<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, 1999
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
incorporation or organization) Identification Number)
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 11, 1999: 14,636,888
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Part I: Financial Information
- -----------------------------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets as of July 31, 1998 and April 30, 1999
(unaudited)....................................................... 2
Consolidated Statements of Operations (unaudited) for the three-month
and nine-month periods ended April 30, 1998 and 1999.............. 3
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
for the three-month and nine-month periods ended April 30, 1998 and
1999.............................................................. 4
Consolidated Statements of Cash Flows (unaudited) for the nine-month
periods ended April 30, 1998 and 1999............................. 5
Notes to Consolidated Financial Statements........................ 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........ 13
Part II: Other Information
- --------------------------
Item 1 Legal Proceedings................................................. 14
Item 2 Changes in Securities and Use of Proceeds......................... 14
Item 3 Defaults Upon Senior Securities................................... 14
Item 4 Submission of Matters to a Vote of Securities Holders............. 14
Item 5 Other Information................................................. 14
Item 6 Exhibits and Reports on Form 8-K.................................. 14
Signature.................................................................. 14
1
<PAGE>
PART 1. FINANCIAL STATEMENTS
- -----------------------------
ITEM1. CONSOLIDATED FINANCIAL STATEMENTS
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 31, April 30,
1998 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,708 $ 5,916
Short-term investments 400 400
Accounts receivable, net 6,650 12,069
Income and other taxes recoverable 254 165
Other current assets 1,097 1,158
---------------- ----------------
Total current assets 15,109 19,708
Long-term trade accounts receivable 1,039 2,192
Property and equipment, net 4,363 3,876
---------------- ----------------
Total assets $ 20,511 $ 25,776
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,859 $ 2,363
Accrued liabilities 1,712 1,215
Deferred revenue 722 1,458
---------------- ----------------
Total current liabilities 4,293 5,036
Stockholders' equity:
Capital stock:
Preferred stock, Class A and B, no par value,
unlimited as to number; none outstanding - -
Common stock, no par value, unlimited as to number;
shares issued and outstanding 12,919,030 and
14,636,888, respectively 29,465 35,769
Accumulated deficit (12,881) (14,784)
Cumulative translation adjustment (366) (245)
---------------- ----------------
Total stockholders' equity 16,218 20,740
---------------- ----------------
Total liabilities and stockholders' equity $ 20,511 $ 25,776
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
[restated]
<S> <C> <C> <C> <C>
Revenue, net $ 3,037 $ 7,561 $14,000 $20,476
Cost of product sales 606 522 2,424 1,616
Operating expenses:
Research and development 2,595 3,312 7,060 9,727
Selling, administrative and technical
support 2,754 3,588 7,601 9,745
Depreciation 398 467 1,192 1,467
-------------- -------------- -------------- --------------
Total operating expenses 5,747 7,367 15,853 20,939
-------------- -------------- -------------- --------------
Loss from operations (3,316) (328) (4,277) (2,079)
Other income:
Interest income and other, net 119 91 354 176
-------------- -------------- -------------- --------------
Net loss $(3,197) $ (237) $(3,923) $(1,903)
============== ============== ============== ==============
Net loss per share, basic and diluted $(0.25) $(0.02) $(0.32) $(0.14)
============== ============== ============== ==============
Shares used in per share calculation:
Basic and diluted 12,867 14,311 12,109 13,374
============== ============== ============== ==============
</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)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30, April 30,
1998 1999 1998 1999
--------------- --------------- -------------- ---------------
(restated)
<S> <C> <C> <C> <C>
Common stock and paid-in capital
Balance, beginning of period $ 29,368 $ 29,516 $ 17,596 $ 29,465
Common stock issued upon option exercise 59 5 238 56
Common stock issued upon conversion of
special warrants - 6,248 13,759 6,248
Purchase and retirement of officers' shares - - (2,166) -
--------------- --------------- -------------- ---------------
Balance, end of period 29,427 35,769 29,427 35,769
Accumulated deficit and cumulative translation adjustment
Balance, beginning of period (7,877) (14,690) (7,034) (13,247)
Net loss (3,197) (237) (3,923) (1,903)
Foreign currency translation adjustments (45) (102) (162) 121
--------------- --------------- -------------- ---------------
Comprehensive loss (3,242) (339) (4,085) (1,782)
--------------- --------------- -------------- ---------------
Balance, end of period (11,119) (15,029) (11,119) (15,029)
--------------- --------------- -------------- ---------------
