<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27772
METROWERKS INC.
(exact name of registrant as specified in its charter)
CANADA N/A
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9801 METRIC BLVD., SUITE 100, AUSTIN, TEXAS 78758
(Address of principal executive offices) (zip code)
(512) 873-4700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Number of shares of common stock outstanding as of June 15, 1998: 12,913,030
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PART I: FINANCIAL INFORMATION
- -----------------------------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited)
as of July 31, 1997 and April 30, 1998............................... 2
Consolidated Statements of Operations (Unaudited) for the three
and nine month periods ended April 30, 1997 and 1998................. 3
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) for the nine month period ended April 30, 1998........... 4
Consolidated Statements of Cash Flows (Unaudited) for the three
and nine month periods ended April 30, 1997 and 1998................. 5
Notes to Consolidated Financial Statements (Unaudited)............... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk........... 12
PART II: OTHER INFORMATION
- --------------------------
Item 1 Legal Proceedings.................................................... 13
Item 2 Changes in Securities and Use of Proceeds............................ 13
Item 3 Defaults Upon Senior Securities...................................... 13
Item 4 Submission of Matters to a Vote of Securities Holders................ 13
Item 5 Other Information.................................................... 13
Item 6 Exhibits and Reports on Form 8-K..................................... 13
Signature.................................................................... 13
1
<PAGE>
PART 1. FINANCIAL INFORMATION
- -----------------------------
ITEM1. CONSOLIDATED FINANCIAL STATEMENTS
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
July 31, April 30,
ASSETS 1997 1998
---------------- ----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,042 $ 10,707
Accounts receivable, net 5,027 6,722
Inventories 302 211
Income and other taxes recoverable 295 104
Prepaid expenses and other current assets 456 840
---------------- ----------------
Total current assets 11,122 18,584
Long-term receivable - 792
Property and equipment, net 3,046 2,911
---------------- ----------------
Total assets $14,168 $ 22,287
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,913 $ 1,497
Accrued liabilities 1,498 2,154
Deferred revenue 195 128
---------------- ----------------
Total current liabilities 3,606 3,779
Stockholders' equity:
Capital stock
Preferred stock, Class A and B, no par value,
unlimited number authorized; none outstanding - -
Common stock, no par value, unlimited number
authorized; shares issued and outstanding 11,537,500
and 12,882,330, respectively 17,596 29,427
Accumulated deficit (6,984) (10,707)
Cumulative translation adjustment (50) (212)
---------------- ----------------
Total stockholders' equity 10,562 18,508
---------------- ----------------
Total liabilities and stockholders' equity $14,168 $ 22,287
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
================================================================================
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
1997 1998 1997 1998
------------ ---------- ----------- ----------
Revenues:
<S> <C> <C> <C> <C>
Revenues, net, prior to non-recurring charge $3,615 $ 5,537 $12,065 $16,700
Non-recurring charge (Note 6) - (2,500) - (2,500)
------------ ---------- ----------- ----------
Revenues, net 3,615 3,037 12,065 14,200
Cost of sales 958 606 3,501 2,424
Operating expenses:
Research and development 1,828 2,595 4,214 7,060
Selling, administrative and technical support 2,198 2,754 5,673 7,601
Depreciation 324 398 794 1,192
Non-recurring charge 4,297 - 4,297 -
------------ ---------- ----------- ----------
Total operating expenses 8,647 5,747 14,978 15,853
Loss from operations (5,990) (3,316) (6,414) (4,077)
Other income:
Interest income and other, net 70 119 284 354
------------ ---------- ----------- ----------
Net loss $ (5,920) $(3,197) $(6,130) $(3,723)
============ ========== =========== ==========
Net loss per share, basic and diluted $ (0.51) $ (0.25) $ (0.53) $ (0.31)
============ ========== =========== ==========
Shares used in per share calculation,
basic and diluted 11,529 12,867 11,523 12,109
============ ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
Cumulative Total
Common Stock Special Warrants Accumulated Translation Stockholders'
Shares Amount Shares Amount Deficit Adjustment Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1997 11,537,500 $17,596 - $ - $ (6,984) $ (50) $10,562
Exercise of common stock
options 38,286 126 - - - - 126
Issuance of special warrants,
net of offering costs of
$301,000 (Note 4) - - 1,500,000 11,718 - - 11,718
Foreign currency translation
adjustment - - - - - (11) (11)
Net earnings - - - - 237 - 237
- ---------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1997 11,575,786 $17,722 1,500,000 $11,718 $ (6,747) $ (61) $22,632
Exercise of common stock
