<PAGE>
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 March 31, 1997
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 X No
---------- ------------
As of April 30, 1997, there were 7,591,568 shares of the Registrant's
Common Stock outstanding.
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
FORM 10-Q
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 4
For the three months ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 5
For the three months ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3- Quantitative and Qualitative Disclosure about Market Risk 13
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 27.1 Financial Data Schedule
2
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $13,583 $21,074
Short-term investments 21,225 13,929
Accounts receivable, net 4,259 2,671
Prepaid income taxes 310 271
Other current assets 1,037 1,259
-------- --------
Total current assets 40,414 39,204
LONG TERM ASSETS 250 250
PROPERTY AND EQUIPMENT, net 2,553 2,511
-------- --------
$43,217 $41,965
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 303 $ 303
Current portion of capitalized lease
obligations 141 138
Accounts payable 591 662
Accrued liabilities 2,237 1,738
Deferred revenue 2,224 1,909
-------- --------
Total current liabilities 5,496 4,750
-------- --------
LONG-TERM LIABILITIES, net of current portion:
Notes payable 349 425
Capitalized lease obligations 397 433
-------- --------
Total long-term liabilities 746 858
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 33,661 33,661
Notes receivable from shareholders (446) (474)
Deferred compensation (960) (1,041)
Retained earnings 4,720 4,211
-------- --------
Total shareholders' equity 36,795 36,357
-------- --------
$43,217 $41,965
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
REVENUE:
License $3,322 $ 2,769
Maintenance and other 1,401 914
Professional services 332 0
------ ------
Total product revenue 5,055 3,683
Funded development 0 81
------ ------
Total revenue 5,055 3,764
COST OF REVENUE:
License 285 254
Maintenance and other 240 230
Professional services 261 57
Funded development 0 135
------ ------
Total cost of revenue 786 676
------ ------
Gross profit 4,269 3,088
------ ------
OPERATING EXPENSES:
Sales and marketing 1,728 1,264
Research and development 1,633 1,146
General and administrative 491 426
------ ------
Total operating expenses 3,852 2,836
------ ------
Income from operations 417 252
OTHER INCOME, net 445 10
------ ------
Income before provision for
income taxes 862 262
PROVISION FOR INCOME TAXES 353 142
------ ------
Net income $ 509 $ 120
------ ------
------ ------
NET INCOME PER SHARE $ 0.06 $ 0.02
------ ------
------ ------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 8,480 5,510
------ ------
------ ------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 509 $ 120
Adjustments to reconcile net
income to net cash used for
operating activities:
Depreciation and amortization 195 115
Allowance for doubtful accounts 43 15
Non-cash compensation expense 109 66
Changes in operating assets and
liabilities--
Accounts receivable (1,631) (1,511)
Prepaid income taxes (39) (15)
Other current assets (28) (416)
Accounts payable (71) (180)
Accrued liabilities 499 119
Deferred revenue 315 451
-------- --------
Net cash used for
operating activities (99) (1,236)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (7,296) -
Collection of note receivable 250 -
Capital expenditures (237) (87)
-------- --------
Net cash used for
investing activities (7,283) (87)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (33) -
Payment of notes payable (76) (76)
Issuances of common stock - 92
Repurchases of common stock - (63)
-------- --------
Net cash used for
financing activities (109) (47)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,491) (1,370)
CASH AND CASH EQUIVALENTS, beginning
of period 21,074 3,284
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,583 $ 1,914
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
year ended December 31, 1996 included in the Company's Annual Report on
Form 10-K.
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, 1997, or any
other future periods.
2. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which will be adopted by the Company in the fourth
quarter of 1997. SFAS No. 128 requires companies to compute net income
per share under two different methods, basic and diluted, and to
disclose the methodology used for the calculation. SFAS No. 128
requires restatement of all prior-period earnings per share data
presented. If SFAS No. 128 had been applied by the Company during the
first quarter of 1997 and 1996, basic net income per share would have
been $.07 and $.02 and diluted net income per share would have been $.06
and $.02, respectively.
In February 1997, the FASB issued SFAS No. 129, "Disclosure Information
about Capital Structure", which will be adopted by the Company in the
fourth quarter of 1997. SFAS No. 129 requires companies to disclose
certain information about their capital structure. The Company does not
anticipate that SFAS No. 129 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 for the
three months ended March 31, 1996 include all common and common
equivalent shares issued within the 12 months preceding the filing date
of the Company's Initial Public Offering as if they were outstanding for
the entire period presented (using the treasury stock method and an
initial public offering price of $12.00 per share for stock options).
