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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30,
1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number: 0-21047
TECHNOLOGY MODELING ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2708698
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
595 LAWRENCE EXPRESSWAY
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (408) 328-0930
(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 No X
----- -----
As of October 31, 1996, there were 7,689,169 shares of the Registrant's
Common Stock outstanding.
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TECHNOLOGY MODELING ASSOCIATES, INC.
FORM 10-Q
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations 4
For the three months and nine months ended
September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows 5
For the nine months ended September 30, 1996
and 1995
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 13
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security-Holders 14
ITEM 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 11.1 Computation of Net Income per Share
Exhibit 27.1 Financial Data Schedule
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . $29,974 $3,284
Short-term investments . . . . . . . . . . 994 --
Accounts receivable, less allowance for
doubtful accounts of $175 and $165,
respectively. . . . . . . . . . . . . . 2,409 2,799
Prepaid income taxes . . . . . . . . . . . 175 134
Other current assets . . . . . . . . . . . 867 410
-------- ------
Total current assets. . . . . . . . . . 34,419 6,627
PROPERTY AND EQUIPMENT, net . . . . . . . . . 2,466 1,441
-------- ------
$ 36,885 $8,068
-------- ------
-------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable . . . . . $ 303 $ 303
Current portion of capitalized lease
obligations. . . . . . . . . . . . . . 135 --
Accounts payable. . . . . . . . . . . . . 366 604
Accrued liabilities . . . . . . . . . . . 1,047 1,442
Deferred revenue. . . . . . . . . . . . . 2,984 1,536
-------- ------
Total current liabilities 4,835 3,885
-------- ------
LONG-TERM LIABILITIES, net of current portion:
Notes payable . . . . . . . . . . . . . . 501 728
Capitalized lease obligations . . . . . . 468 --
-------- ------
Total long-term liabilities. . . . . . 969 728
-------- ------
SHAREHOLDERS' EQUITY:
Common stock, no par value - Authorized:
25,000 shares Outstanding: 7,240 and
4,311 shares, respectively . . . . . . 29,126 1,030
Notes receivable from shareholders. . . . (503) (576)
Deferred compensation . . . . . . . . . . (1,121) --
Retained earnings . . . . . . . . . . . . 3,579 3,001
-------- ------
Total shareholders' equity . . . . . 31,081 3,455
-------- ------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . $36,885 $8,068
-------- ------
-------- ------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------ ------ ------- ------
REVENUE:
License. . . . . . . . . . . . . . $3,336 $1,898 $ 9,058 $5,799
Maintenance and other. . . . . . . 1,399 947 3,458 2,553
------ ------ ------- ------
Total product revenue. . . . . . 4,735 2,845 12,516 8,352
Funded development . . . . . . . . 82 30 309 104
------ ------ ------- ------
Total revenue. . . . . . . . . . 4,817 2,875 12,825 8,456
------ ------ ------- ------
COST OF REVENUE:
License. . . . . . . . . . . . . . 343 111 851 348
Maintenance and other. . . . . . . 429 170 997 493
Funded development . . . . . . . . 67 22 332 101
------ ------ ------- ------
Total cost of revenue. . . . . . 839 303 2,180 942
------ ------ ------- ------
Gross profit . . . . . . . . . . 3,978 2,572 10,645 7,514
------ ------ ------- ------
OPERATING EXPENSES:
Sales and marketing. . . . . . . . 1,692 754 4,412 2,158
Research and development . . . . . 1,307 1,079 3,784 3,065
General and administrative . . . . 363 357 1,219 1,050
------ ------ ------- ------
Total operating expenses . . . . 3,362 2,190 9,415 6,273
------ ------ ------- ------
Income from operations . . . . . 616 382 1,230 1,241
OTHER INCOME (EXPENSE), NET . . . . 25 34 27 24
------ ------ ------- ------
Income before provision for
income taxes . . . . . . . . . 641 416 7 1,265
