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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27988
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MICROWARE SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
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IOWA 42-1073916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 N.W. 118TH ST.
DES MOINES, IOWA 50325
(Address of principal (Zip Code)
executive offices)
(515) 223-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [X]
THE APPROXIMATE VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MAY 31, 2000 WAS $22,515,549. THIS CALCULATION DOES NOT REFLECT
A DETERMINATION THAT PERSONS ARE AFFILIATES FOR ANY OTHER PURPOSES.
NUMBER OF SHARES OUTSTANDING AS OF MAY 31, 2000: 15,186,800.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY STATEMENT TO BE FILED FOR
THE 2000 ANNUAL MEETING OF SHAREHOLDERS (PART III).
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MICROWARE SYSTEMS CORPORATION
<TABLE>
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INDEX
Page
Part I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 4A. Executive Officers of the Registrant 19
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 21
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 36
Part III
Item 10. Directors and Executive Officers of the
Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial
Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Part IV
Item 14. Exhibits, Financial Statements, Schedule, and
Reports on Form 8-K 38
Signatures 40
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PART I
CAUTIONARY NOTE
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS. 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 IN THIS REPORT. 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, 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 ANNUAL REPORT AND IN THE COMPANY'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 REPORT TO REFLECT ANY FUTURE
EVENTS OR DEVELOPMENTS.
ITEM 1. BUSINESS
Microware Systems Corporation was organized under the laws of the state of
Iowa in 1977. Its principal executive offices are located at 1500 N.W. 118th
Street, Des Moines, Iowa 50325 (telephone number 515-223-8000; Internet:
[email protected] or http://www.microware.com). References in this Annual
Report on Form 10-K to "Microware" or "the Company" are to Microware Systems
Corporation and its subsidiaries.
GENERAL DEVELOPMENT OF BUSINESS
Microware develops, markets and supports sophisticated real-time operating
system software and development tools for the traditional embedded systems,
communications, and consumer products markets. Microware's product line is built
around its OS-9 real-time operating system, which was first introduced in 1980
and has been continually refined to incorporate advances in technology. OS-9 is
a real-time operating system targeted at "embedded systems" - computers
dedicated to specialized tasks embedded within application-specific industrial
or computer products. Microware markets its products primarily through its sales
forces in North America, Europe and Japan.
Microware's business is focused on developing and marketing OS-9 for use in
traditional embedded systems, including industrial automation, transportation,
medical, and government/military systems; communications infrastructure
products, including networking equipment, ATM, ISDN, digital subscriber loop,
Ethernet and fast Ethernet, and custom connectivity applications; and higher
volume embedded systems for consumer and business uses, such as digital
television decoders, advanced wireless telephones and pagers, point-of-sale
equipment, workforce automation devices, in-car navigation systems and Internet
appliances. During the past fiscal year, Microware continued its emphasis on the
traditional embedded systems and communications markets.
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INDUSTRY BACKGROUND
Real-time operating systems are significantly different from the operating
systems that run general-purpose desktop computers. Many applications require a
"real-time" capability that enables them to provide an immediate, predictable
response to external events. For example, an embedded system that controls an
anti-lock braking system in an automobile needs to react to external events such
as pressure on the brake pedal, speed of the automobile and road conditions, all
within a fraction of a second. Similarly, real-time systems are important to
achieve "lip-sync" by simultaneously decompressing and synchronizing digital
streams of audio and video information. Real-time systems are used to enhance
performance, reduce manufacturing costs and enable product customization and
differentiation.
Real-time operating systems may be loaded from external media, or may
reside within a microprocessor as part of an embedded system. An embedded system
is comprised of a microprocessor and related software that are dedicated to a
specialized task or set of tasks, embedded within an application specific
industrial or consumer product. Examples of typical products that have one or
more microprocessors and embedded systems include automated teller machines,
cellular telephones, pagers, copiers, facsimile machines and automobiles. Many
of these products require real-time embedded systems that provide true
multitasking, memory management and protection, input-output systems and
networking/telecommunication capabilities. Fueled by declining costs and
improving performance of 32/64 bit microprocessors, embedded systems are
becoming increasingly sophisticated and used in or with a wider range of
applications.
Demand for commercial real-time operating systems is driven by growth in
real-time embedded systems. The Company anticipates that organizations that
develop embedded systems will continue to migrate from internally developed
systems to cost-effective third party products. Companies that internally
develop application software for embedded systems are focused on maximizing
productivity, minimizing costs and reducing time to market while maintaining
flexibility. Thus, embedded systems applications developers seek to use a fully
integrated and open modular suite of software development tools and real-time
operating systems to allow software development to occur concurrently with
product development. With increased product complexity and time to market
pressures, organizations are relying more heavily on third party specialized
consulting services for product and system design and development.
PRODUCTS AND SERVICES
Microware offers a broad range of software products based on the OS-9
real-time operating system that can be configured to suit a range of
applications in a variety of industries. These operating system products are
complemented by the Company's development tools, technical support services,
and custom software development services, which facilitate development of
embedded OS-9 applications. Substantially all of the Company's revenues are
derived from OS-9 and related tools.
Because the Company's current revenues and future growth are dependent upon
the continued acceptance of OS-9 technology in its current markets and the
successful application of OS-9 technology in new markets, impairment of the OS-9
software in any market for any reason could have a material adverse effect on
the Company's current business or future revenues.
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OPERATING SYSTEM PRODUCTS
Microware's operating system products are based on a variety of packages of
the OS-9 kernel, a range of I/O and file managers, various networking protocols,
and device drivers. OS-9 is combined with more specialized software modules to
create operating system products targeted at specific 32/64 bit processors and
applications markets.
OS-9 products include those targeted at Original Equipment Manufacturers
("OEMs"), which include limited source code and enable OEMs to develop
customized versions of OS-9 for their specific embedded system application. OEM
packages are licensed on a processor-specific basis. Current OEM packages
provide support for Motorola 68xxx (680x0, 683xx), Motorola/IBM Power PC (4xx,
6xx, 7xx, 8xx, 82xx), Intel Arm and StrongArm (SA 1100/SA 1110), Intel IXP 1200
network processor, Hitachi SuperH (SH3, SH4), Intel/AMD/ST
Microelectronics/Cyrix x86/Pentium (386, 486, 586, Pentium, Pentium II), MIPS,
over 30 manufacturers of ARM 7 and ARM 9 derivatives, and other processor
families. Additionally, these OEM packages provide support for embedded,
communications, and consumer applications.
Microware's DAVID (Digital Audio/Video Interactive Decoder) combines OS-9
with multimedia application programming interface (API) and support for various
digital audio/video transmission and networking protocols to provide a full
operating environment for the developers of digital TV, interactive television
and set-top boxes.
Microware's operating system products are licensed to OEMs through OEM
license agreements which generally provide licensees (i) the right to use a
specific configuration of an OS-9 module for internal product development in
consideration of payment of an initial license fee; and (ii) the right to
distribute copies of OS-9 and related software embedded in the licensee's
product in consideration of the licensee's payment of a per copy royalty for
every copy of OS-9 distributed. OEM licenses are generally bundled with end-user
licenses of related development tools on a password protected CD ROM providing a
complete development solution in an easy to use package.
All of Microware's operating system products are also available as
board-level products through end-user license agreements which grant licensees
the right to embed copies of the software in a fixed number of single-board
computers. Microware OS-9 board-level products are available for many popular
single-board computers, including the Motorola MVME, Compact PCI (cPCI), and MBX
platforms, single board computers (SBC), PC/AT-compatible computers, and all
reference platforms for supported processors listed above.
Other OS-9 board-level products are also available through third party
board-level vendors.
ADDITIONAL OPERATING SYSTEM PRODUCT COMPONENTS
Microware also offers its customers a wide array of software product
components providing additional functionality as needed for their specific
embedded or consumer application. Certain of these products include technologies
licensed from third parties. These additional product components include the
following:
- Microware MAUI Graphical Environment, which provides a robust graphical
environment for applications in a small memory footprint. MAUI supports numerous
I/O devices including grayscale and color LCD panels, SVGA/VGA graphics
terminals, touch screens, mouse, and keyboards. MAUI has a modular architecture
designed to be easily scaled to meet specific system needs, and is interoperable
across graphics and sound processor platforms.
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- Microware SoftStax Communications Framework, which provides high
performance integrated communications and control for communications devices.
This unique technology allows developers to rapidly change underlying
communications technologies without disturbing application software.
- Microware OS-9 USB - The Universal Serial Bus (USB) implementation uses
the SoftStax(TM) universal framework to create a high performance, low
footprint, low CPU utilization USB implementation for OS-9.
- Microware OS-9 IEEE1394 Software Developers' Kit (SDK) - Microware's
IEEE1394 SDK for OS-9 provides an IEEE1394-1995 compliant turnkey solution for
real-time, high performance applications.
- Microware OS-9 LAN Pak, which provides local area network connectivity
support for Microware SoftStax.
- Microware OS-9 X.25 Pak, which enables networked embedded systems to
communicate over X.25 packet topologies and custom networks.
- Microware OS-9 ISDN Pak, which enables networked embedded systems to
communicate over Basic Rate ISDN network topologies.
- Microware OS-9 Power Management software, which provides configurable
power policy software and integrated power manager software. This technology is
necessary for battery-operated mobile devices.
- Third party middleware for Microware OS-9, including Serial Network
Management Protocol (SNMP), PCMCIA support, True Flash File System (FFS)
support, Infrared Data Association (IrDA), Asychronous Transfer Mode (ATM), web
server and web browser support packages, GUI Builder, MP3 player.
- Microware's implementation of Sun's PersonalJava for OS-9, which enables
PersonalJava-compatibility in OS-9 environments.
DEVELOPMENT TOOLS
Development Tools are developed and sold by Microware to OS-9 licensees for
developing OS-9 applications. Most development tools run on Microsoft Windows
configurations, as well as on OS-9. The tools are designed to reduce the cost
and increase the speed of the development of OS-9 applications. The Microware
operating system and development tools are well integrated and are updated on a
coordinated schedule. Customers therefore avoid potential incompatibility among
competing vendors.
In July 1998, Microware released a new integrated development environment,
Microware Hawk. Microware Hawk is designed as an all-in-one development suite to
enable seamless editing, debugging and compilation of C and C++ code; management
of complex software build scenarios; management of solo- or team-based changes
to source code with version control and access to on-line support to provide
immediate assistance for every function. Microware Hawk is an open development
environment that can be interoperable with a wide variety of third party
development tools. Microware continues to develop compiler, debugger, and
utility program components for inclusion in the Microware Hawk integrated
development. Through these core components, Microware can provide more
substantial performance and operating system functionality than is available in
competitive real-time operating systems.
Following the release of Hawk, the Company released HawkEye, a
visualization tool for OS-9. HawkEye captures and analyzes a log of events such
as forks and exits, context switches, system calls, and interrupts during the
execution of a program. It stores all of this information and graphically
displays it in an easy to understand format.
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Microware's development tools are generally sold under end-user licenses
that enable customers to install and use the tools at a fixed number of
development seats. The development tools are typically packaged with the
operating system product on a single CD-ROM.
CONSULTING SERVICES
Consulting services cover a wide range of activities including custom
engineering, technical support and training. A high level of customer service
and support is essential because many of the Company's customers depend on the
Company's products to support the development and operation of complex
applications. Custom engineering revenues are typically generated from discrete
software engineering projects adapting OS-9 to specific customer requirements.
The Company also selectively engages in custom development in order to extend
its product line. Professional services are generally provided on a rate per
hour and/or per project basis.
SOFTWARE TECHNICAL SUPPORT AND UPGRADE SERVICES
Licenses of Microware's operating system and tools products are typically
sold together with maintenance support contracts that provide updates of the
licensed software and routine technical support. The Company's technical support
staff assists licensees with problems and questions in the installation and use
of the Company's products. Technical support is provided by Microware's staff of
support engineers in North America, Europe, and Japan. Distributors and OEMs
generally offer first level customer support to their end-user customers and
rely on the Company for higher level support.
Microware also offers extended software support and maintenance services on
a per-product basis for a fee. Licensees who purchase extended service are
entitled to technical support services and software product updates during the
service period.