options 34,628 53 - - - - 53
Conversion of special
warrants (Note 4) 1,475,000 13,759 (1,500,000) (11,718) - - 2,041
Purchase and retirement
of officers' shares (Note 4) (225,000) (2,166) - - - - (2,166)
Foreign currency translation
adjustment - - - - - (106) (106)
Net loss - - - - (763) - (763)
- ---------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 12,860,414 $29,368 - $ - $ (7,510) $ (167) $21,691
Exercise of common
stock options 21,916 59 - - - - 59
Foreign currency
translation adjustment - - - - - (45) (45)
Net loss - - - - (3,197) - (3,197)
- ---------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1998 12,882,330 $29,427 - $ - $(10,707) $ (212) $18,508
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. THOUSANDS OF DOLLARS)
================================================================================
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
1997 1998 1997 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,920) $ (3,197) $ (6,130) $ (3,723)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation of property and equipment 324 398 794 1,192
Amortization of software development costs - - 289 -
Non-recurring charge to operations 4,297 - 4,297 -
Changes in assets and liabilities:
Accounts receivable 1,791 945 (11) (1,857)
Other current assets (1,709) (233) (2,050) (102)
Long-term receivable - 114 - (792)
Current liabilities 455 246 624 173
--------------- -------------- --------------- ---------------
Net cash used in operating activities (762) (1,727) (2,187) (5,109)
--------------- -------------- --------------- ---------------
Cash flows from investing activities:
Additions to property and equipment (301) (477) (2,147) (1,057)
Software development costs capitalized - - (783) -
Acquisition cost (471) - (471) -
--------------- -------------- --------------- ---------------
Net cash used in investing activities (772) (477) (3,401) (1,057)
--------------- -------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from issue of special warrants - - - 11,593
Proceeds from exercise of stock options 79 59 150 238
--------------- -------------- --------------- ---------------
Net cash provided by financing activities 79 59 150 11,831
--------------- -------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (1,455) (2,145) (5,438) 5,665
Cash and cash equivalents at beginning of period 7,515 12,852 11,498 5,042
--------------- -------------- --------------- ---------------
Cash and cash equivalents at end of period $ 6,060 $10,707 $ 6,060 $10,707
=============== ============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(U.S. THOUSANDS OF DOLLARS)
===============================================================================
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. Operating
results for the nine months ended April 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended July 31, 1998, or for any
other interim period. For further information, refer to the consolidated
financial statements and footnotes thereto included in Form 10-K for the year
ended July 31, 1997 of Metrowerks Inc. and subsidiaries (the "Company").
The consolidated financial statements include the accounts of Metrowerks Inc.
and its two wholly-owned subsidiaries, Metrowerks Corporation, a Texas
corporation, which was formed in June 1994, and Metrowerks Co. Ltd., a Japanese
corporation, which was formed in October 1996. All significant intercompany
transactions and balances have been eliminated.
Certain amounts have been reclassified in the April 30, 1997 consolidated
financial statements to conform to the current period classifications.
Note 2 - Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Inventories consist principally of finished goods, books and
third party hardware at April 30, 1998 and July 31, 1997.
Note 3 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
Management does not believe the implementation of SFAS No. 130 and No. 131 will
have a material effect on its consolidated financial statements.
Note 4 - Special Warrants
On October 21, 1997, the Company entered into an Underwriting Agreement for the
purpose of issuing to certain underwriters by way of private placement in
Canada, 1,500,000 special warrants ("Special Warrants") at a price of $10.08
each ($9.62 net of underwriters' fee). Upon the exercise of the 1,500,000
Special Warrants thereby sold, 1,250,000 shares were to have been issued from
treasury by the Company and 250,000 were to have been transferred by three
officers of the Company. These arrangements were modified in that the Company
agreed to assume two of the officers' obligations to deliver an aggregate of
225,000 Common Shares upon the exercise of the Special Warrants in consideration
of the payment by those officers of the proceeds received by them in connection
with the offering of the Special Warrants. The special warrants were exercised
in January 1998. Accordingly, 1,475,000 shares were issued from treasury by the
Company and 25,000 shares were transferred by an officer of the Company. The
225,000 Common Shares owned by the other two officers of the Company were
purchased by the Company for cancellation in December 1997.