PROVISION FOR INCOME TAXES . . . . . 343 168 665 509
------ ------ ------- ------
Net income . . . . . . . . . . . $ 298 $ 248 $ 592 $ 756
------ ------ ------- ------
------ ------ ------- ------
NET INCOME PER SHARE . . . . . . . . $ 0.05 $ 0.04 $ 0.11 $ 0.14
------ ------ ------- ------
------ ------ ------- ------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES. . . . . . . . . 5,521 5,570 5,486 5,429
------ ------ ------- ------
------ ------ ------- ------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 592 $ 756
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization . . . . . . . . . . . . 447 282
Allowance for doubtful accounts . . . . . . . . . . . 10 72
Non-cash compensation expense . . . . . . . . . . . . 290 43
Changes in operating assets and liabilities -
Accounts receivable. . . . . . . . . . . . . . . . 380 (271)
Prepaid income taxes . . . . . . . . . . . . . . . (41) (144)
Other current assets . . . . . . . . . . . . . . . (207) (269)
Accounts payable . . . . . . . . . . . . . . . . . (237) 81
Accrued liabilities. . . . . . . . . . . . . . . . (397) (601)
Deferred revenue . . . . . . . . . . . . . . . . . 1,449 350
------- -------
Net cash provided by operating activities . . . 2,286 299
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments . . . . . . . . . . . (994) (1,538)
Issuance of notes receivable. . . . . . . . . . . . . . . (250) --
Proceeds from sales of short-term investments . . . . . . -- 755
Capital expenditures. . . . . . . . . . . . . . . . . . . (811) (547)
------- -------
Net cash used for investing activities. . . . . (2,055) (1,330)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations. . . . . . . . . . . (56) (12)
Payment of notes payable. . . . . . . . . . . . . . . . . (228) (228)
Issuances of common stock, net of costs . . . . . . . . . 26,810 77
Repurchases of common stock . . . . . . . . . . . . . . . (67) (53)
------- -------
Net cash provided by (used for) financing
activities. . . . . . . . . . . . . . . . . . 26,459 (216)
------- -------
NET INCREASES (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . 26,690 (1,247)
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . 3,284 3,256
------- -------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . $29,974 $ 2,009
------- -------
------- -------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TECHNOLOGY MODELING ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto for the years ended December 31,
1994 and 1995 and for the six months ended June 30, 1996 (unaudited)
included in the Company's registration statement on Form SB-2 declared
effective by the SEC on September 19, 1996.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments that are, in the opinion of management, necessary
to state fairly the results for the periods presented. The results for
such periods are not necessarily indicative of the results to be expected
for the full fiscal year ending December 31, 1996, or any other future
periods.
2. NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's 1996 fiscal year. SFAS No. 123 allows companies that have stock-
based compensation arrangements with employees to adopt a new fair-value
basis of accounting for stock options and other equity instruments, or to
continue to apply the existing accounting rules under Accounting Principles
Board ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees"
but with additional financial statement disclosure. The Company plans to
continue to account for stock-based compensation arrangements under APB
Opinion No. 25 and, therefore, does not anticipate SFAS No. 123 will have a
material impact on its financial position, results of operations or cash
flows.
3. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of shares issuable upon the exercise of stock
options using the treasury stock method. Pursuant to SEC Staff Accounting
Bulletins ("SAB") and staff policy, such computations include all common
and common equivalent shares issued within the 12 months preceding the
filing date as if they were outstanding for all periods presented (using
the treasury stock method and an initial public offering price of $12.00
per share for stock options).