MARKETS, APPLICATIONS AND CUSTOMERS
Microware's strategy is to leverage its advanced technology, strategic
customer relationships, commitment to quality, and expertise based on years of
experience in the embedded systems market to establish and maintain OS-9 as a
leading operating environment for embedded systems. To achieve this goal,
Microware focuses its marketing and product development efforts on those sectors
of the embedded systems market it believes have the greatest potential to
increase Microware's future revenue: (i) traditional embedded systems such as
industrial automation, transportation, medical, and government/military systems,
(ii) communications infrastructure devices and equipment, and (iii) consumer
products such as digital television decoders, wireless telephones, and Internet
appliances. In product development, the Company endeavors to provide
comprehensive solutions for these diverse markets by supporting market-leading
embedded processors and developing new modules providing specialized
functionality for those markets. For example, Microware provides specialized
telecommunications protocol support for communications infrastructure products,
motion picture file manager support for digital television products, power
management software for hand-held, battery-operated wireless devices, and Java
support for Internet access devices. In sales and marketing, this means
developing strategic customer relationships with market leaders, such as
Motorola , in the wireless products market or Zenith in the digital television
market, and working closely with the providers of complementary technologies.
TRADITIONAL EMBEDDED SYSTEMS BUSINESS
The traditional real-time embedded system software market is the core of
Microware's business. Licenses to manufacturers of process control, scientific
and medical instrumentation, and other relatively low-volume products are a
significant source of revenue. Emerging markets for the
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Company's traditional embedded systems business include intelligent
transportation systems, private network computer systems, gaming devices, office
automation and medical instrumentation. The Company believes that the market for
its operating system software in the general embedded systems market is large
and diversified, and continues to develop, market, support and license its
products to and for customers in the traditional embedded systems market.
Microware believes that it has a measurable share of the third party embedded
operating system market.
In fiscal 2000, Microware continued its emphasis on the traditional
embedded systems business by its support for board-level products, developing
its relationships with leading embedded systems distributors and resellers, and
hiring new sales personnel with substantial embedded systems experience. While
the Company believes that its proven technology and long-standing presence in
this rapidly growing market will enable it to substantially increase its
revenues from this market, its ability to do so is subject to significant risks
and uncertainties, particularly the Company's ability to rapidly develop
effective internal and third party sales, distribution and marketing channels in
the embedded systems marketplace.
COMMUNICATIONS INFRASTRUCTURE DEVICES MARKET
The networked embedded systems marketplace is rapidly growing.
Additionally, technological demands of networked embedded systems are evolving
rapidly, as the bandwidth of digital networks expands simultaneously with the
integration of greater multimedia functionality driven by applications such as
telecommuting, Internet access, and video delivery. The Company believes this
growth and the trend toward licensing of third party operating systems creates a
substantial opportunity for targeted packages of OS-9 products.
Microware's solution for the communications infrastructure device market is
to provide an embedded operating system platform which includes a simplified,
integrated communications environment interoperable across telecommunications
protocols and high performance with minimal memory and CPU utilization. The
Microware OS-9 product line has integrated communications features based on the
Microware SoftStax framework. Microware SoftStax is an open architecture
designed to be interoperable with the leading communications protocols and third
party communications infrastructure products.
Microware believes the technological sophistication and openness of its
architecture will enable it to establish a revenue base in the communications
infrastructure market. The communications infrastructure embedded systems
software market is highly fragmented, very competitive, and technically
demanding. As such, there can be no assurance that Microware will be able to
successfully attain significant revenues from the communications infrastructure,
or to recoup its investment in that market.
CONSUMER MARKETS
Microware's efforts in the market for consumer and business embedded
systems devices have focused on select categories which Microware believes
represent significant market opportunities for the Company: the wireless and
internet devices market and the digital television market.
WIRELESS AND INTERNET DEVICES
Since 1996 Microware has marketed a configuration of OS-9 targeted at the
manufacturers of wireless hand-held communications devices and Internet-based
telephones. The current product configurations combine OS-9 with the MAUI
graphics API and new software modules created for key wireless functions such as
power management, Java-compatibility and Internet access.
Microware believes there is an emerging market for new categories of
wireless communications devices combining the small size and low cost of
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traditional pagers and mobile telephones with the more advanced interactivity,
graphical user interface, and computing power of personal digital assistants
such as new types of smart pagers and wireless telephones which include small
screen displays and keyboards and use the Internet to enable transmission and
receipt of electronic mail and in some cases World Wide Web browsing and in-car
navigation syatems. The Company believes OS-9 is well suited to operate such
devices and has developed strategic relationships with OEM manufacturers working
toward their development and eventual deployment.
Microware's wireless and Internet strategy is to provide a wide variety of
products and services for licensing to leading equipment manufacturers. The core
of this strategy is the development of strategic customer relationships with
leading manufacturers of wireless and Internet devices. Microware has developed
such strategic licensing relationships with Motorola, among others, who have
been developing next generation wireless and Internet communications devices
using OS-9.
Under a July 1995 software development and license agreement, Microware is
providing OS-9 as the operating system for various wireless devices under
development by Motorola, Inc. Motorola's PageWriter two-way pager, currently
being marketed through the SkyTel paging network, is based on a customized
version of OS-9 jointly developed by Microware and Motorola. In July 1995,
Motorola also purchased 1,526,232 shares of Microware Common Stock and was
issued warrants to acquire additional shares. As of March 31, 2000, warrants to
acquire 1,248,736 shares were outstanding, of which warrants to purchase 554,992
shares were exercisable. On August 1, 2000, warrants to acquire 693,744 shares
will become exercisable. All outstanding warrants will expire on July 31, 2001.
Pursuant to the Stock and Warrant Purchase Agreement, a designee of Motorola has
the right to serve on Microware's Board of Directors. That seat is currently
vacant.
During the past fiscal year, the Company's revenues from its wireless and
Internet activities primarily consisted of license fees, non-refundable prepaid
royalties and custom contract engineering fees received from wireless and
Internet customers. The Company's future operating results will depend
significantly on the development of its products and personal wireless and
Internet communication devices. To date some of the wireless and Internet device
projects for which OS-9 has been licensed and customized have been delayed due
to factors beyond Microware's control. Such delays may continue in the future.
As wireless and Internet communication markets develop, the Company's strategy
depends on the incorporation of the Company's software into new products, such
as two-way pagers, smart wireless telephones, and in-car navigation systems, for
which demand is uncertain. There can be no assurance that such products will be
successfully developed or commercialized or that the Company will derive
significant revenues or earnings from such products. Moreover, the Company's
wireless and Internet strategy is highly dependent on its ability to market
Java-compatible versions of its products. There can be no assurance that Java
will continue to develop as a popular platform for wireless and Internet
communications devices of OEMs, that Microware will be able to maintain
Java-compatibility on competitive terms under its license with Sun Microsystems,
or that Microware will be able to keep pace with the rapid technological change
in these markets.
DIGITAL TELEVISION MARKET
Since 1993 Microware has offered an OS-9 operating system configuration
targeted at the emerging digital television business. Microware OS-9 for Digital
TV is designed to operate the digital decoders that turn standard televisions
into smart clients on new digital television networks under development by
telephone companies, cable companies, and direct broadcast satellite providers
with interactive processing, graphics, video and audio functionality. Microware
OS-9 for Digital TV has emerged as a leading
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operating system for digital decoders, having been licensed by over 20 set-top
box manufacturers and used in trial and commercial deployments around the world.
A streamlined configuration of Microware OS-9 for Digital TV is targeted at
digital-video broadcast products for existing cable systems, new multichannel
multipoint distribution systems ("MMDS") and DBS networks. Microware OS-9 for
Digital TV-based digital decoders manufactured by Zenith Electronics Corporation
have been contracted for procurement by Americast, a digital television
technology consortium of Ameritech, SBC, Bell South, GTE, and Disney, and are
currently deployed by Bell South in New Orleans.
To date, most of the Company's digital television revenues have been from
Microware OS-9 for Digital TV license agreements and custom contract engineering
with digital decoder OEMs and network operators. The Company's current
activities relating to its new media markets remain focused upon licensing
Microware OS-9 for Digital TV for digital television uses. The Company has
increasingly focused its marketing efforts in the digital television business on
the development of strategic marketing alliances which will enable the Company
to leverage the market position of Microware OS-9 for Digital TV into additional
OEM licenses.
While the Company has received significant revenues in the past from
development licenses, non-refundable pre-paid royalties and custom contract
engineering work sold to digital television decoder OEMs, only a small
proportion of the Company's digital television licensees are actually
manufacturing digital decoders. There can be no assurance that the Company will
be able to achieve significant new digital decoder OEM design wins and
development license revenues, that the Company will receive substantial run-time
license revenues from any digital television industry participant, or that the
Company will be able to establish and maintain DAVID as an industry standard.
Despite the announced intentions of many companies, and the Company's
belief that Microware OS-9 for Digital TV is well positioned as a solution for
the digital television market, the Company believes the digital television
market remains at an early stage and is not well defined. Many prominent
deployments have been delayed, and there can be no assurance that the digital
television market will develop in any predictable or immediate way. These delays
have eroded Microware OS-9 for Digital TV's early market advantage to the
benefit of the Company's competitors. It is therefore difficult to make reliable
estimates of the size of the digital television market or the Company's likely
market share.
COMPETITION
The embedded software industry is highly competitive, highly fragmented and
is characterized by rapidly advancing technologies. To maintain or improve its
position, the Company must continue to enhance its current product offerings and
introduce new product features and extensions in a timely fashion.
All of the Company's products compete with proprietary software developed
internally by embedded system product manufacturers, as well as with many third
party vendors of development tools for embedded systems, including many
privately held companies and several publicly held companies. Several
microprocessor manufacturers, including Intel and Motorola, distribute software
that at times competes with the Company's products. The Company expects that
additional competitors, including other large software vendors, will emerge.
Some of the Company's current competitors, and many of the Company's potential
competitors, have substantially greater technical, sales, marketing and
financial resources than the Company. Other than proprietary
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software developed internally by embedded systems manufacturers, the Company's
products compete primarily with products by Mentor Graphics Corp. (through its
acquisition of Microtec Research, Inc.), Microsoft Corporation ("Microsoft"),
QNX, LynuxWorks and Wind River Systems, Inc.(Wind River), who, in fiscal 2000,
acquired another of the Company's primary competitors, Integrated Systems, Inc.
(ISI).
In the digital television market, Microware OS-9 for Digital TV, also
known as DAVID, competes with software developed internally by set-top box
manufacturers, including Scientific-Atlanta's PowerTV and Thompson Consumer
Electronics' Open TV and with products from Microsoft, Sony and Wind River.
Many of the Company's digital television competitors have substantially
greater technical, sales, marketing and financial resources than the Company.
The Company expects that as the embedded systems market continues to
evolve, additional competitors will seek to enter these markets.
The Company believes that its ability to effectively compete in the
embedded systems market depends on factors both within and outside its control,
including the ability to establish effective sales and distribution channels,
timing and success of new products developed and marketed by the Company and its
competitors, product performance and price, the Company's ability to provide
custom development and integration services, distribution and customer support,
product reputation, customers' willingness to replace internally developed
software solutions and customers' assessment of the Company's financial
resources and its technical and service expertise. The Company believes that its
products compete effectively in markets on the basis of product features,
reliability, price and performance characteristics. However, there can be no
assurance that the Company will be able to compete successfully with respect to
these and other factors. In particular, competitive pressures, including pricing
pressures for the Company's run-time licenses, the Company's past difficulties
encountered in working to develop strong, effective sales and distribution
channels and new product introductions from existing and new competitors could
adversely affect the Company's future business and results from operations.
As a result of consolidation and other transactions involving competitors
and other companies in the Company's markets, the Company occasionally reviews
potential transactions relating to its business, products and technologies. Such
transactions could include mergers, acquisitions, strategic alliances, joint
ventures, licensing agreements, co-promotion agreements or other types of
transactions. The Company may choose to enter into such transactions at any
time, and such transactions could have a material effect on the Company its
business or operations.
MARKETING, SALES AND DISTRIBUTION
Microware markets and licenses its products principally through its direct
sales force. Microware currently uses a direct sales force in North America,
Europe and Japan. The Company has numerous sales offices in the U.S.
International offices are located in the United Kingdom, Germany, France, The
Netherlands and Japan. Distributors and sales representatives are used in
certain countries. Direct sales representatives are supported by field
application engineers who are experienced in the embedded market and the
Company's products and technologies. International sales accounted for
approximately 59%, 64% and 68% of total revenues in fiscal 1998, 1999, and 2000
respectively.
During the last three fiscal years, the Company has continued to experience
significant turnover and attrition in its marketing and sales personnel.
Additionally, the Japanese subsidiary's President and Representative Director,
and the Managing Director of European Operations both
11
<PAGE>
resigned and were replaced in calendar year 2000. The significant turnover
experienced by the Company has had, and may continue to have, an adverse effect
on the Company's operations, the extent of which cannot presently be determined.