Total stockholders' equity $ 18,308 $ 20,740 $ 18,308 $ 20,740
=============== =============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOWS (unaudited)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended
April 30,
1998 1999
--------- ---------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,923) $(1,903)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 1,192 1,467
Changes in assets and liabilities:
Accounts receivable (2,370) (4,832)
Other current assets (109) (7)
Long-term receivables (792) (1,153)
Current liabilities 916 106
--------- ---------
Net cash used in operating activities (5,086) (6,322)
Cash flows from investing activities:
Purchase of available-for-sale securities (400) -
Additions to property and equipment (1,057) (852)
--------- ---------
Net cash used in investing activities (1,457) (852)
Cash flows from financing activities:
Net proceeds from issue of special warrants 11,593 6,248
Proceeds from exercise of stock options 238 56
--------- ---------
Net cash provided by financing activities 11,831 6,304
Effect of exchange rate changes on cash and cash equivalents (23) 78
Increase (decrease) in cash and cash equivalents 5,265 (792)
Cash and cash equivalents at beginning of period 5,042 6,708
--------- ---------
Cash and cash equivalents at end of period $10,307 $ 5,916
========= =========
Non-cash investing and financing activities:
Property and equipment financed by
accounts payable $ - $ 128
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
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 of financial
position and results of operations. Operating results for the nine months ended
April 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended July 31, 1999, 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, 1998 of
Metrowerks Inc. and Subsidiaries (the "Company").
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Metrowerks Corporation, a Texas corporation,
Metrowerks Corporation's wholly-owned subsidiaries, Metrowerks Co. Ltd., a
Japanese corporation, and Metrowerks GmbH, a German corporation. All
significant intercompany transactions and balances have been eliminated.
Certain amounts have been reclassified in the April 30, 1998 consolidated
financial statements to conform to the current period classifications. All
dollar amounts presented are denominated in United States dollars.
Note 2 - 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 ("1997 Special Warrants") at a price of
$10.08 each ($9.62 net of underwriters' fee). Upon the exercise of the
1,500,000 1997 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 1997 Special
Warrants in consideration of the payment by those officers of the proceeds
received by them in connection with the offering of the 1997 Special Warrants.
The 1997 Special Warrants were exercised in January 1998. Accordingly,
1,475,000 new shares were issued 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 $11,593
from the offering. The proceeds are net of offering costs of $1,007.
On February 4, 1999, the Company entered into an Underwriting Agreement for the
purpose of issuing to certain underwriters by way of private placement in
Canada, 1,700,000 special warrants ("1999 Special Warrants") at a price of $4.00
each ($3.76 net of underwriters' fee). In February 1999, 1,700,000 1999 Special
Warrants were issued. Each 1999 Special Warrant entitled the holder thereof to
receive one common share of the Company. The 1999 Special Warrants were
exercised in February 1999, and accordingly, 1,700,000 new shares were issued by
the Company. The Company received net proceeds of $6,248 from the offering.
The proceeds are net of underwriter's fees and offering costs of $552.
Note 3 - Line of Credit:
During April 1998, the Company entered into a line of credit agreement with a
bank. Borrowings under the agreement may aggregate up to $1,500 and bear
interest at the bank's prime rate of interest plus one percent (8.75% as of
April 30, 1999). The agreement, which expires in January 2000, is utilized to
collateralize letters of credit issued to the Company's landlord for leasehold
improvements and to meet short-term working capital requirements which may arise
from time to time. Borrowings under the agreement are collateralized by the
assets of the Company except the Company's intellectual property. The credit
agreement contains certain minimum quarterly profitability and various financial
ratio requirements. As of April 30, 1999, the Company was not in compliance
with certain financial covenants under the agreement. This non-compliance has
been waived by the bank. However, there can be no assurance that the bank would
waive any future non-compliance. Under the agreement, the Company may not pay
dividends or make any other distribution payment on account or in redemption,
retirement or purchase of any capital stock, and the Company must also limit the
amount of funds transferred to any affiliate or affiliated company.
6
<PAGE>
Note 4 - Computation of Net Loss Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
establishes standards for computing and presenting earnings per share. SFAS No.
128 is effective for fiscal years ending after December 15, 1997.