4. CAPITAL STOCK
In September 1996, the Company completed the initial public offering of its
common stock. The Company sold 2,443,535 shares for net proceeds of $26.5
million. In October 1996, the Company's underwriters exercised their over
allotment option to purchase an additional 450,000 shares which provided
additional proceeds of $5.0 million.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1979 to develop, market and support physical
simulation software for IC design and manufacturing. The Company's original
products were based on research done at Stanford University, and until 1988, the
Company was focused primarily on research and development. In 1988, the Company
hired additional management, established an engineering strategy, added
distribution channels and marketing capabilities and began to position its
products with a more commercial focus. Today, the Company sells eleven products
in six product groups and strives to offer regular updates for its products.
The Company's revenue consists primarily of fees for licenses of the Company's
software products and fees for maintenance and customer support. Products
typically are licensed on a perpetual basis, with pricing determined by the
number of concurrent users. The Company recognizes revenue from software
licenses when software has been shipped and there are no significant remaining
vendor obligations. When the Company receives payment prior to shipment and
fulfillment of significant vendor obligations, such payments are recorded as
deferred revenue and customer deposits and are recognized as revenue only upon
shipment and fulfillment of any significant vendor obligations.
The Company sells its products directly through its own sales organization in
North America and Europe. In Asia, the Company uses an exclusive distributor in
Japan and exclusive sales representatives in Korea, Taiwan and other markets.
The Japanese distributor purchases the Company's products at a fixed price and,
in turn, resells them to its customers. The Asian sales representative firms
are paid commissions directly by the Company based on their licensing of the
Company's products.
The Company also earns revenue from maintenance agreements for customer support
and product enhancements. Maintenance fees are paid in advance and are not
refundable. Maintenance revenue for ongoing customer support and product
enhancements is recognized ratably over the term of the maintenance agreement,
which is generally twelve months. In April 1996, the Company entered into its
first professional services agreement, whereby the Company will provide a
customer with methodologies for integrated circuit design and manufacturing to
improve its design and production efficiencies. The Company recognizes revenue
under professional service agreements on the percentage of completion method of
accounting based upon the achievement of contractual goals.
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RESULTS OF OPERATIONS. The following table sets forth, for the periods
indicated, certain statements of operations data of the Company expressed as a
percentage of total revenue.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------ ------ ------ ------
REVENUE:
License. . . . . . . . . . . . . 69.3% 66.0% 70.6% 68.6%
Maintenance and other. . . . . . 29.0 33.0 27.0 30.2
----- ----- ----- -----
Total product revenue . . . . 98.3 99.0 97.6 98.8
Funded development . . . . . . . 1.7 1.0 2.4 1.2
----- ----- ----- -----
Total revenue . . . . . . . . 100.0 100.0 100.0 100.0
----- ----- ----- -----
COST OF REVENUE:
License. . . . . . . . . . . . . 7.1 3.8 6.6 4.1
Maintenance and other. . . . . . 8.9 5.9 7.8 5.8
Funded development . . . . . . . 1.4 0.8 2.6 1.2
----- ----- ----- -----
Total cost of revenue . . . . 17.4 10.5 17.0 11.1
----- ----- ----- -----
Gross profit. . . . . . . . . 82.6 89.5 83.0 88.9
----- ----- ----- -----
OPERATING EXPENSES:
Sales and marketing. . . . . . . 35.1 26.2 34.4 25.5
Research and development . . . . 27.1 37.5 29.5 36.3
General and administrative . . . 7.6 12.5 9.5 12.4
----- ----- ----- -----
Total operating expenses. . . 69.8 76.2 73.4 74.2
----- ----- ----- -----
Income from operations. . . . 12.8 13.3 9.6 14.7
OTHER INCOME (EXPENSE), NET . . . 0.5 1.2 0.2 0.3
----- ----- ----- -----
Income before provision
for income taxes. . . . . . 13.3 14.5 9.8 15.0
PROVISION FOR INCOME TAXES . . . . 7.1 5.9 5.2 6.1
----- ----- ----- -----
Net income. . . . . . . . . . 6.2% 8.6% 4.6% 8.9%
----- ----- ----- -----
----- ----- ----- -----
REVENUE. License revenue consists principally of revenue for licensing the
Company's software and is generally recognized when the software has been
shipped and there are no significant remaining obligations. Maintenance and
other revenue consists primarily of fees for providing system updates, user
documentation and technical support for software products, and is recognized
ratably over the term of the maintenance agreement. Funded development revenue
consists of revenue earned on development contracts with government-sponsored
and private entities and is recognized under the percentage of completion
method.