The Company's future operating results will depend significantly on the
Company's ability to develop its sales and distribution channels. In order to
rapidly increase revenues and as the embedded market continues to mature, the
Company continues to realign its efforts and resources towards strengthening its
current sales and distribution channels, particularly in North America.
Additionally, in fiscal 2001, the Company anticipates utilizing a focused
network of Value Added Resellers (VARs) and distributors. While the Company
believes the use of distributors will provide an effective channel to
substantially increase its revenues, there can be no assurance that the Company
will be able successfully engage distributors.
In fiscal 2000, the Company invested in the expansion and development of
its sales channels and the upgrading of its infrastructure to increase marketing
activity associated with the release of new products. In addition to hiring a
Director of Corporate Communications, the Company has retained the services of a
public relations firm. While the Company anticipates that these investments will
lead to increased revenue generation, there can be no assurance that there will
be that result.
The Company will continue to generate new business opportunities in its
target markets through direct marketing, advertising, websites, press releases,
trade shows, user group meetings, telemarketing, direct mailings and through its
strategic alliances.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in product development. The
Company believes that its future success will depend in large part on its
ability to enhance its existing products, to develop new products and to
maintain its technological competitiveness. As of March 31, 2000, the Company
employed 55 product development engineers. Of these, 47 engineers were based in
Des Moines, Iowa and 8 were based in Tokyo, Japan.
During fiscal 1998, 1999, and 2000 research and development expenses
amounted to $7.2 million, $6.8 million, and $5.8 million, respectively,
excluding capitalized software development costs. For the above periods,
research and development expenses represented 41%, 41%, and 43% of the Company's
total revenues, respectively. For the same periods, software development costs
capitalized totaled $215,000, $64,000,and $0 respectively. The Company believes
that its current level of research and development expenses is adequate to meet
its competitive needs. The Company anticipates that it will continue to commit
substantial resources to product development in the future.
PRODUCTION
The Company prepares master software media, user manuals and packaging for
each product. The Company's media duplication, production of product packaging,
and printing of user manuals and related materials is performed by the Company
at its facilities and by third party sources throughout the world. The Company
grants duplication rights to certain of its original equipment manufacturers. To
date, the Company has not experienced any material difficulties or delays in
production of its software products or documentation.
BACKLOG
The Company generally ships its products within a few days after acceptance
of a customer purchase order and, therefore, has insignificant
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<PAGE>
product backlog. The low product backlog makes it difficult to predict with
accuracy quarterly revenues and quarterly earnings prior to the end of a
quarterly reporting period.
EMPLOYEES
As of March 31, 2000, the Company employed 127 people, including 57 in
marketing, sales and support services, 55 in engineering and product development
and 15 in operations, finance and administration. Of these employees, 82 are
located in the United States, and 45 are employed by the Company's international
operations. None of the Company's employees are represented by a labor union or
is the subject of a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are good.
NOTICE REGARDING TRADEMARKS
Microware, the Microware logo, OS-9, Hawk, HawkEye, DAVID, MAUI, UpLink,
ITEM, FasTrak, Ultra C, Ultra C++ and SoftStax are registered trademarks of
Microware Systems Corporation. Java, Java OS and PersonalJava are trademarks of
Sun Microsystems, Inc. All other marks are trademarks or registered trademarks
of their respective holders.
ADDITIONAL RISK FACTORS
In addition to the other risk factors contained herein, the Company
believes the following additional risk factors should be taken into
consideration in evaluating its business:
HISTORY OF OPERATING LOSSES; VARIABILITY OF QUARTERLY OPERATING RESULTS.
The Company has experienced significant operating losses for the past four
fiscal years. While the Company has taken a number of measures to increase its
revenues, decrease its operating expenses, and attain profitability, there can
be no assurance that these measures will succeed or that the Company will become
profitable. Furthermore, the Company's revenues and operating results have
varied substantially from quarter to quarter, remain difficult to forecast due
to the nature of the embedded systems market and the Company's business, and
should not be relied upon as an indication of future performance.
MARKET RISKS. The Company has invested substantial resources in the
development of emerging markets, in particular the digital television and
wireless and Internet communications devices markets. While the Company has
achieved a substantial number of OEM licenses in these markets and a number of
the devices are currently in commercial deployment, these markets remain at an
early stage and are increasingly competitive, and there can be no assurance that
the Company will receive substantial revenues or earnings from products or
services in these markets.
The Company has continued its focus on the traditional embedded systems
business in an effort to lessen the variability of its quarterly operating
results and attain profitability. The traditional embedded systems business is
diverse and increasingly competitive, and there can be no assurance that the
Company will be able to substantially increase its revenues from that market.
The communications infrastructure device market is highly fragmented, very
competitive, and technically demanding. While Microware believes the
technological sophistication and openness of its product architecture for the
market will enable it to establish a substantial revenue base in the
communications infrastructure market, there can be no assurance that the Company
will be able to do so.
13
<PAGE>
ABILITY TO KEEP PACE WITH COMPETITION AND RAPID TECHNOLOGY CHANGE. The
embedded systems markets are highly diverse and devoid of established technology
standards. A majority of embedded operating systems and applications are
developed in-house by OEMs, and no single processor platform accounts for a
majority or even a substantial minority of the embedded systems under
development. Moreover, the market is increasingly competitive, with a number of
industry-leading companies with substantially greater financial and technical
resources than Microware devoting substantial resources to the development of
significant market share in the embedded systems business. While the Company
tries to support the industry-leading 32-bit microprocessors which it believes
represent the best market opportunities, and to offer the best possible array of
incremental software functionalities, there can be no assurance that the
Company's current products will meet the demands of the market in an environment
of increasing competition and rapid technology change.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND TRANSITIONS. The Company has
in the past experienced delays in software development, and there can be no
assurance that the Company will not experience such delays in the future. Such
delays, which can occur because of resource constraints, unforeseen
technological obstacles within or outside the Company's control, and changes in
market requirements, can have a material adverse effect on the Company's
business.
COMPETITION. The Company has attracted substantial competition in its
targeted markets. Many of the Company's traditional competitors have grown
substantially as a result of successful exploitation of growth in the embedded
systems market and through mergers and acquisitions, and in some cases have
expanded their businesses in a manner which competes more directly with the
Company. Microsoft has devoted substantial resources to the development of its
Windows CE product, which is attempting to capture a significant market share in
the handheld computer market and other segments of the embedded market. Sun
Microsystems, Inc. offers an embedded operating system product called JavaOS,
which it markets together with its Java technology. There can be no assurance
the Company will be able to successfully attain new market share or even
maintain its existing market share in this increasingly competitive market.
ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL. The Company's future
performance depends to a significant degree upon the continued contributions of
its key management, product development, marketing and sales personnel, many of
whom have joined the Company recently. The Company has continued to experience
significant turnover in personnel during the past fiscal year. Additionally, the
Japanese subsidiary's President and Representative Director, and the Managing
Director of European Operations both resigned and were replaced in calendar year
2000. The Company's ability to execute its market strategy will depend to a
large degree upon its ability to integrate new personnel into the Company.
Competition for qualified personnel throughout the software industry is intense
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel.
INTERNATIONAL OPERATIONS. In the past three fiscal years, the Company
derived at least 50% of its total revenue from sales outside North America, and
this trend is anticipated to continue in the future. This dependence on
international operations subjects the Company to certain risks, including
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. The Company 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. The Company cannot predict whether
14
<PAGE>
quotas, duties, taxes or other charges or restrictions will be implemented on
the Company's 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 the Company's business, financial condition and results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND RISK OF TECHNOLOGY LITIGATION.
Because substantially all of the Company'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. The Company's business is therefore dependent on the
adequacy of the Company's intellectual property protection through patents,
copyrights, trade secrets, and license agreements; the adequacy and continued
availability of its licenses of integrated technology from third parties; and
the absence of any material technology litigation related to the Company's
products.
ISSUANCE OF PREFERRED STOCK, OPTIONS AND WARRANTS. In April 2000, the
Company issued 3,500 shares of Series I Preferred Stock initially convertible
into 1,473,684 shares of common stock, stock options to purchase 618,595 shares
of common stock, and warrants to purchase 87,500 shares of common stock.
Subsequently, 668,556 shares of common stock were issued pursuant to the
conversion of 1,578 shares of Series I Preferred Stock. Additionally, the
Company has previously issued warrants to acquire 1,803,728 shares of common
stock to Motorola, of which warrants to acquire 554,992 shares of common stock
have expired and warrants to acquire 554,992 shares of common stock are
currently exercisable. In addition, the Company has issued and will continue to
issue substantial stock options to employees. The holders of these preferred
shares, options and warrants have the opportunity to profit from a rise in the
market price of the Company's common stock, thus resulting in a possible
dilution in the interest of other security holders. The Company's ability to
obtain additional capital may be adversely affected as long as the convertible
securities remain unexercised. Moreover, the holders of the convertible
securities may exercise such securities at a time when the Company may be able
to obtain capital by a new offering of securities on terms more favorable than
those under which existing warrants or options are exercisable.
15
<PAGE>
ITEM 2. PROPERTIES
The Company owns its main operating facility located in Des Moines, Iowa,
subject to mortgage debt. This space is used for research and development, sales
and marketing, operations and administration and consists of approximately
88,000 square feet. Annual mortgage payments for the Company's main operating
facility total approximately $600,000. In December 1998, the Company began
subletting excess capacity in its main operating facility in order to reduce its
operating costs associated with the facility. As of January 1, 2000, the Company
had sublet approximately 29,000 square feet of its main operating facility and
will continue to sublet additional excess capacity in the future. The Company
also leases numerous domestic and international sales and support offices for an
aggregate annual rental payment of approximately $500,000. The Company believes
that additional space will be available as needed.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On September 1, 1999, Microware filed suit in the United States District
Court for the Southern District of Iowa ("Court") 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 registered trademark
for the mark "OS-9". On March 16, 2000, the Company was notified that the Court
had ruled in favor of Apple in this matter. The Company filed a notice of appeal
to the decision on March 30, 2000.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Kenneth B. Kaplan 47 President, Chief Executive Officer and Chairman of the
Board of Directors
George E. Leonard 59 Executive Vice President, Chief Financial Officer, Chief
Operating Officer, Treasurer, Secretary and Director
James H. Boswell 50 Vice President of Sales
Beth E. Law 36 Chief Accounting Officer, Controller, Assistant Treasurer
and Assistant Secretary
</TABLE>
Mr. Kaplan has served as President and Chief Executive Officer of the
Company since he co-founded it in 1977. Mr. Kaplan was one of the principal
designers of the OS-9 real-time operating system. Mr. Kaplan is a member of the
boards of directors of the Interactive Multimedia Association and is a Trustee
of Drake University and Buena Vista University. Mr. Kaplan attended Drake
University.
Mr. Leonard joined the Company in August 1998 as Executive Vice President,
Chief Financial Officer, Treasurer and Secretary. Mr. Leonard was appointed
Chief Operating Officer and a director on May 16, 2000. Prior to joining the
Company, from July 1996 to July 1998, Mr. Leonard was the Vice President and
Chief Financial Officer and a director of Western Pacific Airlines, based in
Colorado Springs, Colorado. Western Pacific Airlines filed for bankruptcy
protection under Chapter 11 on October 4, 1997 and converted its filing to
Chapter 7 in July 1998. Mr. Leonard also served as Chairman and Chief Executive
Officer of Consumer Guaranty Corporation of Phoenix, Arizona, President and CEO
of GEL Management Corporation, Chairman and Chief Executive Officer of AmBank
Holding Company, and Executive Vice President, Chief Financial Officer, Chief
Lending Officer and Chief Banking Officer and a Director of MeraBank from 1975
to 1996. Mr. Leonard holds as B.S. degree from the United States Naval Academy
and an M.B.A from the University of Chicago
Mr. Boswell joined the Company in February 1999 as Vice President of Sales.
From November 1995 until joining the Company, Mr. Boswell served with Paradigm
Technology, Inc. of Milpitas, California, where he was successively Director of
Marketing and Vice President of Sales and Marketing. From April 1994 to November
1995, Mr. Boswell was a Strategic Sales Manager with Sharp Microelectronics of
San Jose, California. From 1989 to 1994 Mr. Boswell held various positions with
Hitachi America, Ltd., including Regional Sales Manager. Mr. Boswell has held
other electronics sales, marketing, and operations positions with LSI Logic,
Advanced Micro Devices, and Hewlett Packard. Mr. Boswell holds a B.S. degree
from the University of New Mexico and an M.B.A. from the University of Arizona.