Options to purchase the following shares of common stock at the indicated range
of price per share were outstanding during the three-month and nine-month
periods ended April 30, 1998 and 1999, but were not included in the computation
of diluted earnings per share because the inclusion of the options in the
diluted per share calculation was antidilutive:
<TABLE>
<CAPTION>
Options Range of
Excluded Exercise Prices
--------------- -------------------
<S> <C> <C>
Three months ended:
April 30, 1998 1,589,331 $1.05 - $11.77
April 30, 1999 1,637,538 $1.05 - $11.77
Nine months ended:
April 30, 1998 1,589,331 $1.05 - $11.77
April 30, 1999 1,637,538 $1.05 - $11.77
</TABLE>
Note 5 - Accounting Standards Adopted
As of August 1, 1998, the Company adopted the Accounting Standards Executive
Committee of the AICPA's Statement of Position 97-2 (SOP 97-2), Software Revenue
Recognition as amended on March 31, 1998, which delineates the accounting for
software product and maintenance revenues.
Also on August 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.
Note 6 - Restatement of Prior Periods
The accompanying results of operations, statements of changes in stockholders'
equity, statements of changes of cash flows for the nine-month period ended
April 30, 1998 have been restated to reflect a reduction in revenues and an
increase in net loss of $200. This restatement resulted from a contemporaneous
agreement to provide additional deliverables under a software development
agreement during the second quarter of fiscal year 1998. Based on the additional
deliverable under the contract, the original revenue allocation was determined
to be in error and has been restated. This remaining deliverable was conveyed to
the customer and the revenue was recognized in the fourth quarter of fiscal year
1998. The restatement resulted in a change of $14,200 prior to restatement to
revenue of $14,000 for the nine-month period ended April 30, 1998. The
restatement also resulted in a change of net loss from $3,723 prior to
restatement to $3,923 for the nine-month period ended April 30, 1998.
Accordingly, the revenue and net loss for the three-month period ended July 31,
1998 were restated from $4,855 to $5,055 and $2,173 to $1,973, respectively.
There was no effect from the restatement on the three-month period ended April
30, 1998 or the twelve-month period ended July 31, 1998.
Note 7 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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; however, it is not required in interim filings in the initial year of
adoption.
Management does not believe the implementation of SFAS No. 131 will have a
material effect on its consolidated financial statements.
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, potential fluctuations
in the Company's quarterly results, the Company's entry into the embedded
systems market, risks relating to the Company's ability to complete the
development of new products, technological change, the dependence on key
personnel, the Company's ability to protect its proprietary technology, the
quality of the Company's software products, reliance on international sales,
which involves numerous risks, fluctuation in stock price, increased
competition, the Company's limited history of profitability, the management of
growth, potential litigation, influence of existing stockholder, the need for
additional funds, year 2000 compliance, and the Company's 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
The Company's principal line of business is the research, design, development,
marketing and support of computer software development tools. The Company's
products are used primarily by professional software programmers and by
programmers in the academic community to develop applications software for
platforms using a variety of operating systems ("OS") including desktop
operating systems such as Windows 95/98/NT, Mac(R) OS, and Linux and commercial
off-the-shelf embedded operating systems, such as VxWorks, QNX, Nucleus OS(TM)
and Windows CE. CodeWarrior is also used by programmers for many proprietary
platforms such as 3Com's Palm Computing platform, Sony PlayStation,(TM) Nintendo
64, Sega Dreamcast and AG Communications' (a Lucent subsidiary) GTD-5 operating
system.
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 new versions of existing
products and believes that its future operating results will depend upon the
commercial success of these new products, new targeted platforms and operating
systems. There can be no assurance that the Company will be able to
successfully develop and introduce these products or that the Company's new
products will achieve market acceptance.
The Company expanded its sales efforts to include the establishment of OEM
relationships with various semiconductor vendors and system vendors ("OEM
partners"). Through these OEM relationships the Company typically licenses
certain CodeWarrior technologies to the OEM partner for exclusive and non-
exclusive distribution to their customers. The Company anticipates that OEM
arrangements, as described above, may account for a significant percentage of
revenue for fiscal 1999 and 2000. However, there can be no assurance that the
Company will be able to enter into future agreements or that the existing or
future agreements will result in sales of the CodeWarrior products. The
Company's annual and quarterly results may depend significantly on the Company's
ability to enter into these new OEM arrangements.