Total revenue increased 67.5% to $4.8 million for the three months ended
September 30, 1996 from $2.9 million for the three months ended September 30,
1995 and increased 51.7% to $12.8 million for the nine months ended September
30, 1996 from $8.5 million for the nine months ended September 30, 1995.
International sales were $3.9 million and $2.0 million for the three months
ended September 30, 1996 and 1995, respectively, representing 81.3% and 69.6% of
total revenue for the respective periods. International sales were $9.4 million
and $6.4 million for the nine months ended September 30, 1996 and 1995,
respectively, representing 72.4% and 74.8% of total revenue for the respective
periods. The
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increase in both total and international revenue was due primarily to
increased licensing and maintenance and other revenue from Asia. It is
anticipated that international revenue will continue to constitute a
significant portion of total revenue. International revenues are subject to
certain additional risks normally associated with international operations,
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, foreign withholding taxes,
limitations on repatriation of earnings and reduced protection of
intellectual property rights.
License revenue increased 75.8% to $3.3 million for the three months ended
September 30, 1996 from $1.9 million for the three months ended September 30,
1995 and increased 56.2% to $9.1 million for the nine months ended September 30,
1996 from $5.8 million for the nine months ended September 30, 1995. The primary
reason for the increase in license revenue was additional licensing of the
Company's process simulation and device simulation products.
Maintenance and other revenue increased 47.7% to $1.4 million for the three
months ended September 30, 1996 from $947,000 for the three months ended
September 30, 1995 and increased 35.4% to $3.5 million for the nine months ended
September 30, 1996 from $2.6 million for the nine months ended September 30,
1995. The increase in maintenance and other revenue was attributable to an
increase in the Company's installed base of products, the Company's continued
effort toward obtaining customer renewals of maintenance, and the commencement
of revenue from contracts obtained by the Company's professional services group.
COST OF REVENUE. Cost of revenue consists primarily of the costs of media and
shipping of licensed products, the costs of providing maintenance support to the
Company's customers, royalties payable and the cost of the Company's
professional services group. Cost of license revenue as a percent of license
revenue increased to 10.3% for the three months ended September 30, 1996 from
5.8% of license revenue for the three months ended September 30, 1995. Cost of
license revenue as a percent of license revenue increased to 9.4% for the nine
months ended September 30, 1996 from 6.0% of license revenue for the nine months
ended September 30, 1995. Cost of license revenue increased in both periods
primarily due to increased royalty expenses incurred on revenues from third
party software products sold by the Company. Cost of maintenance and other
revenue as a percent of maintenance and other revenue increased to 30.7% for the
three months ended September 30, 1996 from 18.0% for the three months ended
September 30, 1995. Cost of maintenance and other revenue as a percentage of
maintenance and other revenue increased to 28.8% for the nine months ended
September 30, 1996 from 19.3% for the nine months ended September 30, 1995. The
increase in the cost of maintenance and other revenue in both periods was
attributable primarily to the start-up costs associated with the Company's
professional services group. Cost of funded development revenue as a percentage
of funded development revenue increased to 81.7% for the three months ended
September 30, 1996 from 73.3% for the three months ended September 30, 1995, and
increased to 107.4% for the nine months ended September 30, 1996 from 97.1% in
the nine months ended September 30, 1995 as a result of the timing of milestone
payments associated with funded development programs.