Ms. Law has served as Chief Accounting Officer, Controller and Assistant
Treasurer of the Company since February 2000. Prior to joining the Company, Ms.
Law worked for Network Six, Inc., a systems integrator based in Warwick,
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<PAGE>
Rhode Island. Ms. Law is a Certified Public Accountant, and holds a B.S. degree
from the University of Rhode Island.
On March 1, 2000 and May 10, 2000, respectively, Mr. Ishibashi, President,
Microware Systems Kabushiki Kaisha (subsidiary) and Mr. Allen, Managing Director
European Operations and a director, resigned their positions with the Company
and were replaced later in the year. While not officers of the Company, the
nature of their duties with respect to the Company's subsidiaries may mean they
were deemed to be executive officers under applicable SEC rules.
The Company currently has an employment agreement with Mr. Leonard. The
Company does not have employment agreements with any other executive officers,
but has one-year agreements not to compete with certain of its executive
officers and other key employees. The loss of service of one or more of the
Company's other executive officers could adversely affect the Company's
business.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is listed on the Nasdaq National Market under the
trading symbol "MWAR." The closing price of the Company's common stock, no par
value (the "Common Stock"), as reported by the Nasdaq National Market as of May
31, 2000 was $3.00 per share. The following table sets forth the low and high
closing sales prices per share for the Company's common stock on the Nasdaq
National Market for the quarter indicated.
<TABLE>
<CAPTION>
Fiscal 1999 Low High
<S> <C> <C>
Quarter ended June 30, 1998 $4.500 $6.000
Quarter ended September 30, 1998 $3.063 $4.875
Quarter ended December 31, 1998 $1.563 $3.500
Quarter ended March 31, 1999 $1.875 $4.375
Fiscal 2000 Low High
Quarter ended June 30, 1999 $1.563 $ 2.000
Quarter ended September 30, 1999 $1.438 $ 2.625
Quarter ended December 31, 1999 $1.563 $ 6.250
Quarter ended March 31, 2000 $4.750 $10.750
</TABLE>
As of May 31, 2000, there were approximately 260 shareholders of record of
the Company's Common Stock. Certain recordholders are brokers and other
institutions holding on behalf of shareholders. The Company has estimated the
total number of such shareholders to be 5,000.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any cash dividends in the foreseeable future. Any future
determinations to pay cash dividends will be at the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition, credit and loan agreements in effect at that time and any
other factors deemed relevant by the Board of Directors.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected financial data. There were no
cash dividends or distributions made by the Company during the periods
presented.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Revenues $23,655 $26,134 $17,724 $16,615 $13,417
Cost of revenues 5,100 6,969 5,946 4,844 3,420
-------------- -------------- ------------- ------------- ---------------
Gross profit 18,555 19,165 11,778 11,771 9,997
Operating expenses:
Research & development 5,009 7,155 7,223 6,772 5,762
Sales & marketing 8,421 10,819 10,148 11,474 9,611
General & administrative
3,899 3,415 4,485 3,578 3,049
Special charges - 438 940 - -
-------------- -------------- ------------- ------------- ---------------
17,329 21,827 22,796 21,824 18,422
-------------- -------------- ------------- ------------- ---------------
Operating profit(loss) 1,226 (2,662) (11,018) (10,053) (8,425)
Other income (expense):
Foreign currency gain (loss), net
13 (30) (79) 91 237
Gain on sale of land and building
- - 215 140 -
Gain on sale of investment
- - 881 - -
Interest (expense) income, net
283 1,118 265 (35) (282)
-------------- -------------- ------------- ------------- ---------------
296 1,088 1,282 196 (45)
-------------- -------------- ------------- ------------- ---------------
Earnings (loss) before income taxes
1,522 (1,574) (9,736) (9,857) (8,470)
Income tax(benefit) expense
146 (3) 210 81 169
-------------- -------------- ------------- ------------- ---------------
Net earnings (loss) $1,376 ($1,571) ($9,946) ($9,938) (8,639)
============== ============== ============= ============= ===============
Basic earnings (loss) per share (1)
$ 0.12 ($0.11) ($0.69) ($0.68) ($0.58)
============== ============== ============= ============= ===============
Shares used in per share calculation
- basic (1)
11,090 13,754 14,378 14,718 14,994
============== ============== ============= ============= ===============
Diluted earnings (loss) per share (1)
$0.11 ($0.11) ($0.69) ($0.68) ($0.58)
============== ============== ============= ============= ===============
Shares used in per share calculation
- diluted (1)
12,930 13,754 14,378 14,718 14,994
============== ============== ============= ============= ===============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash & short-term investments
$12,337 $19,962 $13,620 $ 7,527 $ 1,967
Working capital 13,300 23,024 14,414 7,908 1,509
Total assets 24,938 49,083 37,499 27,534 18,210
Total long-term
debt (2) 1,227 8,076 6,984 6,918 6,847
Total shareholders' equity
18,543 34,726 25,356 15,943 7,479
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net earnings (loss) per share.
(2) Includes current installments of long-term debt and long-term portion of
notes payable to banks. See Note 5 of Notes to Consolidated Financial
Statements.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION PROVIDES AN ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, AND SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE NOTES THERETO AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF THE COMPANY.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This discussion and analysis of the Company's financial condition and
results of operations includes forward-looking statements that involve risk and
uncertainty, including management's expectations for fiscal 2001 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, 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 Annual Report and in the Company'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 Report to reflect any future
events or developments. The Company's operating results have varied
significantly from quarter to quarter in the past, and the future operating
results of the Company may fluctuate as a result of the above and other risk
factors detailed in this Annual Report and other documents filed by the Company
with the Securities and Exchange Commission. Due to all of the foregoing
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future performance. In prior years, the Company's actual financial
performance has not always met market expectations and the Company has
experienced significant quarterly losses. It is likely that, in some future
quarter, the Company's financial performance will again fall below market
expectations.
OVERVIEW
Microware develops, markets and supports real-time operating system
software and high-level language compilers used in consumer electronics,
communications, process control and factory automation, scientific research, and
government/defense applications. Microware's product line is built around the
OS-9 family of real-time operating systems for advanced microprocessors. The
Company's OS-9 product family includes options for programming languages,
networking, graphical interfaces and productivity tools. Substantially all of
the Company's revenues in the last and current fiscal years have been derived
from licenses and related services from the OS-9 product family.
The Company has historically derived revenues from development licenses and
run-time license royalty fees along with sales of related software productivity
tools, maintenance support and custom contract engineering work. Custom contract
engineering revenues are typically derived from discrete
24
<PAGE>
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.
A key element of the Company's long-term strategy is to develop products
which can be embedded into successful, high volume customer products; thereby
significantly increasing license run-time royalty fees. Any increase in the
percentage of revenues attributable to license run-time royalties will depend
on the Company's successful negotiation of license run-time royalties and on
the successful commercialization by the Company's customer of the underlying
product. In addition, there can be no assurances that the Company will be
successful when the markets, for which the Company products are targeted,
emerge.
25
<PAGE>
RESULTS OF OPERATIONS
Amounts and percentage of revenues: The following table sets forth, for
the periods indicated, the amount and related percentage of the Company's total
revenues by each line item.
<TABLE>
<CAPTION>
($ in thousands)
Amounts and Percentage of Revenues
----------------------------------------------------------------------
Years ended March 31,
----------------------------------------------------------------------
1998 1999 2000
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product $ 12,047 68% $ 12,313 74% $ 10,384 77%
Services 5,677 32 4,302 26 3,033 23
-------- --- -------- --- -------- ----
17,724 100 16,615 100 13,417 100
-------- --- -------- --- -------- ----
Cost of revenues:
Product 2,745 15 2,613 16 2,041 15
Services 3,201 18 2,231 13 1,379 10
-------- --- -------- --- -------- ----
5,946 33 4,844 29 3,420 25
-------- --- -------- --- -------- ----
Gross profit 11,778 67 11,771 71 9,997 75
-------- --- -------- --- -------- ----
Operating expenses:
Research & development 7,223 41 6,772 41 5,762 43
Sales and marketing 10,148 57 11,474 69 9,611 72
General &
administrative 4,485 25 3,578 21 3,049 23
Special charges 940 6 - - - -
-------- --- -------- --- -------- ----
22,796 129 21,824 131 18,422 138
-------- --- -------- --- -------- ----
Operating loss (11,018) (62) (10,053) (60) (8,425) (63)
-------- --- -------- --- -------- ----
Other income (expense):
Foreign currency
(loss) gain, net (79) * 91 * 237 2
Gain on sale of land
and building 215 1 140 1 - -
Gain on sale of
investment 881 5 - - - -
Interest income
(expense), net 265 1 (35) * (282) (2)
-------- --- -------- --- -------- ----
1,282 7 196 1 (45) *
-------- --- -------- --- -------- ----
Loss before income
tax (benefit)
expense (9,736) (55) (9,857) (59) (8,470) (63)
Income tax (benefit)
expense 210 1 81 * 169 1
-------- --- -------- --- -------- ----
Net loss $ (9,946) (56)% $ (9,938) (59)% (8,639) (64)%
======== ===== ======== ===== ======== =====
</TABLE>
*Insignificant
26
<PAGE>
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
REVENUES. Total revenues decreased 19.2% or $3.2 million, from $16.6
million in fiscal 1999 to $13.4 million in fiscal 2000. During fiscal 2000,
the Company experienced significant attrition and turnover in its North
American sales and marketing personnel. The significant turnover experienced
by the Company has had, and may continue to have, an adverse effect on the
Company's operations, the extent of which cannot presently be determined.
Product revenues decreased 15.7%, or $1.9 million, from $12.3 million in
fiscal 1999 to $10.4 million in fiscal 2000. The decrease in product revenues
from fiscal 1999 to fiscal 2000 resulted from fewer initial license fees.
Additionally, fiscal 1999 product revenue included substantial prepaid
royalties, which consequently decreased royalty revenue recognized in fiscal
2000. Product revenues from certain strategic customers and the Company's
DAVID licensees, continued to fall below management expectations. Future
growth in product revenues will continue to be substantially dependent on the
Company's ability to develop cost effective sales channels in North America
and abroad and the Company's customers' timely and successful development and
distribution of new products using the Company's products. Each of these
factors makes product revenues difficult to accurately forecast on a
quarterly or annual basis. Services revenues decreased 29.5%, or $1.3
million, from $4.3 million in fiscal 1999 to $3.0 million in fiscal 2000. The
decrease in service revenues resulted from a decline in custom engineering
contracts.
International revenues represented 59%, 64% and 68% of total revenues
in fiscal 1998, 1999 and 2000, respectively. The percentage increase in fiscal
2000 resulted from a continued decline in U.S. revenues, while overseas sales
experienced a relatively smaller reduction. The Company expects international
sales to continue to represent a significant portion of its revenues although
the percentage may fluctuate from period to period. In Europe and Japan,
revenues and expenses are primarily denominated in local currencies. 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 documentation, production quality, duplication of manuals and media
for software products, as well as those costs related to the packaging, shipping
and delivery of the product to the customer. Cost of product revenues also
includes direct third party royalty expense and amortization expense of
purchased and capitalized software. Cost of services revenues includes direct
and indirect costs for technical phone support, training and education, and
custom engineering.
Total cost of revenues decreased 29.4%, or $1.4 million, from $4.8
million in fiscal 1999 to $3.4 million in fiscal 2000. Overall cost of revenues
decreased due to the reduction in total revenues. As a percentage of product
revenues, cost of product revenues decreased from 21.2% in fiscal 1999 to 19.7%
in fiscal 2000. Cost of product revenues decreased as a percentage of product
revenues as a result of marginal efficiencies achieved in the direct costs of
producing, packaging and shipping products to customers. As a percentage of
services revenues, cost of services revenues decreased from 51.9% in fiscal 1999
to 45.5% in fiscal 2000. The percentage decrease between periods primarily
resulted from an increase in higher margin support and maintenance contracts
rather than custom engineering contracts which have greater costs associated.
27
<PAGE>
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 14.9%, or $1.0 million,
from $6.8 million in fiscal 1999 to $5.8 million in fiscal 2000. The reduction
in research and development expense is a primary result of fewer engineers
employed by the Company during fiscal 2000. While research and development costs
have decreased from year to year, these same expenses have increased as a
percentage of sales from 41% in fiscal 1999 to 43% in fiscal 2000. The Company
has made substantial investments in product development. The Company believes
that its future success will depend in large part on its ability to enhance its
existing products, to develop new products and to maintain technological
competitiveness. Consequently, the Company anticipates that it will continue to
commit substantial resources to product development in the future.