The Company also derives a significant portion of its revenue from product
development agreements under which the Company receives payments from a third
party for porting its programming tools to 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 these agreements to which
the Company is a party during a quarter and the timing of deliverables under
these agreements. 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 internal 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.
8
<PAGE>
The Company intends to continue to invest significant amounts to expand 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 revenue growth rates should not be relied upon as an indication of
revenue growth rates for future periods.
RECENT EVENTS
In March 1999, the Company announced its strategic development, distribution and
licensing agreements with Nintendo of America, Sega Enterprises, Ltd. and Sony
Computer Entertainment. The agreements provide CodeWarrior technology for the
industry's current major video game consoles: Nintendo 64 home video game
system; Sega Dreamcast from Sega Enterprises, Ltd.; PlayStation from Sony
Computer Entertainment; and the next generation PlayStation from Sony Computer
Entertainment.
The Company also released CodeWarrior for Red Hat Linux, GNU Edition in the
third quarter of fiscal 1999. The Company believes CodeWarrior is the first
commercial-grade Integrated Development Environment (IDE) to be ported to Linux.
Beginning May 1, 1999, the Company replaced the program of one-year technical
support included in the purchase of the products with a new support program that
is tiered and fee-based. The new support program for desktop products provides
initial 30 days of email and telephone support at no charge with various fee
based packages for any subsequent support. The new support program for embedded
systems products provides 90 days of email and telephone support at no charge
with subsequent technical support offered on a fee basis as a percentage of the
product sale.
Additionally, during the third quarter of fiscal 1999, the Company announced the
separation of the CodeWarrior Professional product into two, platform-specific
products effective with Release 5 of CodeWarrior for Mac OS, Professional
Edition and Release 5 of CodeWarrior for Windows, Professional Edition.
Thereafter, the Company intends to release of each product annually, with
incremental updates available throughout the year. CodeWarrior Release 5 for
both platforms is expected to release in the fourth quarter of fiscal 1999 and
is designed to support for rapid application development (RAD) with GUI builders
and wizards for Java.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of net revenue for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
1998 1999 1998 1999
---- ---- ---- ----
(restated)
<S> <C> <C> <C> <C>
Revenue, net........................................ 100.0% 100.0% 100.0% 100.0%
Cost of product sales............................... 20.0 6.9 17.3 7.9
Operating expenses:
Research and development ..................... 85.4 43.8 50.4 47.5
Selling, administrative and technical
support.................................... 90.7 47.4 54.3 47.6
Depreciation of property and equipment ....... 13.1 6.2 8.5 7.2
Total operating expenses .................. 189.2 97.4 113.2 102.3
Loss from Operations............................... (109.2) (4.3) (30.5) (10.2)
Other income:
Interest income and other .................... 3.9 1.2 2.5 0.9
Net loss........................................... (105.3) (3.1) (28.0) (9.3)
</TABLE>
Revenue
The Company recognizes revenue from the sale of its products upon product
shipment provided there are no contingencies, the Company has vendor specific
objective evidence of the values of each deliverable recognized, and collection
is probable. The Company sells its products through its direct sales force and
indirectly through distributors. 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 expects return allowances will continue to vary in the future. The
Company's agreements with its distributors generally provide the distributors
with limited rights to return
9
<PAGE>
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 recognizes revenue on its OEM arrangements under the terms of each
specific agreement. These OEM agreements typically allow platform vendors to
use and distribute versions of CodeWarrior tools, which support their platforms.
The Company anticipates that OEM arrangements, as described above, may be a
significant percentage of revenue for fiscal 1999 and 2000. The Company expects
that future quarterly results will depend significantly on the ability of the
Company to enter into new OEM agreements. However, there can be no assurance
that the Company will be able to enter into future agreements or that the
existing or future agreements will result in increased sales of the CodeWarrior
products.
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. The amount of these
revenues generally approximates the amount of the costs incurred by the Company
in performing under these agreements. These costs are expensed as research and
development expenses.