SALES AND MARKETING. Sales and marketing expenses include the costs associated
with sales personnel, promotional events (such as trade show and technical
conference attendance) and advertising and public relations programs. Sales and
marketing expenses increased to $1.7 million for the three months ended
September 30, 1996 from $754,000 for the three months ended September 30, 1995
and increased as a percentage of total revenue to 35.1% from 26.2% for the three
months ended September 30, 1996 and 1995, respectively. Sales and marketing
expenses increased to $4.4 million for the nine months ended September 30, 1996
from $2.2 million for the nine months ended September 30, 1995 and increased as
a percentage of total revenue to 34.4% from 25.5% for the nine months ended
September 30, 1996 and 1995, respectively. Sales and marketing expenses
increased in both periods due primarily to the addition of sales and marketing
personnel and the opening of new sales offices in Boston, Portland and Milan,
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Italy this year. The Company expects that its sales and marketing expenses will
continue to increase for the foreseeable future as the Company expands its
marketing and distribution capabilities.
RESEARCH AND DEVELOPMENT. Research and development expenses include the costs
of creating new products and developing enhancements to existing products.
Software development costs have been expensed as incurred, because software
development has generally been completed concurrently with the establishment of
technological feasibility. Research and development expenses increased to $1.3
million for the three months ended September 30, 1996 from $1.1 million for the
three months ended September 30, 1995 but decreased as a percentage of total
revenue to 27.1% from 37.5% for the three months ended September 30, 1996 and
1995, respectively. Research and development expenses increased to $3.8 million
for the nine months ended September 30, 1996 from $3.1 million for the nine
months ended September 30, 1995, but decreased as a percentage of total revenue
to 29.5% from 36.3% for the nine months ended September 30, 1996 and 1995,
respectively. Research and development costs in both periods increased
primarily due to increased headcount. The decrease as a percentage of revenue
on both periods was due to revenues increasing at a faster rate than the
increase in research and development expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
costs associated with the Company's executive office, human resources and
finance functions. General and administrative expenses increased to $363,000
for the three months ended September 30, 1996 from $357,000 for the three months
ended September 30, 1995, but decreased as a percentage of total revenue to 7.6%
from 12.5% for the three months ended September 30, 1996 and 1995, respectively.
General and administrative expenses increased to $1.2 million for the nine
months ended September 30, 1996 from $1.1 million for the nine months ended
September 30, 1995, but decreased as a percentage of total revenue to 9.5% from
12.4% for the nine months ended September 30, 1996 and 1995, respectively. The
decrease as a percentage of revenue in both periods was due to revenues
increasing at a faster rate than the increase in general and administrative
expenses. The Company expects that general and administrative expenses will
increase due to increases in staff and the costs of being a public company.
OTHER INCOME (EXPENSE), NET. Other income is primarily interest income earned
on excess cash balances. Other expense is primarily interest paid on notes
payable and under capitalized lease obligations. Other income was $64,000 and
$60,000 for the three months ended September 30, 1996 and 1995, respectively and
$132,000 and $139,000 for the nine months ended September 1996 and 1995,
respectively. Other expense was $39,000 and $26,000 for the three months ended
September 30, 1996 and 1995, respectively and $105,000 and $115,000 for the nine
months ended 1996 and 1995, respectively.
PROVISION FOR INCOME TAX. Provision for income tax consists primarily of
federal income taxes, state taxes and international withholding taxes. The
Company's effective rate of taxation was 52.9% for the nine months ended
September 30, 1996 and 40.2% for the nine months ended September 30, 1995.
Because the Company generates a significant portion of its total revenue from
international sales that require withholding of foreign tax, it has not been
able to utilize all of its available tax credits. Accordingly, the Company has
generated significant tax credit carryforwards. Given the uncertainty over
ultimate utilization of these credits, the Company has not been benefited in the
tax provision, which has resulted in an effective rate of taxation in excess of
the U.S. statutory rate.
LIQUIDITY AND CAPITAL RESOURCES. The Company has financed its operations to
date through private sales of equity securities and with cash from operations.