6
<PAGE>
Note 5 - Computation of Net Loss Per Share
The Company has adopted the provisions of SFAS No. 128 effective April 30, 1998.
SFAS No. 128 requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by giving effect to all dilutive potential
common shares that were outstanding during the period. For the Company,
dilutive potential common shares consist of the incremental common shares
issuable upon the exercise of stock options for all periods. In accordance with
SFAS No. 128, all prior period earnings per share amounts have been restated to
reflect this method of calculation.
Basic and diluted earnings per share are calculated as follows for the three and
nine month periods ended April 30, 1997 and 1998 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
April 30, April 30,
1997 1998 1997 1998
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net loss for the period $(5,920) $(3,197) $(6,130) $(3,723)
================ ================ ================ ================
Weighted average number of common shares
issued and outstanding 11,529 12,867 11,523 12,109
Common stock equivalents:
Employee stock options - - - -
---------------- ---------------- ---------------- ----------------
Average common and common stock equivalents 11,529 12,867 11,523 12,109
================ ================ ================ ================
Basic and diluted loss per share $ (0.51) $ (0.25) $ (0.53) $ (0.31)
================ ================ ================ ================
</TABLE>
Outstanding options to purchase the following shares of common stock at the
indicated range of price per share during the three and nine month periods ended
April 30, 1997 and 1998, were not included in the computation of diluted
earnings per share because the inclusion of the options in the diluted per share
calculation would be antidilutive.
<TABLE>
<CAPTION>
Range of
Three months ended: Options excluded exercise prices
----------------------- ------------------------
<S> <C> <C>
April 30, 1998 1,441 $1.05 - $ 9.37
April 30, 1997 1,242 $1.07 - $13.06
Range of
Nine months ended: Options excluded exercise prices
----------------------- ------------------------
April 30, 1998 1,441 $1.05 - $ 9.37
April 30, 1997 1,242 $1.07 - $13.06
</TABLE>
Note 6 - Non-recurring charge
In the third quarter of fiscal 1998 the Company recorded a non-recurring charge
of $2.5 million to reflect a change in the Company's strategy for selling and
distributing its embedded software products. The Company has historically sold
its products indirectly through third party distributors. As Metrowerks has
moved into the embedded systems marketplace, the Company has determined that
selling its products directly is a more effective and efficient selling
approach. Accordingly, in the third quarter, the Company recorded the charge to
reserve for the remaining inventory at third party distributors.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the consolidated financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. Statements in this report
concerning expectations for the future constitute forward-looking statements
which are subject to a number of known and unknown risks, uncertainties and
other factors which may cause actual results, performance or achievements of the
Company or industry trends to differ materially from those expressed or implied
by such forward looking statements. Relevant risks and uncertainties include,
among others, fluctuations in quarterly results, the development of new
products, technological change, the Company's entry into the embedded systems
market, the dependence on key personnel, the protection of proprietary
technology, the quality of the Company's software products, reliance on
international sales, increased competition, the superior financial strength of
certain competitors, the Company's limited history of profitability, the
management of growth, potential litigation, the need for additional funds, and
the dependence on third-party distribution channels. Other risk factors which
should be read in conjunction with the consolidated financial condition and
results of operations are included from time to time in the Company's other
filings with the securities commissions in Canada and the United States
Securities and Exchange Commission, press releases and other communications. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
THE COMPANY
Metrowerks designs, develops, markets and supports software programming tools.
The Company's products are used primarily by professional software programmers
and by programmers in the academic community to develop applications software
for a variety of platforms including Windows 95 and Windows NT operating
systems used by PCs; the MacOS operating system used by the Macintosh and Power
Macintosh computers; and for operating systems and microprocessors used in the
embedded systems market. Examples of the Company's tools used in the embedded
systems market include CodeWarrior for Sony PlayStation, CodeWarrior for
PalmPilot, CodeWarrior for PowerPC and CodeWarrior for MIPS.