Revenue, a substantial portion of which has been derived from sales of the
Company's CodeWarrior professional programming tools, increased 149.0% from
$3.04 million in the third quarter of fiscal 1998 to $7.56 million in the third
quarter of fiscal 1999. The increase of revenues from is due in a large part to
an increase in net product sales of $4.56 million from $2.06 million in the
third quarter of fiscal 1998 to $6.62 million in the third quarter of fiscal
1999. The Company entered into several OEM agreements during the quarter, which
contributed significantly to third quarter revenues. Product development
agreement revenues for the third quarter of fiscal 1999 were $891,000, or 11.8%
of total revenues, compared to $950,000, or 31.3% of total revenues in the third
quarter of fiscal 1998. The decrease in product development agreement revenue
occurred as many of the agreements entered into by the Company were reaching
final stages and the Company began to shift its focus towards the sale of these
newly developed products. There can be no assurance that the Company will be
able to continue to enter into such development agreements in the future. Net
revenue increased 46.3% from $14.00 million for the nine-month period ended
April 30, 1998 to $20.48 million for the nine-month period ended April 30, 1999.
Note, revenue amounts for the third quarter of fiscal 1998 are net of a one-time
charge of $2.50 million related to a change in the Company's strategy for
selling and distributing embedded software products. As the Company determined
that selling these products directly was more effective and efficient selling
approach, the Company recorded the charge to reserve for remaining embedded
software products at third party distributors.
Cost of Product Sales and Product Margins
Cost of product sales consists primarily of the cost of product media and
duplication, the cost of packaging materials, royalties, shipping expenses and
cost of third party hardware. Costs associated with product development
agreement revenues are included in research and development expenses, are not
separately identified and approximate revenue attributable to these agreements.
Cost of sales decreased from $606,000 in the third quarter of fiscal 1998 to
$522,000 in the third quarter of fiscal 1999. Of these amounts, the cost of net
software sales, which consists of total cost of sales less the cost of third
party hardware, was $580,000 in the third quarter of fiscal 1998 and $467,000 in
the third quarter of fiscal 1999, representing 28.1% and 7.1% of net software
sales, respectively. The cost of net software sales for third quarter fiscal
1998 represented 12.7% of net software sales prior the one-time distribution
charge. Cost of sales was $2.42 million and $1.62 million for the nine-month
period ended April 30, 1998 and 1999, respectively, a decrease of 33.3%. The
cost of net software sales was $2.13 million for the nine-month period ended
April 30, 1998 and $1.43 million for the nine-month period ended April 30, 1999,
representing 21.5% and 7.7% of net software sales respectively. The cost of net
software sales for the nine-month period ended April 30, 1998 represented 17.2%
of net software sales prior the one-time distribution charge. Product margins
have increased from the three-month and nine-month periods ended April 30, 1998
to the three-month and nine-month periods ended April 30, 1999 due to an
increase in large site license sales and certain OEM sales which have higher
margins than the sale of shrink-wrapped software to individual end users. In
the second quarter of fiscal 1999, cost of net software sales totaled $441,000
or 8.0% of net 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 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
10
<PAGE>
evaluates the realizable value of capitalized software on an ongoing basis,
relying on a number of factors, including earnings management, 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.
Research and development costs increased from $2.60 million for the third
quarter of fiscal 1998 to $3.31 million for the third quarter of fiscal 1999,
representing 85.4% and 43.8% of net revenues, respectively. For the nine-month
period ended April 30, 1998 research and development expenditures were $7.06
million compared to $9.73 million for the nine-month period ended April 30,
1999, representing 50.4% and 47.5% of net revenues, respectively. 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 120 employees at April 30, 1998 to 150 employees at
April 30, 1999. Research and development expenses in the second quarter of
fiscal 1999 were $3.26 million or 52.9% of net revenues. The research and
development team consisted of 142 employees at January 31, 1999. The Company
anticipates an increase in research and development costs in future periods to
expand its current and future product lines.
Selling, administrative and technical support. Selling, administrative and
technical support costs increased from $2.75 million in the third quarter of
fiscal 1998 to $3.59 million in the third quarter of fiscal 1999, representing
90.7% and 47.4% of net revenues, respectively. This increase is due to an
increase in selling, administrative and technical support headcount from 92
employees at April 30, 1998 to 102 employees at April 30, 1999. Selling,
administrative and technical support costs increased from $7.60 million for the
nine-month period ended April 30, 1998 to $9.75 million for the nine-month
period ended April 30, 1999, representing 54.3% and 47.6% of net revenues,
respectively. In the second quarter of fiscal 1999, selling, administrative and
technical support costs totaled $3.10 million or 50.3% of net revenues, and
headcount in selling, administrative and technical support was 105 employees.