However, on September 20, 1996, approximately $26.5 million in cash, net of
expenses, was raised through the Company's initial public offering.
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Net cash provided by operating activities was $2.3 million for the nine months
ended September 30, 1996 which resulted primarily from net income and an
increase in customer deposits. Cash used in investing activities resulted
primarily from net purchases of short-term investments and additions to property
and equipment.
As of September 30, 1996, the Company had working capital of $29.6 million and
cash and equivalents and short-term investments of $ 31.0 million. As of
September 30, 1996, the Company had no bank indebtedness and no long term
commitments other than operating lease obligations. The Company believes that
the existing cash and equivalents and short-term investments and funds generated
from operations will provide the Company with sufficient funds to finance its
operations through at least the next 12 months. Thereafter, the Company may
require additional funds to support its working capital requirements or for
other purposes and may seek to raise such additional funds through public or
private financing or from other sources. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to the Company or its shareholders.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward looking statements that include risks and
uncertainties, including but not limited to those listed below and from time to
time in the Company's other reports filed with the SEC. The actual results that
the Company achieves may differ materially from any forward looking statements
due to such risks and uncertainties.
The Company's quarterly operating results have varied in the past, and may vary
significantly in the future, depending on factors such as size and timing of
significant customer orders, timing and levels of operating expenses, increased
competition, timing of new product announcements and releases by the Company and
its competitors, market acceptance of new and enhanced versions of the Company's
products, gain or loss of significant customers, distributors or sales
representatives, renewal rates of maintenance contracts, pricing changes by the
Company or its competitors, personnel changes, and economic conditions in
general and in the semiconductor industry specifically. Any unfavorable change
in these or other factors could have a material adverse effect on the Company's
operating results for a particular quarter.
In particular, quarterly revenue and operating results depend on the volume and
timing of orders received during the quarter. A significant portion of the
Company's revenue in each quarter results from licenses entered into during that
quarter, and the Company historically has operated with little order backlog.
There can be no assurance that the Company will attain a significant backlog in
the future. The Company's expense levels are relatively fixed and are based, in
part, on expectations regarding future revenue. Furthermore, the Company often
recognizes a substantial portion of its license revenue in the last month or
even weeks of a quarter, and, therefore its net income, if any, may be
disproportionately affected by a reduction in revenue because only a small
portion of the Company's expenses vary with its revenue. Because of the
relatively large dollar size of the Company's typical software license, any
delay in the closing of a transaction may have a significant impact on the
Company's operating results for a particular period.
In addition, the Company's revenue and results of operations have been and may
continue to be affected by seasonal trends, which may result in higher revenue
in certain quarters due to customers' purchasing and budgetary practices. There
can be no assurance that seasonal trends in customer purchasing will not
materially adversely affect the Company's results of operations in future
quarters. Consequently,
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operating results in any period should not be considered indicative of the
results to be expected for any future period.
The historical competition for technology computer-aided design ("TCAD")
products has come from design automation or research and development groups
working within established IC manufacturing companies. These companies, some of
which are customers of the Company, have access to significantly greater
financial resources than the Company and may be able to develop their own
simulation tools, thus reducing their reliance upon products from independent
companies such as the Company. Established IC manufacturers or design companies
may elect in the future to market their internally developed products and
compete directly with the Company for other customers. If these or other
established companies enter the market, competitive pressures could intensify
due to their significantly greater financial, technical and marketing resources,
as well as the name recognition that these companies possess.
In addition, Silvaco International, Inc. and at least one other small private
company offer products that compete with a number of the Company's products.