6
<PAGE>
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
twelve 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. Beginning in the three months
ended June 30, 1996, the Company began offering professional services,
whereby the Company provides customers with methodologies for integrated
circuit design and manufacturing to improve design and production
efficiencies and calibration services to customize the Company's products to
each customer's unique manufacturing processes. The Company recognizes
revenue under professional service agreements on the percentage of completion
method of accounting based upon the achievement of contractual goals.
7
<PAGE>
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
MARCH 31,
1997 1996
---- ----
REVENUE:
License 65.7% 73.6%
Maintenance and other 27.7 24.3
Professional services 6.6 0.0
------ ------
Total product revenue 100.0 97.9
Funded development 0.0 2.1
------ ------
Total revenue 100.0 100.0
COST OF REVENUE:
License 5.6 6.8
Maintenance and other 4.7 6.1
Professional services 5.2 1.5
Funded development 0.0 3.6
------ ------
Total cost of revenue 15.5 18.0
------ ------
Gross margin 84.5 82.0
OPERATING EXPENSES:
Sales and marketing 34.2 33.6
Research and development 32.3 30.4
General and administrative 9.7 11.3
------ ------
Total operating expenses 76.2 75.3
------ ------
Income from operations 8.3 6.7
OTHER INCOME, net 8.8 0.2
------ ------
Income before provision for
income taxes 17.1 6.9
PROVISION FOR INCOME TAXES 7.0 3.7
------ ------
Net income 10.1% 3.2%
------ ------
------ ------
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUE Revenue for licensing the Company's software 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. Professional services revenue is based upon customer contracts,
and is recognized under the percentage of completion method. 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 34.3% to $5.1 million for the three months ended
March 31, 1997 from $3.8 million for the three months ended March 31, 1996.
International sales were $3.4 million and $2.8 million for the three months
ended March 31, 1997 and 1996, respectively, representing 67.2% and 73.3% of
total revenue for the respective periods. The increase in both total and
international revenue was due primarily to increased licensing and
maintenance and other revenue from Asia and North America. It is anticipated
that international revenue will continue to constitute a significant portion
of total revenue for the foreseeable future. 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. It has been the Company's experience that some
of its large Korean customers institute significant upgrades of their design
tools relatively infrequently and their purchasing patterns are hard to
predict.
8
<PAGE>
License revenue increased 20.0% to $3.3 million for the three months ended
March 31, 1997 from $2.8 million for the three months ended March 31, 1996.
The primary reason for the increase in license revenue was additional
licensing of the Company's process simulation and device simulation products
in the U.S. and Japan.
Maintenance and other revenue increased 53.2% to $1.4 million for the three
months ended March 31, 1997 from $914,000 for the three months ended March
31, 1996. The increase in maintenance and other revenue was attributable to
an increase in the Company's installed base of products and the Company's
continued effort toward obtaining customer renewals of maintenance.
Professional services revenue was $332,000 for the three months ended March
31, 1997. It was not until the three months ended June 30, 1996 that the
Company commenced performing services and recognizing revenue from contracts
obtained by the Company's professional services group.
In 1995, the Company deliberately reduced its participation in funded
development programs and decided not to pursue new contracts. Consequently,
there was no funded development revenue for the three months ended March 31,
1997 compared to $81,000 for the three months ended March 31, 1996.
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 decreased to 8.6% for the three months ended March 31, 1997 from 9.2%
of license revenue for the three months ended March 31, 1996. Cost of
license revenue decreased primarily due to decreased 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 decreased to 17.1% for the three months ended March 31, 1997 from
25.1% for the three months ended March 31, 1996, as revenue increased at a
faster rate than the costs of providing maintenance support to the Company's
customers. The cost of professional services increased to $261,000 for the
three months ended March 31, 1997 from $57,000 for the three months ended
March 31, 1996 as the Company hired additional personnel to meet the
obligations under the revenue contracts obtained by the Company.
SALES AND MARKETING Sales and marketing expenses include the costs
associated with sales and marketing personnel, commissions, 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 March 31, 1997 from $1.3
million for the three months ended March 31, 1996 and increased as a
percentage of total revenue to 34.2% from 33.6% for the three months ended
March 31, 1997 and 1996, respectively. Sales and marketing expenses increased
primarily due to the addition of sales and marketing personnel and the
ongoing expenses of sales offices opened in mid-1996 in Boston, Portland and
Milan, Italy. The Company expects that its sales and marketing expenses will
continue to increase in absolute dollars.
RESEARCH AND DEVELOPMENT Research and development expenses include the costs
of creating new products and developing enhancements to existing products and
providing operations support. 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 $1.6 million for the three months ended
March 31, 1997 from $1.1 million for the three months ended March 31, 1996,
and increased as a percentage of total revenue to 32.3% from 30.4% for the
three months ended March 31, 1997 and 1996, respectively. Research and
development costs increased primarily due to increased headcount.