The Company is currently expanding its sales and marketing activities in the
embedded market and anticipates that its selling, administrative and technical
support costs will continue to increase in future periods.
Depreciation. Depreciation expense totaled $398,000 in the third quarter of
fiscal 1998, $501,000 in the second quarter of fiscal 1999, and $467,000 in the
third quarter of fiscal 1999. For the nine-month period ended April 30, 1998
depreciation expense totaled $1.19 million compared to $1.47 million for the
nine-month period ended April 30, 1999. The increase in depreciation expense is
due to the Company's investment in property and equipment necessary to provide
support for the Company's growth in personnel during these periods.
Liquidity and Capital Resources
As of April 30, 1999, the Company had cash and cash equivalents of $5.92 million
and working capital of $14.67 million.
On February 4, 1999, the Company entered into an Underwriting Agreement for the
purpose of issuing to certain underwriters by way of private placement in
Canada, 1,700,000 special warrants ("1999 Special Warrants") at a price of $4.00
each ($3.76 net of underwriters' fee). In February 1999, 1,700,000 1999 Special
Warrants were issued. Each 1999 Special Warrant entitled the holder thereof to
receive one common share of the Company. The 1999 Special Warrants were
exercised in February 1999, and accordingly, 1,700,000 new shares were issued by
the Company. The Company received net proceeds of $6.25 million from the
offering. The proceeds are net of underwriter's fees and offering costs of
$552,000.
During April 1998, the Company entered into a line of credit agreement with a
bank. Borrowings under the agreement may aggregate up to $1.50 million and bear
interest at the bank's prime rate of interest plus one percent (8.75% as of
April 30, 1999). The agreement, which expires in January 2000, is utilized to
collateralize letters of credit issued to the Company's landlord for leasehold
improvements and to meet short-term working capital requirements which may arise
from time to time. Borrowings under the agreement are collateralized by the
assets of the Company except the Company's intellectual property. The credit
agreement contains certain minimum quarterly profitability and various
financial-ratio requirements. As of April 30, 1999, the Company was not in
compliance with certain financial covenants under the agreement. This non-
compliance has been waived by the bank. However, there can be no assurance that
the bank would waive any future non-compliance. Under the agreement, the
Company may not pay dividends or make any other distribution payment on account
or in redemption, retirement or purchase of any capital stock, and the Company
must also limit the amount of funds transferred to any affiliate or affiliated
company.
Net cash used in operating activities was $5.09 million and $6.32 million for
the nine-month periods ended April 30, 1998 and 1999, respectively. The increase
in cash used in operating activities is primarily due to the net loss for the
periods and growth in accounts receivable during the periods. Net cash used in
investing activities was $1.46 million and $852,000 for the nine-month periods
ended April 30, 1998 and 1999, respectively. During the nine-month period ended
April 30, 1998, these expenditures were primarily for the acquisition of
furniture and equipment to support the increase in headcount and products
developed by the Company and the Company's purchase of a certificate of deposit
to collateralize a deposit with
11
<PAGE>
the landlord for the Company's corporate headquarters in Austin, Texas. The
expenditures during the nine-month period ended April 30, 1999 consisted
primarily of investments in furniture and leasehold improvements related to the
Company's headquarters. Net cash provided by financing activities was $11.83
million and $6.30 million for the nine-month periods ended April 30, 1998 and
1999, respectively. As mentioned above, the Company completed a financing in the
second quarter of fiscal 1998 resulting in an increase in cash of $11.59 million
net of underwriter's fees and offering costs of $1.01 million and a financing in
the third quarter of fiscal 1999 resulting in an increase in cash of $6.25
million net of underwriter's fees and offering costs of $552,000.
The Company currently anticipates that existing funds together with anticipated
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months. To the
extent that these sources of funds are insufficient to meet these requirements,
the Company will be required to raise additional funds. Possible sources of
financing include the sale of equity securities or borrowings from banks. The
sale of additional equity or convertible debt securities could be dilutive.
There can be no assurance that the Company will be able to obtain financing on
commercially reasonable terms, if at all, in the future.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. Many
currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failures, generation of
erroneous data or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such Year 2000 requirements. The Year 2000 problem is pervasive and complex.