Other companies offer a single product that competes with one of the Company's
products. Because these competitors are private companies for which little
public information is available, the Company can only estimate their size and
market penetration. The Company has experienced pricing pressures in the past,
and increased competition from current competitors or new market entrants could
result in additional price reductions, reduced margins or loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, it is possible that
large, well established electronic computer-aided design ("ECAD") companies may
acquire the technology of one or more of the Company's private competitors in
order to gain access to the markets in which the Company competes. With
significantly more financial resources than the Company and large existing
customer bases, these potential competitors could increase the competition faced
by the Company. Because of the changing nature of the ECAD and TCAD markets and
actual and potential competition, there can be no assurance that the Company
will be able to maintain its market share or that its competitors will not
increase their market share of the TCAD market.
The electronic design automation ("EDA") industry is characterized by rapid
technological change, frequent new product introductions and enhancements of
existing products, evolving industry standards and rapidly changing customer
requirements. The Company must meet the challenges of the EDA industry by
introducing new products and product enhancements, and must continue to address
customers' current and future needs in a timely manner. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the development, the introduction of the marketing of these products.
Additionally, there can be no assurance that the Company's new products and
product enhancements, if developed, will meet the requirements of the
marketplace, will be of acceptable quality or will achieve market acceptance or
that the introduction of new products or new industry standards will not render
existing products obsolete and unmarketable.
In 1993, 1994, 1995 and the first nine months of 1996, licensing and maintenance
of the Company's software products in Asia, primarily Japan, Korea and Taiwan,
accounted for approximately 53.6%, 55.9%, 61.5% and 61.5%, respectively, of the
Company's total revenue. Sales of the Company's product licenses to customers
in Japan are made exclusively through a single distributor, Innotech Corporation
("Innotech"). In Korea, licenses to customers are made through a single
independent sales representative, C&G Technology, Inc ("C&G"). Sales to
customers in Taiwan were also carried out through a single independent sales
representative, Business Technology, Inc ("BTI"). The Company expects that
sales to customers in Japan, Korea and Taiwan will continue to make up a
significant proportion of the Company's total product revenue for the
foreseeable future. Since the Company's products are used by highly skilled
professional engineers, in order to be effective, a distributor or sales
representative must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy
12
<PAGE>
sales cycle, customer training and product service and support. Only a
limited number of distributors and sales representatives possess such
resources. There can be no assurance that any or all of the agreements with
Innotech, C&G and BTI will continue for any substantial period of time or
that these companies will continue to distribute the Company's software
products, and there is no assurance that the Company could replace these
entities without significant difficulty.
In addition, international sales inherently involve a number of risks, including
currency fluctuations, unexpected changes in governmental regulatory
requirements, tariffs and taxes, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, limited protection of the Company's products and intellectual
property rights under the laws of certain foreign countries and political
instability and economic recession in foreign markets. There can be no
assurance that such factors will have a material adverse effect on future
international licensing and maintenance revenue and, consequently, on the
Company's business, operating results and financial condition.
The Company derived a significant majority of its total revenue in the first
nine months of 1996 from the licensing and maintenance of two software products,
TSUPREM-4 and Medici, and the Company expects to continue to derive a
substantial portion of its total revenue from these two products for the
foreseeable future. As a result, the Company's future operating results are
significantly dependent upon continued market acceptance of TSUPREM-4 and
Medici. There can be no assurance that the Company will successfully develop
new products or that such products will find market acceptance or meet customer
expectations. The Company's two principal products may be rendered obsolete by
future technical advances by the Company's competitors or even by certain of its
customers or marketing partners. The failure of the Company to maintain and
enhance the capabilities of its current products or to introduce new products
successfully into the market could have a material adverse effect on the
Company's business, operating results and financial condition.
Because of the complexity and substantial cost of the Company's products,
licensing these products to the Company's customers typically involves a
significant technical evaluation and commitment of cash and other resources,
with the attendant delays frequently associated with customers' internal
procedures to approve large expenditures and to evaluate and accept new
technologies that affect key operations. In addition, certain of the Company's
foreign customers have lengthy purchasing cycles that may increase the amount of
time the Company must dedicate to placing its products with these customers.