SALES AND MARKETING. Sales and marketing expense consists primarily of
sales and marketing personnel related costs, including sales commissions. Sales
and marketing expense also includes costs of advertising, public relations and
attendance at industry trade shows. Sales and marketing expense decreased 16.2%,
or $1.9 million, from $11.5 million in fiscal 1999 to $9.6 million in fiscal
2000. The overall decrease was primarily attributable to reduction of the number
of sales and marketing personnel through attrition and turnover. In fiscal 2001,
the Company expects to increase its investment in the expansion and development
of its sales channels and the upgrading of its infrastructure in addition to
expanding marketing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel 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 14.8%, or
$529,000, from $3.6 million in fiscal 1999 to $3.0 million in fiscal 2000. The
decrease in general administrative expenses primarily resulted from a reduction
in administrative staff as well as decreased recruiting and relocation
activities.
OTHER INCOME (EXPENSE). Other income (expense) decreased 123%, or
$241,000, from $196,000 in fiscal 1999 to ($45,000) in fiscal 2000. The decrease
between periods resulted from a reduction of interest income due to cash used in
operations, and the inclusion in fiscal 1999 of the gain on the sale of the
Company's former headquarters building.
28
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
REVENUES. Total revenues decreased 6.3% or $1.1 million, from $17.7
million in fiscal 1998 to $16.6 million in fiscal 1999. During fiscal 1998, the
Company experienced significant turnover in its sales personnel, particularly in
North America and Japan. During fiscal 1999, the turnover in Japan was
stabilized; however the Company experienced significant attrition in its
marketing personnel and continued to experience significant turnover in its
North American sales personnel. The significant turnover experienced by the
Company has had, and may continue to have, an adverse effect on the Company's
operations, the extent of which cannot presently be determined. Product revenues
increased 2.2%, or $266,000, from $12.0 million in fiscal 1998 to $12.3 million
in fiscal 1999. The increase in product revenues from fiscal 1998 to fiscal 1999
primarily stemmed from non-refundable prepaid royalties and license fees from
Motorola for the Company's Digital TV and Java product offerings. The Company
continues to be negatively impacted by the slower than anticipated emergence of
various target markets, such as cellular phones, two-way paging, personal
Internet devices and digital and interactive television. Product revenues from
certain strategic customers including Motorola, Northern Telecom Ltd., Ericsson
and the Company's DAVID licensees, continued to fall below management
expectations. Future growth in product revenues will continue to be
substantially dependent on the Company's ability to develop cost effective sales
channels in North America and abroad and the Company's customers' timely and
successful development and distribution of new products using the Company's
products. Each of these factors makes product revenues difficult to accurately
forecast on a quarterly or annual basis. Services revenues decreased 24.2%, or
$1.4 million, from $5.7 million in fiscal 1998 to $4.3 million in fiscal 1999.
The decrease in services revenues primarily resulted from a decrease in funded
development of advanced processor ports along with, to a lesser extent, a
reduction in DAVID custom services.
International revenues represented 50%, 59% and 64% of total revenues
in fiscal 1997, 1998 and 1999, respectively. The percentage increase in fiscal
1999 resulted primarily from a reduction in U.S. revenue compounded by an
overall increase in revenues from Europe. The Company expects international
sales to continue to represent a significant portion of its revenues although
the percentage may fluctuate from period to period. In Europe and Japan,
revenues and expenses are primarily denominated in local currencies. 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 documentation, production quality, duplication of manuals and media
for software products, as well as those costs related to the packaging, shipping
and delivery of the product to the customer. Cost of product revenues also
includes direct third party royalty expense and amortization expense of
purchased and capitalized software. Cost of services revenues includes direct
and indirect costs for technical phone support, training and education, and
custom engineering.
Total cost of revenues decreased 18.5%, or $1.1 million, from $5.9
million in fiscal 1998 to $4.8 million in fiscal 1999. Overall cost of revenues
decreased due to the reduction in total revenues. As a percentage of product
revenues, cost of product revenues decreased from 22.8% in fiscal 1998 to 21.2%
in fiscal 1999. Cost of product revenues decreased as a percentage of product
revenues primarily as a result of marginal efficiencies achieved in the direct
costs of producing, packaging and shipping products to customers. As a
percentage of services revenues, cost of services revenues decreased from 56.4%
in fiscal 1998 to 51.9% in fiscal 1999. The percentage decrease between
29
<PAGE>
periods primarily resulted from higher margin custom contract engineering work
being performed during fiscal 1999 as compared fiscal 1998.
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 6.2%, or $451,000, from
$7.2 million in fiscal 1998 to $6.8 million in fiscal 1999. The reduction in
research and development expense is a primary result of fewer engineers employed
by the Company during fiscal 1999. The Company has made substantial investments
in product development. The Company believes that its future success will depend
in large part on its ability to enhance its existing products, to develop new
products and to maintain technological competitiveness. Consequently, the
Company anticipates that it will continue to commit substantial resources to
product development in the future.
SALES AND MARKETING. Sales and marketing expense consists primarily of
sales and marketing personnel related costs, including sales commissions. Sales
and marketing expense also includes costs of advertising, public relations and
attendance at industry trade shows. Sales and marketing expense increased 13.1%,
or $1.3 million, from $10.2 million in fiscal 1998 to $11.5 million in fiscal
1999. The overall increase was primarily attributable to the Company's continued
investment in its domestic and international sales and distribution channels and
support infrastructures. In fiscal 2000, the Company expects to continue
investing in the expansion and development of its sales channels and the
upgrading of its infrastructure in addition to increasing marketing activity
associated with the release of new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel 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 20.2%, or
$907,000, from $4.5 million in fiscal 1998 to $3.6 million in fiscal 1999. The
decrease in general administrative expenses primarily resulted from a reduction
in recruiting and relocation costs along with costs associated with the move to
the Company's new headquarters facility.
SPECIAL CHARGES. No special charges were incurred during the 1999
fiscal year. During the fiscal year ended March 31, 1998, the Company determined
that due to revised estimates of the marketability of certain products under
development, a special charge of $940,000 was appropriate to more adequately
reflect the residual value of certain intangible assets. Included in this charge
was approximately $566,000 of deferred development costs in the form of prepaid
royalties, approximately $202,000 relating to goodwill associated with
MicroMall, Inc., a subsidiary of the Company, and approximately $172,000
relating to the write-off of previously capitalized purchased technology.
OTHER INCOME (EXPENSE). Other income decreased 84.7%, or $1.1 million,
from $1.3 million in fiscal 1998 to $196,000 in fiscal 1999. The decrease
between periods resulted from gains on the sale of the Company's interest in
Unwired Planet Inc. and its former headquarters facility of $881,000 and
$215,000, respectively, in fiscal 1998. In addition, other income decreased due
to a reduction of interest income due to cash used in operations, and an
increase in interest expense related to the Company's long-term debt on its new
headquarters facility.
30
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and operating results have varied substantially
from quarter to quarter and should not be relied upon as an indication of future
performance. The Company believes its revenues may fluctuate from quarter to
quarter depending upon such factors as new product introductions by the Company
or others, seasonality of customer buying patterns, the Company's sales
commission plan, renewals of product licenses by customers, product development
and marketing expenses, changes in Company and competitors' pricing policies,
the timing of significant orders, the mix of products sold, the mix of
international versus domestic revenues, currency fluctuations, the existence of
product errors and the hiring and training of additional staff. Furthermore,
delays in closing product licensing transactions or in completion of custom
contract engineering work during any quarter could cause quarterly revenues and
net earnings for that quarter to fall below anticipated levels. The Company
derives a significant portion of its revenues from a relatively small number of
large account customers, therefore any delay in the consummation of business
with this small number of customers could significantly impact the Company's
quarterly performance. The majority of the Company's revenues in a quarter has
been historically derived from orders received in the last month of that
quarter, which makes the Company's financial performance more susceptible to an
unexpected downturn in business and makes quarterly results difficult to
forecast. In addition, the Company's expense levels are based on present
expectations of future revenue levels, and a shortfall in revenues could result
in a disproportionate decrease in the Company's net earnings. As the markets in
which the Company compete mature and as new and existing companies compete for
customers, price competition is likely to intensify and such competition could
adversely affect quarterly operating results. Variations in product mix may also
affect gross profit margin percentages. Therefore, although the Company's
revenues and gross profit in any period may increase in absolute terms, such an
increase may result in lower gross profit margin percentages.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations primarily through
cash flow from operations, the sale of common and preferred stock and, to a
lesser extent, long-term debt. At March 31, 2000, the Company had approximately
$1,509,000 in working capital and $1,967,000 in cash and short-term investments
as compared to $7,908,000 in working capital and $7,527,000 in cash and
short-term investments at March 31, 1999. The decrease in working capital and
cash and short-term investments resulted principally from the use of cash during
fiscal 2000 for operating activities.
Cash used in operating activities amounted to $8,859,000, $6,310,000
and $4,972,000 for fiscal years 1998, 1999 and 2000, respectively. The cash used
in operations in fiscal 2000 primarily resulted from the net loss of $8,639,000.
Additionally significant uses of cash resulted from a decrease in accounts
payable of $171,000.
Cash provided by investing activities was $4,558,000, $6,799,000 and
$3,464,000 for fiscal years 1998, 1999 and 2000, respectively. In fiscal 1999
and 2000, cash provided by investing activities resulted principally from net
maturities of short-term investments of $6,924,000 and $3,904,000 respectively.
Cash (used in) provided by financing activities was ($508,000),
$186,000, and $104,000 for fiscal years 1998, 1999 and 2000, respectively. In
fiscal 1998, cash used in financing activities primarily resulted from the
31
<PAGE>
payoff of the Company's construction note, partially offset by proceeds received
on the Company's new long-term promissory note and the issuance of common stock
resulting from stock options exercised. In fiscal 1999 and 2000, cash provided
by financing activities primarily resulted from proceeds received from the
issuance of common stock due to stock options exercised.
As of March 31, 2000, the Company had approximately $6,847,000 of
long-term debt, including current portion, outstanding relating to its
headquarters building. Monthly payments are $49,000, including interest at
7.46%, with the unpaid balance due January 1, 2008. In accordance with the loan
agreement, the Company has provided the lender an irrevocable standby letter of
credit in the amount of $786,000. In order to obtain the irrevocable standby
letter of credit, the Company has pledged a $786,000 U.S. Treasury note as
collateral. See Note 5 of Notes to Consolidated Financial Statements.
On April 19, 2000, subsequent to the fiscal year end, the Company
completed a private placement of 3,500 shares of Series I 4% Cumulative
Convertible Preferred Stock for gross proceeds of $3.5 million. The financing
also includes warrants and options for purchase of additional shares of the
Company's common stock, which if exercised, the Company estimates that it would
receive gross cash proceeds of approximately $3.46 million in the aggregate.
There can be no assurances that such warrants and options will be exercised, and
therefore no certainty of future cash proceeds can be anticipated. On June 14,
2000, the holders of the Series I Preferred Stock converted 1,578 of those
shares into 668,556 shares of common stock.
Management believes current working capital and its $1.0 million bank
line of credit will be adequate to meet the Company's future working capital,
new product development and capital expenditure requirements at least through
the end of fiscal 2001.
Management does not believe that inflation has historically had a
material effect on the Company's results of operations.
Many of the Company's international contracts are denominated in local
currencies, and an increase in the relative value of the dollar against such
currencies would lead to a reduction in Company revenues. The Company attempts
to minimize its foreign currency exposure by attempting to keep intercompany
balances current and minimizing assets in any one currency denomination.
However, due to recent losses, intercompany balances have increased and are not
specifically hedged and there can be no assurance that the Company's future
results of operations will not be adversely affected by currency fluctuations.
The Company anticipates that international sales will continue to
account for a significant portion of net sales in the foreseeable future. This
dependence on international operations subjects the Company 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. The Company 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. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented on the Company's 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 the Company's business, financial condition and
results of operations.
32
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
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 for
transactions that were entered into in fiscal years beginning after March 15,
1999. The adoption of this statement has not had a material impact on the
Company's operating results, financial position or cash flows.
YEAR 2000 ISSUE
To date, the Company has not experienced, nor has been made aware of,
any material Year 2000 compliance-related failures. Costs associated with
assessment and implementation of a Year 2000 compliance plan have been expensed
as incurred, and have not been material. The Company does not expect to incur
significant additional costs related to year 2000 issues.
"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.
33
<PAGE>
ITEM 7A.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. The Company is exposed to changes in fair values of its
long-term debt that carries a fixed interest rate. As discussed in Note 5 of
Notes to Consolidated Financial Statements, Microware had total long-term debt
of $6,847,000 at March 31, 2000.