The Company derives substantially all of its revenue from a limited number of
products. The Company's future revenue is substantially dependent upon the
continued acceptance of its CodeWarrior products. The Company is also in the
process of developing a number of new products and believes that its future
revenue will depend upon the commercial success of these new products.
The Company also derives a portion of its revenue from third party product
development agreements pursuant to which the Company receives payments from a
third party for developing programming tools for a particular platform,
operating system or programming language. The amount of revenue the Company
receives from this particular source will depend upon the number of such
agreements to which the Company is a party during such period. Further, there
can be no assurance that the Company will be able to continue to enter into such
development agreements in the future. The Company's product development efforts
have also entailed significant research and development expenditures. In
addition, to enhance its competitive position in the future, it will be
necessary for the Company to broaden its product offerings. This objective may
require expansion of the Company's internal product development efforts or
acquisitions of or investments in complementary businesses, products or
technologies. Furthermore, if the Company were unable to enter into new
software development agreements in the future, the Company would, at a minimum,
have to increase its research and development expenditures. These higher
expense levels combined with fluctuations in revenue could affect the Company's
quarterly and annual results and result in fluctuations in its operating
results. The Company intends to continue to invest significant amounts in
expanding its product line and accordingly may continue to experience losses and
volatility of revenue and operating results in future periods. The Company
believes that the recent growth rates reflected in results of operations for
prior periods should not be relied upon as an indication of growth rates for
future periods.
In May, the Company combined its two facilities in Austin, Texas into one
primary location. The Company has committed to certain expenditures for
leasehold improvements and moving costs which will be incurred in the fourth
quarter of fiscal 1998. The funds to satisfy these commitments will come from
cash currently available.
8
<PAGE>
RECENT EVENTS
In the third quarter of fiscal 1998 the Company recorded a non-recurring charge
of $2.5 million to reflect a change in the Company's strategy for selling and
distributing its embedded software products. The Company has historically sold
its products indirectly through third party distributors. As Metrowerks has
moved into the embedded systems marketplace, the Company has determined that
selling its products directly is a more effective and efficient selling
approach. Accordingly, in the third quarter, the Company recorded the charge to
reserve for the remaining inventory at third party distributors. The Company
also announced that effective May 1, 1998 the Company increased the retail
prices of its embedded software products from $899 to between $2,000 and $3,000.
The Company also announced support for three new microprocessor architectures in
the third quarter. Metrowerks will develop CodeWarrior development tools for
Motorola's M.CORE microprocessor and Motorola's AltiVec technology, their next
generation PowerPC architecture. The M.CORE architecture is targeted for
integrated wireless, automotive, consumer electronics and general market
applications while the AltiVec technology is designed for increased levels of
performance in multimedia. In addition, Metrowerks announced that it will be
supporting AMD-3D Technology with its CodeWarrior tools. AMD-3D technology is
targeted for programmers, such as game developers who are writing applications
with extensive graphics and multimedia requirements.
The Company announced in the third quarter that a new subsidiary, Quorum
Technologies, had been formed to provide support to Metrowerks and Metrowerks
partners who use GCC compilers and linkers based on the Free Software Foundation
or Cygnus Solutions codebases.
Metrowerks also announced that it would develop CodeWarrior software development
tools for Novell's NetWare Server Operating System. The tools will include the
CodeWarrior Windows-hosted integrated development environment with C/C++
compilers and Novell's debugger, libraries and linkers. Metrowerks began
shipping the tools in the third quarter of fiscal 1998.
The Company recently announced that CodeWarrior would be the primary development
environment for the QNX 4.2 and QNX Neutrino Realtime Operating Systems from QNX
Software Systems Ltd. ("QNX"). The QNX 4.2 and QNX Neutrino Realtime Operating
Systems are scaleable, fault-tolerant OSes with fully distributed processing.
Applications include telecom/datacom devices, industrial controllers, office
equipment, medical instrumentation, and consumer electronics.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
1997 1998 1997 1998
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues, net 100.0% 100.0% 100.0% 100.0%
Cost of sales 26.5 20.0 29.0 17.1
Product margins (1) 61.3 72.1 61.0 79.0
Operating expenses:
Research and development 50.6 85.4 34.9 49.7
Selling, administrative
and technical support 60.8 90.7 47.0 53.5
Depreciation of property
and equipment 9.0 13.1 6.6 8.4
Non-recurring charge 118.9 35.6
Total operating
expenses 239.3 189.2 124.1 111.6
Operating loss (165.8) (109.2) (53.1) (28.7)
Other income:
Interest income and other 1.9 3.9 2.4 2.5
Net loss (163.9) (105.3) (50.7) (26.2)
</TABLE>
(1) Product margins are based on net software product revenues and cost of
software product sales only.