For these and other reasons, the sales cycle associated with the licensing of
the Company's products is lengthy and subject to a number of significant risks,
including customers' budgetary constraints and internal acceptance evaluations
that are beyond the Company's control. Because of the lengthy sales cycle and
the large size of customers' average orders, if revenue projected from a
specific customer for a particular quarter is not realized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected.
13
<PAGE>
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security-Holders
On July 8, 1996, the Company solicited the written consent of its shareholders
to approve the following matters: (i) Amendment to the Company's Articles of
Incorporation to provide that all action by shareholders of the Company be taken
by noticed meeting pursuant to Sections 601 and 602 of the California
Corporations Code; (ii) Amendment of the Company's 1996 Equity Incentive Plan to
provide that outstanding options granted pursuant to the Company's prior equity
incentive plans that expire or become unexercisable without having been
exercised will become available for grant under the 1996 Equity Incentive Plan;
(iii) Amendment of the Company's 1996 Directors Stock Option Plan (a) to provide
that all option grants to directors under such plan will vest as to 25% of the
shares one year after the grant date and vest as to 2.08% of the shares each
month thereafter; and (b) to give the Compensation Committee of the Board of
Directors discretion to grant transferable options under plan; and (iv)
Amendment of the Company's 1996 Employee Stock Purchase Plan to increase the
maximum employee contribution under Section 9(a) of such plan to 15% from 10%.
At the time of the consent, the Company had 4,762,222 shares of Common Stock
outstanding. The Company had no outstanding shares of Preferred Stock. With
respect to all of the above actions, the Company received the affirmative vote
of the holders of 3,800,530 shares of its outstanding Common Stock (79.8%).
There were no votes cast against any of the proposals, no abstentions and no
broker non-votes. No consents were received from the holders of the remaining
961,692 shares of Common Stock.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the three months ended September 30, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNOLOGY MODELING ASSOCIATES, INC.
(Registrant)
DATE: November 12, 1996 By: /s/ Roy E. Jewell
------------------------ ------------------------
ROY E. JEWELL
President and Chief Executive Officer
DATE: November 12, 1996 By: /s/ Bennet L. Weintraub
------------------------ ------------------------
BENNET L. WEINTRAUB
Chief Financial Officer and
Vice President of Finance and
Administration
15
<PAGE>
EXHIBIT 11.1
TECHNOLOGY MODELING ASSOCIATES, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------ ------ ------ ------
Net income. . . . . . . . . . . . . . . $ 298 $ 248 $ 592 $ 756
------ ------ ------ ------
------ ------ ------ ------
Weighted average common
shares outstanding. . . . . . . . . . 4,430 4,279 4,240 3,476
Shares related to SAB No. 83. . . . . . 959 959 959 959
Weighted average common share
equivalents related to stock options
(using the treasury stock method). . . 132 332 287 994
------ ------ ------ ------
Shares used in per share computation. . 5,521 5,570 5,486 5,429
------ ------ ------ ------
------ ------ ------ ------
Net income per share. . . . . . . . . . $ 0.05 $ 0.04 $ 0.11 $ 0.14
------ ------ ------ ------
------ ------ ------ ------
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENT OF OPERATIONS FOUND ON PAGES
3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE 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> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 29,974
<SECURITIES> 994
<RECEIVABLES> 2,584
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 34,419
<PP&E> 4,359
<DEPRECIATION> 1,893
<TOTAL-ASSETS> 36,885
<CURRENT-LIABILITIES> 4,835
<BONDS> 0
0
0
<COMMON> 29,126
<OTHER-SE> 1,955
<TOTAL-LIABILITY-AND-EQUITY> 36,885
<SALES> 0
<TOTAL-REVENUES> 12,825
<CGS> 0
<TOTAL-COSTS> 2,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 1,257
<INCOME-TAX> 665
<INCOME-CONTINUING> 592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