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
9
<PAGE>
increased to $491,000 for the three months ended March 31, 1997 from $426,000
for the three months ended March 31, 1996, but decreased as a percentage of
total revenue to 9.7% from 11.3% for the three months ended March 31, 1997
and 1996, respectively. General and administrative expenses increased
primarily due to increased headcount and the costs of being a public company.
The decrease as a percentage of revenue was due to revenues increasing at a
faster rate than the increase in general and administrative expenses. The
Company expects general and administrative expenses will continue to decrease
as a percentage of revenue.
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 $475,000
and $34,000 for the three months ended March 31, 1997 and 1996, respectively.
Other expense was $30,000 and $24,000 for the three months ended March 31,
1997 and 1996, respectively. The increase in other income was due to the
interest earned on proceeds received from the Company's initial public
offering in 1996.
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 41.0% for the three months ended
March 31, 1997 and 54.2% for the three months ended March 31, 1996. Because
the Company generates a significant portion of its total revenue from
international sales, the Company historically has a significant amount of
foreign tax withheld, and has not been able to utilize all of its available
tax credits. Accordingly, the Company generated significant tax credit
carryforwards. Given the uncertainty over ultimate utilization of these
credits, they have not been fully benefited in the prior year's tax
provision, which resulted in an effective rate of taxation in 1996 in excess
of the U.S. statutory rate. Because of increases in domestic income, the
Company's effective tax rate in 1997 has declined, due to the anticipated
utilization of available tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through private sales
of equity securities and with cash generated from operations. During 1996,
approximately $31.0 million in cash, net of expenses, was raised through the
Company's initial public offering.
For the three months ended March 31, 1997, the Company used $99,000 for
operating activities. The use of funds resulted primarily from an increase
in accounts receivable offset by net income and an increase in accrued
liabilities and deferred revenue. Cash used in investing activities of $7.3
million was primarily purchases of short-term investments.
As of March 31, 1997, the Company had working capital of $34.9 million and
cash and equivalents and short-term investments of $34.8 million. As of
March 31, 1997, the Company had no bank indebtedness and no long-term
commitments other than operating lease obligations. The Company expects to
spend approximately $1.0 million on capital items in the next 12 months. 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 on a short and long term basis.
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.
10
<PAGE>
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.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS: SEASONALITY. The Company's
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.
In particular, 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 period results from licenses entered into during
that period, 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 periods 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 periods. Consequently, operating results in any period
should not be considered indicative of the results to be expected for any
future period.
INTENSE COMPETITION. The historical competition for 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,
11
<PAGE>
operating results and financial condition. In addition, it is possible that
large, well established EDA 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 EDA 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.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The 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 1996, 1995, 1994 and the first three months of 1997, licensing and
maintenance of the Company's software products in Asia, primarily Japan,
Korea and Taiwan, accounted for approximately 60.0%, 61.5% 55.9% and 56.5%,
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 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.
GEOGRAPHICAL CONCENTRATION IN ASIA: DEPENDENCE UPON DISTRIBUTORS AND
REPRESENTATIVES. 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 not have a
material adverse effect on future international licensing and maintenance
revenue and, consequently, on the Company's business, operating results and
financial condition.
PRODUCT CONCENTRATION. The Company derived a significant majority of its
total revenue in 1996 and the first three months of 1997 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
12
<PAGE>
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.
LENGTHY SALES CYCLE. 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 period
is not realized in that period, the Company's operating results for that
period could be materially adversely affected.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Not applicable
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit
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 March 31, 1997.
13
<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: May 12, 1996 By: /s/ Roy E. Jewell
--------------------------- ----------------------------------
ROY E. JEWELL
President and Chief Executive
Officer
DATE: May 12, 1996 By: /s/ Bennet L. Weintraub
--------------------------- ----------------------------------
BENNET L. WEINTRAUB
Chief Financial Officer and
Vice President of Finance and
Administration
14
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,583
<SECURITIES> 21,225
<RECEIVABLES> 4,477
<ALLOWANCES> 218
<INVENTORY> 0
<CURRENT-ASSETS> 40,414
<PP&E> 3,879
<DEPRECIATION> 1,326
<TOTAL-ASSETS> 43,217
<CURRENT-LIABILITIES> 5,496
<BONDS> 0
0
0
<COMMON> 33,661
<OTHER-SE> 3,314
<TOTAL-LIABILITY-AND-EQUITY> 43,217
<SALES> 0
<TOTAL-REVENUES> 5,055
<CGS> 0
<TOTAL-COSTS> 786
<OTHER-EXPENSES> 3,852
<LOSS-PROVISION> 43
<INTEREST-EXPENSE> (445)
<INCOME-PRETAX> 862
<INCOME-TAX> 353
<INCOME-CONTINUING> 509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
