severance payments,
COBRA payments, and office space payments) will be paid to CONNAGHAN as a
lump sum.
7
<PAGE>
MICROWARE hereby irrevocably and unconditionally releases, acquits, and
forever discharges CONNAGHAN of and from any and all actions, courses of
action, suits, debts, charges, claims, damages and expenses which it may have
against CONNAGHAN relating to CONNAGHAN's employment, except for any claims
that MICROWARE may have against CONNAGHAN for conduct or omissions of
CONNAGHAN that MICROWARE deems to have been outside the course and scope of
his employment, against the best interests of the corporation and/or its
shareholders, in violation of an applicable federal, state or local law or in
violation of or inconsistent with any than existing policy or procedure of
MICROWARE, and except for any claims that MICROWARE may have against
CONNAGHAN for breach of this Severance Agreement and General Release or
breach of the "AGREEMENT TO PROTECT CONFIDENTIAL INFORMATION FROM COMPETITIVE
DISCLOSURE" which CONNAGHAN signed on September 19, 1997 and the "AGREEMENT
ON NON-DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION AND THE
OWNERSHIP OF WORK PRODUCT" which CONNAGHAN signed on May 21, 1997.
CONNAGHAN represents, warrants and promises that the sum of $122,308 and the
items listed in Paragraph SIXTH are new consideration to which he is not
otherwise entitled under any policy or practice of MICROWARE, and which he
would not receive but for this Agreement, and that he will accept the
foregoing in full, final and complete settlement of all claims he may have,
and which he is releasing, under this Agreement including any claims for pay,
compensatory damages, punitive damages, liquidated damages, attorneys fees,
and expenses or costs which CONNGHAN may have, or may have incurred. No
promise for any other or further consideration to CONNAGHAN has been made by
anyone subject to this Severance Agreement and General Release.
8
<PAGE>
SEVENTH. The parties agree that neither party shall make any defamatory or
disparaging comments about the other party. Nothing in this paragraph
prohibits either party from truthfully stating the reason that the employment
relationship was severed, including as articulated in the internal
announcement attached hereto.
EIGHTH. CONNAGHAN represents and certifies that he has carefully read and
fully understands all of the provisions and effects of this Agreement, that
CONNAGHAN is fully aware of his rights to discuss any and all aspects of this
matter with an attorney chosen by him, and that he is knowingly and
voluntarily entering into this Agreement and that neither MICROWARE nor its
agents, representatives or attorneys, nor anyone else has made any
representations concerning the terms or effects of this Agreement other than
those contained herein.
NINTH. a. This Agreement shall be binding upon CONNAGHAN and upon CONNAGHAN's
heirs, administrators, representatives, executors, successors and assigns, and
shall inure to the benefit of the RELEASEES and each of them, and to their
heirs, administrators, representatives, executors, successors, and assigns.
b. This AGREEMENT shall be binding upon MICROWARE and upon
MICROWARE's successors and assigns, and shall inure to the benefit of the
persons identified therein, and to their heirs, administrators,
representatives, executors, successors and assigns.
TENTH. CONNAGHAN expressly acknowledges that, except as specifically provided
herein, this Agreement is intended to include in its effect, without
limitation, all claims which have arisen and of which CONNAGHAN knows or does
not know, should have known, had reason to know or suspects to exist in
CONNAGHAN's favor at the time of execution hereof, and that this
9
<PAGE>
Agreement contemplates the extinguishment of any such claim or claims.
ELEVENTH. Should any tax liability arise or accrue under state or federal tax
laws as a result of any payments made pursuant to this Agreement beyond that
for which withholdings are made, CONNAGHAN agrees to timely pay any and all
such obligations and to hold MICROWARE and the RELEASEES harmless therefrom.
TWELFTH. This Agreement is made and entered into in the State of Iowa, and
shall in all respects be interpreted, enforced and governed under the laws of
said State. The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning, and not strictly for or
against any of the parties. Any controversy, claim, dispute, or disagreement
arising under, out of, or relating to this Agreement shall be submitted for
resolution exclusively to a federal or state court of competent jurisdiction
located in Polk County, State of Iowa, USA. CONNAGHAN and MICROWARE consent
and submit to the jurisdiction and venue of such courts for the resolution of
such controversies, claims, disputes, or disagreements.
THIRTEENTH. Should any provision of this Agreement be declared or be
determined by any court to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term, or provision shall be deemed not to be a part
of this Agreement.
FOURTEENTH. CONNAGHAN agrees and acknowledges that the terms and conditions
of this Agreement constitute confidential information of MICROWARE, and has
not or will not be disclosed by CONNAGHAN or MICROWARE to any third party
(except for attorneys and tax advisors under privilege or as required by law
as determined by advice of counsel) without first obtaining written
permission from MICROWARE.
10
<PAGE>
FIFTHTEENTH. This Agreement sets forth the entire agreement between the
parties hereto, and fully supersedes any and all prior agreements or
understandings between the parties hereto pertaining to the subject matter
hereof, excluding the September 19, 1997 "AGREEMENT TO PROTECT CONFIDENTIAL
INFORMATION FROM COMPETITIVE DISCLOSURE" and the May 21, 1997 "AGREEMENT ON
NON-DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION AND THE
OWNERSHIP OF WORK PRODUCT", any agreements regarding confidentiality and
ownership of intellectual property, and all agreements under the Company's
Stock Option Plans between CONNAGHAN and MICROWARE. Facsimile versions of
this document shall be deemed originals in all respects.
SIXTEENTH. In the event of a breach or threatened breach by CONNAGHAN of the
agreements set forth in Paragraph 5C, 5D and 14, CONNAGHAN acknowledges and
agrees that damages constitute an inadequate remedy at law and that MICROWARE
shall be entitled, in addition to remedies otherwise available in law or
equity, to preliminary and final injunctions enjoining such breach or
threatened breach and CONNAGHAN consents to the issuance thereof.
SEVENTEENTH. All notices and other communications in connection with this
Agreement shall be made in writing and addressed as follows, or to such other
address as shall have been designated in writing by the addressee:
(a) If to CONNAGHAN:
--------------------------------------------
--------------------------------------------
--------------------------------------------
11
<PAGE>
(b) If to MICROWARE:
1500 NW 118th St.
Des Moines, IA 50325
ATTN: President
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND
UNKNOWN CLAIMS. THE SIGNATORIES HERETO ACKNOWLEDGE THAT THEY HAVE EACH READ
THE FOREGOING DOCUMENT, AND UNDERSTAND ITS TERMS, AND FREELY AND VOLUNTARILY
SIGN THE SAME.
MICROWARE SYSTEMS CORPORATION M. DENIS CONNAGHAN
By: /s/ Kenneth B. Kaplan /s/ M. Denis Connaghan
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF 9/30/99 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED 9/30/99 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,180
<SECURITIES> 2,713
<RECEIVABLES> 2,900
<ALLOWANCES> 398
<INVENTORY> 50
<CURRENT-ASSETS> 8,440
<PP&E> 16,839
<DEPRECIATION> 4,878
<TOTAL-ASSETS> 22,774
<CURRENT-LIABILITIES> 4,523
<BONDS> 0
0
0
<COMMON> 37,086
<OTHER-SE> (26,047)
<TOTAL-LIABILITY-AND-EQUITY> 22,774
<SALES> 4,975
<TOTAL-REVENUES> 6,477
<CGS> 1,067
<TOTAL-COSTS> 1,765
<OTHER-EXPENSES> 9,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> (4,635)
<INCOME-TAX> 90
<INCOME-CONTINUING> 14,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,725)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
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