FOREIGN CURRENCY RISK
Microware transacts business in various foreign currencies, primarily
Japanese yen and certain European currencies, as discussed in Item 1 and Note 10
of Notes to Consolidated Financial Statements, and accordingly is exposed to
fluctuations in foreign currency markets. The Company does not enter into
foreign currency hedging transactions.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in the financial
statements set forth in Item 14(a) under the caption "Consolidated Financial
Statements."
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
36
<PAGE>
PART III
ITEMS 10-13
The response to Items 10, 11, 12, and 13 are incorporated by reference
to the information concerning the applicable subjects in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders, expected to be filed
pursuant to Regulation 14A no later than 120 days following March 31, 2000.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
The following are included herein:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1999 and 2000
Consolidated Statements of Operations for the three years ended
March 31, 2000
Consolidated Statements of Shareholders' Equity for the three years
ended March 31, 2000
Consolidated Statements of Cash Flows for the three years ended
March 31, 2000
Notes to Consolidated Financial Statements
2. Exhibits. The following are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------
<S> <C>
3.1 Composite of Restated and Amended Articles of Incorporation of the
Company, filed as Exhibit 3.1 to the Company's Current Report on Form
8-K dated April 19, 2000 and hereby incorporated by reference.
3.2 Restated and Amended Bylaws of the Company, filed as Exhibit 3.2 to
Pre-Effective Amendment No. 3 to the Company's Registration Statement
on Form S-1 Reg. No. 33-99160-3 and hereby incorporated by reference.
4.1 Articles of Incorporation and Bylaws of the Company (included in
Exhibits 3.1 and 3.2).
10.1 Stock and Warrant Purchase Agreement between the Company and Motorola,
Inc. dated July 31, 1995, including Form of Warrant, filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1 Reg. No.
33-99160 and hereby incorporated by reference.
10.2 Shareholder Agreement among the Company, Kenneth B. Kaplan, and
Motorola, Inc. dated July 31, 1995, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 Reg. No. 33-99160 and
hereby incorporated by reference.
10.3 Agreement among the Company, Kenneth B. Kaplan, Lawrence A. Crane, and
the 1994 Series A Preferred Stock holders dated March 11, 1996, filed
as exhibit 10.18 to Pre-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.4 Software Development and License Agreement between the Company and
Motorola, Inc. filed as Exhibit 10.17 to Pre-Effective Amendment No. 3
to the Company's Registration Statement on Form S-1, Reg. No.
33-99160, and hereby incorporated by reference.
10.5 +1991 Stock Option Plan of the Company, filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.6 +1992 Stock Option Plan of the Company, filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.7 +1995 Stock Option Plan of the Company, as amended, filed as Exhibit
10.8 to the Form 10-K Report of the Company for the fiscal year ended
March 31, 1998, and hereby incorporated by reference.
38
<PAGE>
10.8 +1999 Employee Stock Purchase Plan of the Company, filed as Exhibit
4.3 to the Company's Registration Statement on Form S-8, Reg. No.
333-33622, and hereby incorporated by reference.
10.9 +401(k) Plan of the Company, filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.10 +Non-Contributory Profit Sharing Plan of the Company, filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1, Reg. No.
33-99160, and hereby incorporated by reference.
10.11 +Employment Agreement by and between George E. Leonard and the
Company, dated as of September 17, 1999, filed as Exhibit 10.10 to
Form 10-Q for the fiscal quarter ended September 30, 1999 and hereby
incorporated by reference.
10.12 Securities Purchase Agreement between the Company and Elliott
Associates, L.P. and Westgate International, L.P., dated as of April
19, 2000, filed on the Company's Current Report on Form 8-K filed May
4, 2000, and hereby incorporated by reference.
10.13 Registration Rights Agreement between the Company and Elliott
Associates, L.P. and Westgate International, L.P., dated as of April
19, 2000, filed on the Company's Current Report on Form 8-K filed May
4, 2000, and hereby incorporated by reference.
10.14 Form of Option Agreement issued to Elliott Associates, L.P. and
Westgate International, L.P., dated as of April 19, 2000, filed on May
4, 2000, and hereby incorporated by reference.
10.15 Form of Warrant Agreement issued to Elliott Associates, L.P. and
Westgate International, L.P., dated as of April 19, 2000, filed on the
Company's Current Report on Form 8-K filed May 4, 2000, and hereby
incorporated by reference.
21 *Subsidiaries of the Registrant.
23 *Consent of KPMG LLP
27 *Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K - None.
--------------------------------------------------------
</TABLE>
+ Compensation Plan or Agreement
* Filed Herewith
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, on the 28th day of June,
2000.
MICROWARE SYSTEMS CORPORATION,
AN IOWA CORPORATION
By: /s/ KENNETH B. KAPLAN
Kenneth B. Kaplan, President and Chief
Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and
officers of Microware Systems Corporation, an Iowa corporation, which is filing
an Annual Report on Form 10-K with the Securities and Exchange Commission under
the provisions of the Securities Exchange Act of 1934 as amended, hereby
constitute and appoint Kenneth B. Kaplan, George E. Leonard, Beth E. Law, and
Arthur Don and each of them, each of their true and lawful attorneys-in-fact and
agents; with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to the report to be filed with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all interests and purposes as
each of them might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ KENNETH B. KAPLAN Chairman of the Board of
----------------------------------------- Directors, President & Chief
Kenneth B. Kaplan Executive Officer (Principal
Executive Officer) June 28, 2000
/s/ GEORGE E. LEONARD Executive Vice President,
----------------------------------------- Chief Financial Officer,
George E. Leonard Chief Operating Officer, June 28, 2000
Treasurer and Secretary
(Principal Financial
Officer)and Director
/s/ BETH E. LAW Chief Accounting Officer,
----------------------------------------- Controller and Assistant June 28, 2000
Beth E. Law Treasurer (Principal
Accounting Officer)
/s/ ARTHUR DON Director June 28, 2000
-----------------------------------------
Arthur Don
Director June 28, 2000
-----------------------------------------
James A. Gordon
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DANIEL P. HOWELL Director June 28, 2000
-----------------------------------------
Daniel P. Howell
/s/ DENNIS E. YOUNG Director June 28, 2000
-----------------------------------------
Dennis E. Young
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Microware Systems Corporation:
We have audited the accompanying consolidated balance sheets of Microware
Systems Corporation and subsidiaries as of March 31, 1999 and 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Microware
Systems Corporation and subsidiaries at March 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000, in conformity with generally accepted accounting
principles.
KPMG LLP
Des Moines, Iowa
April 28, 2000
F-1
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, March 31,
Assets 1999 2000
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,840 $ 1,184
Short-term investments (note 5) 4,687 783
Trade receivables, net of allowance for
doubtful accounts of $485 and $434 (notes 2 and 4) 3,593 2,935
Income taxes receivable 122 78
Inventories (note 4) 71 77
Prepaid expenses and other current assets 438 413
Deferred tax assets (note 6) 473 -
-------- --------
Total current assets 12,224 5,470
Property and equipment, net (notes 3 and 5) 12,516 11,350
-------- --------
Other assets:
Intangible assets, net of amortization (notes 1 and 4) 2,007 753
Deposits and other 787 637
-------- --------
Total other assets 2,794 1,390
$27,534 $18,210
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, March 31,
Liabilities and Shareholders' Equity 1999 2000
--------- ---------
<S> <C> <C>
Current liabilities:
Notes payable to banks (note 4) $ 253 $ -
Current installments of long-term debt 71 77
Accounts payable 927 756
Accrued expenses 2,140 2,061
Deferred revenues 812 865
Income taxes payable 113 202
-------- --------
Total current liabilities 4,316 3,961
Long-term debt, less current installments (note 5) 6,847 6,770
Deferred income taxes (note 6) 428 -
-------- --------
Total liabilities 11,591 10,731
Shareholders' equity (notes 8 and 12):
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;
15,154,992 and 15,411,900
shares issued, 14,929,892 and
15,186,800 shares outstanding 37,065 37,492
Retained earnings (deficit) (19,795) (28,434)
Accumulated other comprehensive loss - cumulative adjustment
for foreign currency translation (550) (802)
-------- --------
16,720 8,256
Less cost of common shares aquired for the
treasury, 225,100 and 225,100 shares 777 777
-------- --------
Total shareholders' equity 15,943 7,479
Commitments (note 13)
-------- --------
$ 27,534 $ 18,210
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenues (notes 2 and 9):
Product $ 12,047 $ 12,313 $ 10,384
Services 5,677 4,302 3,033
--------------- ---------------- -----------------
17,724 16,615 13,417
--------------- ---------------- -----------------
Cost of revenues:
Product 2,745 2,613 2,041
Services 3,201 2,231 1,379
--------------- ---------------- -----------------
5,946 4,844 3,420
--------------- ---------------- -----------------
Gross profit 11,778 11,771 9,997
--------------- ---------------- -----------------
Operating expenses:
Research and development 7,223 6,772 5,762
Sales and marketing 10,148 11,474 9,611
General and administrative 4,485 3,578 3,049
Special charges (note 11) 940 - -
--------------- ---------------- -----------------
22,796 21,824 18,422
--------------- ---------------- -----------------
Operating loss (11,018) (10,053) (8,425)
--------------- ---------------- -----------------
Other income (expense):
Foreign currency (loss) gain, net (79) 91 237
Gain on sale of land and building 215 140 -
Gain on sale of investment 881 - -
Interest expense (465) (525) (568)
Interest income 730 490 286
--------------- ---------------- -----------------
1,282 196 (45)
--------------- ---------------- -----------------
Loss before income tax expense (9,736) (9,857) (8,470)
Income tax expense (note 6) 210 81 169
--------------- ---------------- -----------------
Net loss (note 9) $ (9,946) $ (9,938) $ (8,639)
=============== ================ =================
Basic loss per share $ (.69) $ (.68) $ (.58)
=============== ================ =================
Shares used in per share calculation - basic 14,378 14,718 14,994
=============== ================ =================
Diluted loss per share $ (.69) $ (.68) $ (.58)
=============== ================ =================
Shares used in per share calculation - diluted 14,378 14,718 14,994
=============== ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Accumulated
Retained other Total
Preferred Common earnings comprehensive Treasury shareholders'
stock stock (deficit) loss stock equity
----- ----- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ - $ 36,152 $ 89 $ (738) $ (777) $ 34,726
Comprehensive loss
Net loss - - (9,946) - - (9,946)
Currency translation adjustments - - - (7) - (7)
-----------
Total comprehensive loss (9,953)
Issuance of common shares of stock - 643 - - - 643
Legal and other fees incurred for
issuance of common shares of stock - (60) - - - (60)
--------- -------- ---------- --------- ---------- -----------
Balance at March 31, 1998 $ - $ 36,735 $ (9,857) $ (745) $ (777) $ 25,356
Comprehensive loss
Net loss - - (9,938) - - (9,938)
Currency translation adjustments - - - 195 - 195
-----------
Total comprehensive loss (9,743)
Issuance of common shares of stock - 351 - - - 351
Legal and other fees incurred for
issuance of common shares of stock - (21) - - - (21)
-------- -------- ---------- --------- ---------- -----------
Balance at March 31, 1999 $ - $ 37,065 $ (19,795) $ (550) $ (777) $ 15,943
Comprehensive loss
Net loss - - (8,639) - - (8,639)
Currency translation adjustments - - - (252) - (252)
-----------
Total comprehensive loss (8,891)
Issuance of common shares of stock - 454 - - - 454
Legal and other fees incurred for
issuance of common shares of stock - (27) - - - (27)
-------- -------- ---------- --------- ---------- -----------
Balance at March 31, 2000 $ - $ 37,492 $ (28,434) $ (802) $ (777) $ 7,479
========= ======== ========== ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,946) $ (9,938) $ (8,639)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,366 2,905 2,859
Gain on sale of land and building (215) (140) -
Write down of intangible and other assets 940 - -
Gain on sale of investment (881) - -
Deferred income taxes 74 150 45
Change in trade receivables, net 2,837 526 658
Change in income taxes receivable 201 (116) 44
Change in inventories 30 (5) (6)
Change in prepaid royalties 69 370 -
Change in prepaid expenses and other current assets (469) 347 25
Change in other assets (2,843) 273 150
Change in accounts payable (1,144) (499) (171)
Change in accrued expenses 8 (18) (79)
Change in deferred revenues 159 (221) 53
Change in income taxes payable (45) 56 89
------------ ------------ ------------
Net cash used in operating activities (8,859) (6,310) (4,972)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (4,559) (790) (440)
Proceeds from sale of property and equipment 1,640 665 -
Purchases of short-term investments (24,353) (9,679) -
Maturities of short-term investments 25,945 16,603 3,904
Proceeds from sale of investment, net 5,885 - -
------------ ------------ ------------
Net cash provided by investing activities 4,558 6,799 3,464
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to banks
and long-term debt 10,702 - -
Principal payments on notes payable to banks and long-term debt (11,793) (144) (323)
Proceeds on issuance of common shares of stock 643 351 454
Cost of issuance of common shares of stock (60) (21) (27)
------------ ------------ ------------
Net cash (used in) provided by financing activities (508) 186 104
------------ ------------ ------------
(4,809) 675 (1,404)
Effect of foreign currency exchange rate changes on cash 60 156 (252)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (4,749) 831 (1,656)
Cash and cash equivalents at beginning of year 6,758 2,009 2,840
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,009 $ 2,840 $ 1,184
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Microware Systems Corporation (Microware) and its subsidiaries (the
Company): Microware Systems (U.K.) Limited; Microware Systems K.K.;
MSC Toolco, Inc.; Microware Systems France S.A.R.L.; Microware
Systems Corporate Park, Inc.; and MicroMall, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
NATURE OF BUSINESS
The Company develops and markets operating system software and high-level
language compilers used in industrial automation, communications,
scientific research, and consumer electronics applications. The
Company's operations are primarily conducted in North America, Japan
and Europe.