9
<PAGE>
REVENUE
The Company recognizes revenue from the sale of its products upon the later of
shipment or the satisfaction of all significant Company obligations. All
revenue is derived from unaffiliated customers. Product returns are estimated
and provided for at the time of sale. Such return allowances as a percentage of
revenues have varied significantly over recent years and periods, reflecting the
Company's experience in product returns as it has significantly expanded the
proportion of its sales through third-party distribution channels and increased
its product portfolio. The Company has reduced significantly its dependence on
third party distributors for its embedded software products, however the Company
expects return allowances for its desktop products will continue to vary in the
future. The Company's agreements with its distributors generally provide the
distributors with limited rights to return unsold inventories under a stock
balancing program. The Company monitors activities of its distributors in an
effort to minimize excessive returns and establishes its reserves based on its
estimates of expected returns. While historically the Company's returns have
been within expectations, the setting of return allowances requires judgments
regarding such factors as future competitive conditions and product acceptance,
which can be difficult to predict.
The Company also derives revenue from product development agreement fees.
Product development agreement fees related to software development are
recognized on a percentage of completion basis over the term of the contract,
and are included in revenue in the income statement.
Revenue, a substantial portion of which has been derived from sales of the
Company's CodeWarrior professional programming tools, increased 53.2% from $3.62
million in the third quarter of fiscal 1997 to $5.54 million in the third
quarter of fiscal 1998, prior to the non-recurring charge of $2.50 million in
the current quarter. The increase in revenues is due in large part to an
increase of $2.27 million in net product sales from $2.32 million in the third
quarter of fiscal 1997 to $4.59 million in the third quarter of fiscal 1998,
prior to the non-recurring charge. Product sales after the non-recurring charge
were $2.09 million. Product development agreement revenues for the third
quarter of fiscal 1998 decreased to $950,000 from $1.30 million in the third
quarter of fiscal 1997 as the Company has shifted its focus towards direct
product sales. Revenues increased 38.4% from $12.07 million for the nine month
period ended April 30, 1997 to $16.70 million for the nine month period ended
April 30, 1998, prior the non-recurring charge. The increase is due primarily
to an increase in product sales of $4.29 million for the nine month period ended
April 30, 1998, prior to the non-recurring charge.
COST OF SALES AND PRODUCT MARGINS
Cost of sales consists primarily of the cost of product media and duplication,
the cost of packaging materials, royalties and shipping expenses. Costs
associated with product development agreement revenues are included in research
and development expenses, are not separately identified and approximate revenue.
Cost of sales decreased from $958,000 in the third quarter of fiscal 1997 to
$606,000 in the third quarter of fiscal 1998. Of these amounts, the cost of
gross software sales was $857,000 in the third quarter of fiscal 1997 and
$572,000 in the third quarter of fiscal 1998, representing 34.6% and 12.1% of
gross software sales, respectively. Cost of sales for the nine month period
ended April 30, 1997 was $3.50 million and $2.42 million for nine month period
ended April 30, 1998, a decrease of 30.8%. The cost of gross software sales was
$3.26 million for the nine month period ended April 30, 1997 and $2.12 million
for the nine month period ended April 30, 1998, representing 34.7% and 15.2% of
gross software sales respectively. The Company has focused on its
manufacturing, fulfillment and distribution operations and has seen significant
improvements in its gross margin as a result. Additionally, the Company has
seen an increase in the amount of direct software sales to customers which
reduce the amount of fulfillment and distribution costs resulting in higher
margins for the quarter. In the second quarter of fiscal 1998, cost of gross
software sales totaled $599,000 or 13.1% of gross software sales
OPERATING EXPENSES
Research and Development. Research and development costs are expensed as
incurred. Eligible software costs incurred between the time a product achieves
technological and financial feasibility until its general release to customers
are capitalized and amortized on a straight-line basis over the economic life
of the product, which is generally three years. The Company evaluates the
realizable value of capitalized software on an ongoing basis, relying on a
number of factors, including operating results, business plans, budgets and
economic projections. In addition, the Company evaluates non-financial data
such as market trends and product development cycles. Research and development
costs are reduced by related grants and investment tax credits.