Significant uncertainty exists in the software industry concerning the potential
impact of Year 2000 problems. The Company is assessing the potential overall
impact of the impending century change on the Company's business, financial
condition and results of operations.
The products provided by the Company 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 the Company
believes that the products do not implicate Year 2000 compliance issues.
Although the Company believes the current versions of its products are year 2000
compliant, there can be no assurances that the current product versions do not
contain undetected errors or defects associated with year 2000 date functions.
With respect to the Company's internal information technology systems, the
Company's year 2000 internal readiness program primarily covers taking inventory
of hardware and software systems, determining the level of year 2000 compliance
of such systems, assessing business risks associated with such systems, creating
action plans to address known risks, executing and monitoring action plans, and
contingency planning. The Company is currently reviewing and addressing year
2000 issues in its mission critical information technology systems such as
finance, order processing, customer service, project management, and sales
management. The Company is also currently reviewing and addressing year 2000
issues in its network servers, network software and widely used desktop software
applications. The Company expects to substantially complete year 2000 readiness
preparations by the third quarter of calendar 1999. In each case, the Company
expects to continue implementation and testing through calendar 1999. The
Company has no current plans to perform an assessment of embedded technology
outside of its information technology systems, and believes that the failure to
be year 2000 compliant of embedded technology in systems such as photocopiers,
HVAC and cardkey readers will not have a material effect on the Company's
business.
Although the Company has not experienced and does not believe that it will incur
any material costs or experience material disruptions in its business associated
with preparing its internal systems for the year 2000, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed of third party
software, third party hardware and internally developed software, or in the
internal systems of its vendors or customers. The most reasonably likely worst
case scenarios would include: (i) loss or corruption of data contained in the
Company's internal information systems, (ii) hardware failure, (iii) the failure
of infrastructure services provided by government agencies and
12
<PAGE>
other third parties (e.g., electricity, phone service, water transport, internet
services, etc.); (iv) the failure of the internal systems of the Company's
vendors or customers, resulting in problems with providing services or making
payments to the Company. The Company is in the early phases of contingency
planning at this time and expects to undertake more in depth contingency
planning after following the completion of its analysis and correction of its
internal year 2000 issues. The Company expects its contingency plans to include,
among other things, manual work-arounds for software and hardware failures, as
well as substitution of systems or vendors, if necessary.
Recent Accounting Pronouncements
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; however, it is not required in interim filings in the initial year of
adoption.
Management does not believe the implementation of SFAS No. 131 will have a
material effect on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to the Company's annual report and Form 10-K for the year ended July 31,
1998.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable and has been omitted.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 1999, the Company entered into an Underwriting Agreement for the
purpose of issuing to certain underwriters by way of private placement in
Canada, 1,700,000 special warrants ("1999 Special Warrants") at a price of $4.00
each ($3.76 net of underwriters' fee). ). In February 1999, 1,700,000 1999
Special Warrants were issued. Each 1999 Special Warrant entitled the holder
thereof to receive one common share of the Company. The 1999 Special Warrants
were exercised in February 1999, and accordingly, 1,700,000 new shares were
issued by the Company.
The underwriters of this private placement were TD Securities Inc. and CIBC Wood
Gundy Securities Inc.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable and has been omitted.
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
Not applicable and has been omitted.
ITEM 5. OTHER INFORMATION
Not applicable and has 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, 1999.
For further information, refer to the Form 10-K for the year ended July 31, 1998
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 11, 1999 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.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGE 2
AND 3 OF THE COMPANY'S FORM 10-Q QUARTERLY REPORT FOR THE PERIOD ENDED APRIL 30,
1999 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 1,697
<SECURITIES> 4,618
<RECEIVABLES> 12,076
<ALLOWANCES> (8)
<INVENTORY> 317
<CURRENT-ASSETS> 19,708
<PP&E> 8,626
<DEPRECIATION> (4,750)
<TOTAL-ASSETS> 25,776
<CURRENT-LIABILITIES> 5,036
<BONDS> 0
0
0
<COMMON> 35,769
<OTHER-SE> (15,029)
<TOTAL-LIABILITY-AND-EQUITY> 25,776
<SALES> 18,471
<TOTAL-REVENUES> 20,476
<CGS> 1,616
<TOTAL-COSTS> 1,616
<OTHER-EXPENSES> 20,859
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> (1,903)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,903)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