TRANSLATION OF FOREIGN FINANCIAL STATEMENTS
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are
translated at year-end exchange rates. Income and expense items are
translated at the average exchange rate for the year. Translation
gains and losses are not included in determining net earnings but are
accumulated as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in determining net
earnings (loss).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of money market funds, a United States treasury
fund and United States treasury bills with stated effective
maturities of three months or less at time of purchase. Short-term
investments consist of United States treasury bills with stated
effective maturities greater than three months at time of purchase.
Cash equivalents and all of the Company's short-term investments are
classified as "held-to-maturity" under the Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and are stated at
amortized cost, which approximates fair value.
F-7
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED
INVENTORIES
Inventories are composed primarily of user manuals and software media
production materials and are stated at the lower of cost or market on
a first-in, first-out basis. Additionally, inventories include costs
incurred to develop customized software under certain consulting
agreements in progress.
INVESTMENTS
In October of 1996, Microware purchased a preferred stock interest in
another company for $5,004. On February 20, 1998, the Company
received net proceeds of $5,885 from the sale of the preferred stock.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on
straight-line methods with estimated useful lives of 5 to 30 years
for building and improvements and 3 to 5 years for furniture,
fixtures, and equipment and research and development equipment.
INTANGIBLE ASSETS
The balance of intangible assets as of March 31, 1999 and 2000 consisted
of the following:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Accumulated
Cost amortization Net
---- ------------ ---
<S> <C> <C> <C>
Capitalized software
development costs $ 1,211 $ 1,038 $ 173
Purchased software 4,363 2,621 1,742
Patents, copyrights, and other 542 450 92
---------- ---------- --------
$ 6,116 $ 4,109 $ 2,007
========== ========== ========
2000
-----------------------------------------------
Accumulated
Cost amortization Net
---- ------------ ---
<S> <C> <C> <C>
Capitalized software
development costs $ 1,211 $ 1,143 $ 68
Purchased software 4,550 3,903 647
Patents, copyrights, and other 444 406 38
---------- ---------- --------
$ 6,205 $ 5,452 $ 753
========== ========== ========
</TABLE>
F-8
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED
INTANGIBLE ASSETS, CONTINUED
The Company historically has capitalized software development costs
incurred in the production of computer software. Software development
costs incurred prior to technological feasibility were expensed as
research and development costs. Capitalization of these costs ceased
when the product was considered available for general release to
customers. The Company no longer capitalizes these costs, but
expenses them as research and development costs. Amortization of
previously capitalized software development costs is calculated using
the straight-line method over the expected product life cycle of
three years. Amortization of capitalized software development costs
amounted to $151, $150 and $105 for the years ended March 31, 1998,
1999, and 2000, respectively.
Purchased software represents the cost of acquiring computer software
used in the Company's products. Amortization of purchased software is
calculated as the greater of the ratio that current revenues bear to
estimated future revenues or the straight-line method not to exceed
three years.
Patents, copyrights, and other are being amortized over 5 to 15 year
periods on the straight-line method.
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance for determining whether computer software is
internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on
capitalization of the losses incurred for computer software developed
or obtained for internal use. The adoption of SOP 98-1 has not had a
material impact on the Company's operating results, financial
position or cash flows.
ADVERTISING
Advertising costs incurred for the years ended March 31, 1998, 1999,
and 2000 were $687, $810, and $982, respectively.
REVENUE RECOGNITION
The Company adopted the provisions of the American Institute of Certified
Public Accountants' (AICPA) Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended by SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2, "Software Revenue
Recognition," effective April 1, 1998. SOP 97-2 and SOP 98-4 provide
guidance on recognizing revenue on software transactions and
supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not
have a material impact on the Company's current licensing or revenue
recognition practices. Product revenues primarily consist of software
licenses and development tool products sold and royalties earned from
equipment distributors. Software license fees are recognized as
revenues upon contract signing and shipment of the software master
copy. Sales of development tool products are recognized as revenues
upon shipment. Royalties earned from equipment distributors are
recognized as revenues when reported by the equipment distributors or
upon written agreement for non-refundable prepaid royalties.
F-9
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED
REVENUE RECOGNITION, CONTINUED
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
for transactions that were entered into in fiscal years beginning
after March 15, 1999. The adoption of this statement has not had a
material impact on the Company's operating results, financial
position or cash flows.
COMPUTATION OF NET EARNINGS (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.
COMPREHENSIVE INCOME (LOSS)
On April 1, 1998, the Company adopted SFAS No. 130, "Reporting
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 the Company,
the primary difference between net income and comprehensive income
results from foreign currency translation adjustments. The adoption
of SFAS No. 130 had no impact on the Company's results of operations.
The Company's comprehensive income has been presented in the Consolidated
Statements of Shareholders' Equity. As of March 31, 2000, accumulated
other comprehensive loss consisted of foreign currency translation
adjustments of $802.
F-10
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose the estimated fair values for its
financial instruments. Fair value estimates, methods, and assumptions
are set forth below:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, TRADE
RECEIVABLES, NOTES PAYABLE TO BANKS, ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
The carrying amount approximates the estimated fair value due to the
short-term nature of those instruments.
LONG-TERM DEBT
Rates currently available to the Company for such borrowings with
similar terms and remaining maturities are used to discount the
future cash flows to estimate the fair value for long-term debt.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (ABP No. 25) and
related interpretations. Under APB No. 25, compensation cost is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the exercise price of
the option granted. Compensation cost for stock options, if any,
is recognized ratably over the vesting period. The Company's
policy is to grant options with an exercise price equal to the
quoted market price of the Company's stock on the grant date.
Accordingly, no compensation cost has been recognized for the
Company's stock option plan. The Company provides additional pro
forma disclosures as required under SFAS No. 123, "Accounting for
Stock-Based Compensation" (see note 8).
(2) TRADE RECEIVABLES
At March 31, 1999 and 2000 the Company had no customer whose trade
receivable balance exceeded 10 percent of consolidated trade
receivables.
The activity in the Company's allowance for doubtful accounts for the
years ended March 31, 1998, 1999, and 2000 consisted of the
following:
<TABLE>
<CAPTION>
Balance at Additions Deductions,
beginning charged to net of Balance at
of year expenses recoveries end of year
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended March 31, 1998 $ 635 $ 587 $ 720 $ 502
====== ===== ===== ======
Year ended March 31, 1999 $ 502 $ 103 $ 120 $ 485
====== ===== ===== ======
Year ended March 31, 2000 $ 485 $ 97 $ 148 $ 434
====== ===== ===== ======
</TABLE>
F-11
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 2000
---- ----
<S> <C> <C>
Land and improvements $ 2,004 $ 2,004
Building 8,426 8,426
Furniture, fixtures, and equipment 3,647 3,637
Research and development equipment 2,806 2,677
Leasehold improvements 49 120
--------- ----------
16,932 16,864
Accumulated depreciation and amortization 4,416 5,514
--------- ---------
$ 12,516 $ 11,350
========= =========
</TABLE>
(4) NOTES PAYABLE TO BANKS
Microware has a $1,000 line of credit with a bank bearing interest at the
bank's base rate. The line of credit matures on October 31, 2000 and
is renewable annually. Funds advanced are secured by Microware's
trade receivables, inventories, and intangible assets. There were no
borrowings outstanding at March 31, 1999 or 2000.
Microware Systems K.K. has credit agreements with various maturities.
Outstanding balances at March 31, 1999 and 2000 totaled $253 and $0,
respectively. The credit agreements were fully secured by Microware
Systems K.K.'s deposit placed on its Tokyo office space.
(5) LONG-TERM DEBT
Long-term debt at March 31, 1999 and 2000 consisted of the following:
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Promissory note $ 6,918 $ 6,847
Less current installments 71 77
--------- ---------
Long-term debt, excluding current installments $ 6,847 $ 6,770
========= =========
</TABLE>
On December 30, 1997, the Company, through its wholly owned
subsidiary Microware Systems Corporate Park, Inc. executed a
promissory note with GMAC Commercial Mortgage Corporation in the
amount of $7,000. The note is secured by the Company's
headquarters facility and associated real estate. In accordance
with the agreement, the Company has provided GMAC an irrevocable
standby letter of credit in the amount of $786 In order to obtain
the irrevocable standby letter of credit, the Company has pledged a
$786 U.S. Treasury note as collateral. Monthly payments are $49,
including interest at 7.46 percent, with the unpaid balance due
January 1, 2008.
F-12
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(5) LONG-TERM DEBT, CONTINUED
The aggregate maturities of long-term debt for each of the five years
ending March 31, 2005 and thereafter are as follows:
<TABLE>
<S> <C>
2001 $ 77
2002 83
2003 90
2004 97
2005 104
Thereafter 6,396
------
$ 6,847
======
</TABLE>
The carrying amount of the Company's long-term debt approximates the fair
value as of March 31, 2000.
(6) INCOME TAXES
The provision for income taxes is based on losses before income tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
United States $ (7,940) $ (8,908) $ (6,618)
Foreign (1,796) (949) (1,852)
---------- --------- ---------
$ (9,736) $ (9,857) $ (8,470)
========== ========= =========
</TABLE>
Components of income tax expense (benefit) for the years ended March 31,
1998, 1999, and 2000 consist of the following:
<TABLE>
<CAPTION>
1998
-----------------------------------
Domestic Foreign
Income Income Total
------- ------ -----
<S> <C> <C> <C>
Current $ 121 $ 15 $ 136
Deferred 74 -- 74
------ ------ --------
$ 195 $ 15 $ 210
====== ==== ========
1999
-------------------------------------
Domestic Foreign
Income Income Total
------- ------ -----
Current $ (155) $ 86 $ (69)
Deferred 150 -- 150
-------- ------ --------
$ (5) $ 86 $ 81
======== ====== ========
2000
-------------------------------------
Domestic Foreign
Income Income Total
------- ------ -----
Current $ 25 $ 99 $ 169
Deferred 45 -- 45
-------- ---- --------
$ 70 $ 99 $ 169
====== ==== ========
</TABLE>
F-13
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(6) INCOME TAXES, CONTINUED
Income tax expense (benefit) for the years ended March 31, 1998, 1999,
and 2000 differs from the "expected" income tax expense (benefit)
computed by applying the United States expected federal income tax
rate of 34 percent to pretax income (loss) due to the following:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit $ (3,310) $ (3,351) $ (2,880)
Increase (decrease) in taxes resulting from:
U.S. losses without current benefit 2,682 2,912 2,489
Foreign losses without current benefit 743 459 449
Foreign taxes 77 86 99
Other 18 (25) 12
------ ------- ------
$ 210 $ 81 $ 169
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at March 31, 1999 and 2000 are presented
below:
<TABLE>
<CAPTION>
March 31,
------------------------------
1999 2000
---- ----
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards $ 10,294 $ 12,971
Foreign net operating loss carryforwards 1,211 1,211
Post contract customer support unearned revenue 201 198
Compensation/benefits 37 30
Allowance for doubtful accounts 153 135
Warranty reserve 86 83
Other 3 1
------- -------
Total gross deferred tax assets 11,985 14,629
Less valuation allowance 11,512 14,248
------- -------
Total deferred tax assets 473 381
------- -------
Deferred tax liabilities:
Capitalized software costs 62 24
Property and equipment 366 357
------- -------
Total deferred tax liabilities 428 381
------- -------
Net deferred tax assets $ 45 $ -
======= =======
</TABLE>
F-14
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(6) INCOME TAXES, CONTINUED
The net deferred tax assets at March 31, 1999 and 2000, are composed of
current deferred tax assets of $473 and $381 respectively, and
noncurrent deferred tax liabilities of $428 and $381, respectively.