10
<PAGE>
Research and development costs increased from $1.83 million in the third quarter
of fiscal 1997 to $2.60 million in the third quarter of fiscal 1998,
representing 50.6% and 85.4% of net revenues, respectively. For the nine month
period ended April 30, 1997 research and development expenditures were $4.21
million compared to $7.06 million for the nine month period ended April 30,
1998, representing 34.9% and 49.7% of net revenues, prior to the non-recurring
charge, respectively. The percentage increase for the third quarter fiscal 1998
and the nine month period ended April 30, 1998 is due to the non-recurring
charge on sales in the third period. Prior to the non-recurring charge research
and development costs represent 46.9% of net revenues for the third quarter
fiscal 1998 and 42.3% for the nine month period ended April 30, 1998. Research
and development expenditures consist primarily of personnel-related costs.
Increases in expenses were due primarily to the growth of the Company's research
and development team from 80 employees to 120 employees. Research and
development expenses in the second quarter of fiscal 1998 were $2.38 million or
47.5% of net revenues.
Selling, administrative and technical support. Selling, administrative and
technical support costs increased from $2.20 million in the third quarter of
fiscal 1997 to $2.75 million in the third quarter of fiscal 1998, representing
60.8% and 90.7% of net revenues, respectively. Selling, administrative and
technical support costs increased from $5.67 million for the nine month period
ended April 30, 1997 to $7.60 million for the nine month period ended April 30,
1998, representing 47.0% and 53.5% of net revenues, prior to the non-recurring
charge, respectively. The percentage increase is due to the non-recurring charge
against sales in the third quarter of fiscal 1998. Prior to the non-recurring
charge selling, administrative and technical support costs represent 49.7% of
net revenues for the third quarter of fiscal 1998 and 45.5% for the nine month
period ended April 30, 1998. This increase in absolute costs is due to an
increase in selling, administrative and technical support headcount from 76
employees at April 30, 1997 to 92 employees at April 30, 1998. In the second
quarter of fiscal 1998, selling administrative and technical support costs
totaled $2.47 million or 49.4% of net revenues.
Depreciation expense totaled $324,000 in the third quarter of fiscal 1997,
$408,000 in the second quarter of fiscal 1998, and $398,000 in the third
quarter of fiscal 1998. For the nine month period ended April 30, 1997
depreciation expense totaled $794,000 compared to $1.19 million for the nine
month period ended April 30, 1998. The increase in depreciation expense from
year to year is due to the Company's investment in property and equipment
necessary to provide support for the Company's growth during this period.
LIQUIDITY AND CAPITAL RESOURCES
On October 21, 1997, the Company entered into an Underwriting Agreement for the
purpose of issuing to certain underwriters by way of private placement,
1,500,000 special warrants ("Special Warrants") at a price of $10.08 each ($9.62
net of underwriters' fee). Upon the exercise of the 1,500,000 Special Warrants
thereby sold, 1,250,000 shares were to have been issued from treasury by the
Company and 250,000 were to have been transferred by three officers of the
Company. These arrangements were modified in that the Company agreed to assume
two of the officers' obligations to deliver an aggregate of 225,000 Common
Shares upon the exercise of the Special Warrants in consideration of the payment
by those officers of the proceeds received by them in connection with the
offering of the Special Warrants. The special warrants were exercised in January
1998. Accordingly, 1,475,000 shares were issued from treasury by the Company
and 25,000 shares were transferred by an officer of the Company. The 225,000
Common Shares owned by the other two officers of the Company were purchased by
the Company for cancellation in December 1997. The Company received net
proceeds of $12.02 million from the offering. The proceeds are net of
underwriter's fees of $580,938 and will be further reduced by anticipated
offering costs of $426,000 which were included in accrued liabilities at January
31, 1998.
Net cash used in operating activities was $5.11 million and $2.19 million for
the nine-month periods ended April 30, 1998 and 1997, respectively. The decrease
in cash from operations is primarily due to the loss from operations and growth
in accounts receivable during the period. Net cash used in investing activities
was $1.06 million and $3.40 million for the nine-month periods ended April 30,
1998 and 1997, respectively. These expenditures were primarily for the
acquisition of furniture and equipment to support the increase in headcount.
Expenditures for the nine-month period ended April 30, 1997 also included the
costs related to the investments for the office in Tokyo, Japan, the acquisition
of fulfillment operations, and the acquisition of the principle assets of the
Latitude Group, Inc.. Net cash provided by financing activities was $11.83
million and $150,000 for the nine-month periods ended April 30, 1998 and 1997,
respectively.
YEAR 2000 COMPLIANCE
"Year 2000 Compliant" means that a program, when used in accordance with its
associated documentation, will (a) initiate and operate, (b) correctly store,
represent, and process dates, and (c) not cause or result in an abnormal
termination or ending, when processing data containing dates in the Year 2000
and in any preceding and following years, provided that all third party products
that exchange date data with the program do so properly and accurately and in a
form and format compatible with the program.
11
<PAGE>
The products provided by Metrowerks process dates only to the extent that these
products use date data provided by the host or target operating system for date
representations used in internal processes, such as file modifications. Any Year
2000 Compliance issues resulting from the operation of the products are
therefore necessarily subject to the Year 2000 Compliance of the relevant host
or target operating system. The Company has directed its customers to the
relevant statements of Microsoft Corporation, Sun Microsystems, Inc., Apple
Computer, Inc., and other host or target operating systems relating to the Year
2000 Compliance of their operating systems. Except as expressly described above,
the products, in themselves, do not process date data and therefore do not
implicate Year 2000 Compliance issues.
The Company has also assessed the readiness of its internal computer systems and
does not expect to incur significant costs in implementing Year 2000 changes if
necessary. There can be no assurance that such changes will be fully completed
in a timely manner. Additionally, the Company could be adversely impacted by
Year 2000 issues faced by major distributors, suppliers, customers and financial
service organizations with which the company interacts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
Management does not believe the implementation of SFAS No. 130 and No. 131 will
have a material effect on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 IS NOT APPLICABLE AND HAS BEEN OMITTED.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 21, 1997, the Company entered into an Underwriting Agreement for
the purpose of issuing to certain underwriters by way of private placement
in Canada, 1,500,000 special warrants ("Special Warrants") at a price of
$10.08 each ($9.62 net of underwriters' fee). Upon the exercise of the
1,500,000 Special Warrants thereby sold, 1,250,000 shares were to have been
issued from treasury by the Company and 250,000 were to have been
transferred by three officers of the Company. These arrangements were
modified in that the Company agreed to assume two of the officers'
obligations to deliver an aggregate of 225,000 Common Shares upon the
exercise of the Special Warrants in consideration of the payment by those
officers of the proceeds received by them in connection with the offering
of the Special Warrants. The special warrants were exercised in January
1998. Accordingly, 1,475,000 shares were issued from treasury by the
Company and 25,000 shares were transferred by an officer of the Company.
The 225,000 Common Shares owned by the other two officers of the Company
were purchased by the Company for cancellation in December 1997.
The underwriters of this private placement were RBC Dominion Securities
Inc., CIBC Wood Gundy Securities Inc., and Gordon Capital Corporation.
ITEMS 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON THE FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
April 30, 1998.
For further information, refer to the Form 10-K for the year ended July 31, 1997
of the company.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Metrowerks Inc.
Date: June 15, 1998 By: /s/ James H. Welch
-----------------------------------
James H. Welch,
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
METROWERKS INC.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGE 2
AND 3 OF THE COMPANY'S FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED APRIL
30, 1998 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 3,270
<SECURITIES> 7,437
<RECEIVABLES> 6,938
<ALLOWANCES> (216)
<INVENTORY> 211
<CURRENT-ASSETS> 18,584
<PP&E> 5,906
<DEPRECIATION> (2,995)
<TOTAL-ASSETS> 22,287
<CURRENT-LIABILITIES> 3,779
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0
0
<COMMON> 29,427
<OTHER-SE> (10,919)
<TOTAL-LIABILITY-AND-EQUITY> 22,287
<SALES> 2,087
<TOTAL-REVENUES> 3,037
<CGS> 606
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<OTHER-EXPENSES> 5,600
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,197)
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