The net change in the total valuation allowance for the years ended March
31, 1999 and 2000 was an increase of $3,422 and $2,736 respectively,
and relates primarily to increases in net operating loss
carryforwards. Utilization of the U.S. and foreign net operating
losses is dependent upon future taxable income generated in the
respective U.S. and foreign subsidiaries. The Company recorded the
valuation allowance due to its lack of history of consistent earnings
in the U.S. and in a foreign subsidiary generating the net operating
loss carryforwards. At March 31, 2000, the Company has U.S. net
operating loss carryforwards for federal income tax purposes of
approximately $36,000 (including approximately $3,600 from tax
benefits related to employee stock options) which are available to
offset future federal taxable income, if any, expiring as follows:
$8,500 in 2012, $10,700 in 2013, $9,400 in 2019, and $7,400 in 2020.
The foreign net operating loss carryforwards expire as follows:
$1,860 in 2003 and $1,500 in 2004.
(7) PROFIT SHARING PLAN
Microware has a contributory profit sharing plan for substantially all
full-time employees. Under the contributory plan, Microware provides
matching cash contributions based on qualified employee
contributions, as well as certain other contributions. Microware's
contributions to the contributory plan for the years ended March 31,
1998, 1999, and 2000 amounted to $175, $114, and $99, respectively.
(8) STOCK OPTIONS
The Company has established 1989, 1991, 1992 and 1995 Stock Option Plans
(the Plans) and granted options to certain officers, directors, and
employees to purchase shares of common stock. The options granted
under the Plans expire 10 years from the date such option is granted.
Options vest over a two to five year period and are exercisable under
conditions specified in the Plans' agreements.
The 1989, 1991, 1992 and 1995 Plans had available 1,200,000, 512,000,
496,000 and 2,070,000 total shares of common stock subject to
option, respectively.
Activity for the Company's Plans is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------------------------------- --------------------------------- ---------------------------------
Number Option Price Number Option Price Number Option Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning
balance 2,060,691 $0.50-15.50 2,008,310 $0.50-15.50 1,869,325 $0.50-15.50
Issued 978,250 $4.375-10.00 1,126,150 $1.94-5.88 535,700 $1.56-10.563
Exercised 587,531 $0.50-3.125 376,900 $0.50-3.125 256,908 $0.50-7.00
Canceled 443,100 $3.125-15.50 888,235 $1.94-15.50 428,750 $1.82-15.50
------------ ----------- -----------
Ending
balance 2,008,310 $0.50-15.50 1,869,325 $0.50-15.50 1,719,367 $0.9375-10.563
============ ============ =========== ============ ========== ==============
</TABLE>
F-15
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(8) STOCK OPTIONS, CONTINUED
SFAS No. 123 requires proforma information regarding net earnings (loss)
and net earnings (loss) per share be determined as if the Company has
accounted for its stock options granted subsequent to December 15,
1994 under the "fair value" method. Under SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using
the Black-Scholes option valuation model with the following
assumptions used for grants during fiscal 1998, 1999 and 2000: risk
free interest rates of 6.0%, 5.0% and 6.0% respectively; expected
volatility of 88.40%, 90.0% and 120.0%, respectively; an expected
option life of 6.0 years, 6.0 years, and 5.0 years, respectively; and
no expected dividends for any year. As the Company was a nonpublic
entity until April 2, 1996, it is permitted under SFAS No. 123 to use
the "minimum value" method to value stock options granted prior to
April 2, 1996. Under the "minimum value" method expected volatility
is effectively zero. The weighted average fair value of stock options
granted under the Plans for the years ended March 31, 1998, 1999, and
2000 were $4.90, $2.03 and $1.86, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair-value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of
its stock options.
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for compensation expense under the
Plans. Had compensation expense under the Plans been determined
pursuant to SFAS No. 123, the Company's proforma net loss and net
loss per share for the years ended March 31, 1998, 1999 and 2000
would have been as follows:
<TABLE>
<CAPTION>
1998 1999 2000
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net loss:
As reported $ (9,946) $ (9,938) $ (8,639)
Proforma $ (10,954) $ (10,976) $ (9,700)
Net loss per share:
As reported
Basic $ (0.69) $ (0.68) $ (0.58)
Diluted $ (0.69) $ (0.68) $ (0.58)
Proforma
Basic $ (0.76) $ (0.75) $ (0.65)
Diluted $ (0.76) $ (0.75) $ (0.65)
</TABLE>
The above proforma disclosures are not necessarily representative of the
effects on reported net earnings (loss) for future years. Diluted
loss per share does not include stock options exercisable (see below)
as the exercise would have an antidilutive effect on the computation.
F-16
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(8) STOCK OPTIONS, CONTINUED
The following table summarizes information about fixed stock options
outstanding under the Plans at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.9375 - 1.55 123,300 2.2 $ 1.2213 123,300 $ 1.2213
$1.56 - 3.10 1,183,377 9.0 $ 2.0010 131,517 $ 2.2374
$3.11 - 4.65 275,200 6.3 $ 3.2362 179,200 $ 3.1592
$4.66 - 6.20 93,000 9.0 $ 5.4777 10,000 $ 5.250
$6.21 - 7.75 43,490 8.3 $ 6.5997 9,595 $ 6.709
$9.31 - 10.85 1,000 9.9 $ 10.563 - $ -
----------- --------
1,719,367 8.0 $ 2.4522 453,612 $ 2.4863
=========== === ====== ======== ========
</TABLE>
F-17
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(9) FOREIGN OPERATIONS
A summary of the Company's domestic and foreign operations as of and for
the years ended March 31, 1998, 1999, and 2000 is presented below:
<TABLE>
<CAPTION>
1998
U.S. U.K. Japan France Germany Eliminations Total
---- ---- ----- ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 10,882 $ 2,692 $ 4,197 $ 1,053 $ 1,827 $ (3,068) $ 17,724
======= ====== ======= ======= ====== ======== =========
Operating (loss) profit $ (9,268) $ (74) $ (1,558) $ (211) $ 93 $ - $ (11,018)
======= ====== ======= ======= ====== ======== =========
Net (loss) earnings $ (8,135) $ (81) $ (1,544) $ (262) $ 76 $ - $ (9,946)
======= ====== ======= ======= ====== ======== =========
Total assets $ 41,105 $ 1,047 $ 1,632 $ 550 $ 744 $ (7,579) $ 37,499
======= ====== ======= ======= ====== ======== =========
Total liabilities $ 10,258 $ 1,479 $ 1,421 $ 1,105 $ 948 $ (3,068) $ 12,143
======= ====== ======= ======= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
1999
U.S. U.K. Japan France Germany Eliminations Total
---- ---- ----- ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,805 $ 3,086 $ 3,171 $ 1,131 $ 2,643 $ (3,221) $ 16,615
======= ====== ======= ======= ====== ======== =========
Operating (loss) profit $ (8,427) $ (145) $ (1,200) $ (358) $ 77 $ - $ (10,053)
======= ====== ======= ======= ====== ======== =========
Net (loss) earnings $ (8,981) $ (162) $ (1,210) $ 355 $ 60 $ - $ (9,938)
======= ====== ======= ======= ====== ======== =========
Total assets $ 31,605 $ 1,053 $ 1,501 $ 850 $ 1,000 $ (8,903) $ 27,106
======= ====== ======= ======= ====== ======== =========
Total liabilities $ 9,349 $ 1,628 $ 2,569 $ 857 $ 1,150 $ (4,390) $ 11,163
======= ====== ======= ======= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
2000
U.S. U.K. Japan France Germany Eliminations Total
---- ---- ----- ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 7,061 $ 1,977 $ 4,125 $ 846 $ 2,243 $ (2,835) $ 13,417
======= ====== ======= ======= ====== ======== =========
Operating loss $ (6,587) $ (468) $ (806) $ (513) $ (51) $ - $ (8,425)
======= ====== ======= ======= ====== ======== =========
Net loss $ (6,783) $ (461) $ (859) $ (522) $ (14) $ - $ (8,639)
======= ====== ======= ======= ====== ======== =========
Total assets $ 25,109 $ 813 $ 1,506 $ 439 $ 909 $ (10,567) $ 18,210
======= ====== ======= ======= ====== ======== =========
Total liabilities $ 9,303 $ 1,836 $ 3,660 $ 932 $ 1,055 $ (6,055) $ 10,731
======= ====== ======= ======= ====== ======== =========
</TABLE>
Included in U.S. revenues are foreign export sales, of approximately $690,
$553, and $422 during the years ended March 31, 1998, 1999, and 2000,
respectively. Revenue eliminations represent primarily intercompany
sales between the U.S. and foreign operations and royalties paid to the
U.S. by foreign subsidiaries.
F-18
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(10) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended March 31, 1998, 1999, and 2000, the Company paid
interest of approximately $701, $519, and $568, respectively.
Income taxes paid during the years ended March 31, 1998, 1999, and 2000
amounted to approximately $95, $13, and $25 respectively.
(11) SPECIAL CHARGES
During the year ended March 31, 1998, the Company determined that due to
revised estimates of the marketability of certain products under
development, a special charge of $940 was appropriate to more
adequately reflect the residual value of certain intangible assets.
Included in this charge was approximately $566 of deferred development
costs in the form of prepaid royalties, approximately $202 relating to
goodwill associated with MicroMall, Inc., a subsidiary of the Company,
and $172 relating to the write-off of previously capitalized purchased
technology.
(12) MOTOROLA STOCK AND WARRANT PURCHASE AGREEMENT
On July 31, 1995, the Company entered into a Stock and Warrant Purchase
Agreement (the Agreement) with Motorola, Inc. (Motorola) pursuant to
which Motorola purchased 1,526,232 common shares of stock of the
Company for $12,100 ($7.93 per share). In addition, pursuant to the
Agreement, Motorola currently holds three separate warrants to purchase
an additional 1,248,736 common shares of stock of the Company at an
exercise price of $10.81 per share. These warrants are exercisable and
expire at certain periods through July 31, 2001. The Agreement contains
certain anti-dilution protection in the event of certain dividends,
stock splits, reclassifications, or issuances of common shares of stock
of the Company or rights thereto. Revenues from Motorola for the years
ended March 31, 1998, 1999, and 2000 were $1,428, $2,227, and $592,
respectively.
(13) COMMITMENTS
The Company leases certain domestic and foreign facilities under
noncancelable operating leases. Minimum annual rental commitments at
March 31, 2000 under all noncancelable operating leases are as follows:
2001 $ 484
2002 $ 125
2003 $ 54
2004 $ 54
2005 $ 31
Thereafter $ -
Rental expense under cancelable and non-cancelable operating leases was
$785, $832, and $573 during the years ended March 31, 1998, 1999, and
2000, respectively.
F-19
<PAGE>
MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
($ in thousands, except share and per share amounts)
(14) SALE OF SERIES I PREFERRED STOCK
On April 19, 2000 the Company entered into a Securities Purchase
Agreement (the Agreement) with Elliott Associates, L.P. and Westgate
International, L.P. pursuant to which Elliott and Westgate purchased a
total of 3,500 shares of Series I Cumulative Convertible Preferred
Stock of the Company for $3,500,000. In addition, pursuant to the
Agreement, Elliott and Westgate currently hold two separate warrants to
purchase an additional 87,500 common shares in aggregate of stock of
the Company at an exercise price of $5.3116 per share, and options to
purchase an additional 618,595 shares in aggregate of common stock at
an exercise price of $4.8497 per share. The Series I Preferred Stock is
convertible into common stock at a conversion price of the lower of (a)
$4.8497 or (b) the average of the two lowest closing bid prices of the
common stock, as recorded on Nasdaq, during the fifteen trading days
prior to the conversion date. The warrants are exercisable at any time,
and expire on April 19, 2005. The options are exercisable at any time,
and expire one year from the date the Registration Statement
registering such common shares is declared effective by the SEC.
(15) CONVERSION OF SERIES I PREFERRED STOCK (UNAUDITED)
On June 14, 2000 Elliott Associates, L.P. and Westgate International, L.P.
converted a total of 1,578 shares of Series I Preferred Stock to
668,556 common shares in aggregate, at a conversion price of $2.375 per
common share.
F-20
