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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, 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, including zip code)
(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 October 31, 1997, there were 8,115,616 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, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
For the three months and nine months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996 5
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 Disclosures about Market Risk 14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 2 - Changes in Securities and Use of Proceeds 15
ITEM 4 - Submission of Matters to a Vote of Security Holders 15
ITEM 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 27.1 Financial Data Schedule
2
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $12,420 $21,074
Short-term investments 22,164 13,929
Accounts receivable, net 4,498 2,671
Prepaid income taxes 310 271
Other current assets 794 1,259
------------ -----------
Total current assets 40,186 39,204
LONG TERM ASSETS 250 250
PROPERTY AND EQUIPMENT, net 2,567 2,511
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$43,003 $41,965
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------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 303 $ 303
Current portion of capitalized
lease obligations 148 138
Accounts payable 445 662
Accrued liabilities 2,516 1,738
Deferred revenue 2,521 1,909
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Total current liabilities 5,933 4,750
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LONG-TERM LIABILITIES, net of current portion:
Notes payable 198 425
Capitalized lease obligations 321 433
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Total long-term liabilities 519 858
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SHAREHOLDERS' EQUITY:
Common stock 33,362 33,661
Notes receivable from shareholders (262) (474)
Deferred compensation (784) (1,041)
Retained earnings 4,235 4,211
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Total shareholders' equity 36,551 36,357
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$43,003 $41,965
------------ -----------
------------ -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
REVENUE:
License $1,865 $ 3,336 $8,530 $ 9,058
Maintenance and other 1,417 1,099 4,241 3,058
Professional services 177 300 1,007 400
--------- --------- -------- ---------
Total product revenue 3,459 4,735 13,778 12,516
Funded development - 82 - 309
--------- --------- -------- ---------
Total revenue 3,459 4,817 13,778 12,825
--------- --------- -------- ---------
COST OF REVENUE:
License 310 343 953 852
Maintenance and other 203 214 609 373
Professional services 363 215 874 623
Funded development - 67 - 332
--------- --------- -------- ---------
Total cost of revenue 876 839 2,436 2,180
--------- --------- -------- ---------
Gross profit 2,583 3,978 11,342 10,645
--------- --------- -------- ---------
OPERATING EXPENSES:
Sales and marketing 1,728 1,692 5,358 4,412
Research and development 2,001 1,307 5,299 3,784
General and administrative 681 363 1,589 1,219
Cost of mergers 300 - 300 -
--------- --------- -------- ---------
Total operating expenses 4,710 3,362 12,546 9,415
--------- --------- -------- ---------
Income (loss) from operations (2,127) 616 (1,204) 1,230
OTHER INCOME, net 449 25 1,315 27
--------- --------- -------- ---------
Income (loss) before provision
for (benefit from) income taxes (1,678) 641 111 1,257
PROVISION FOR (BENEFIT FROM) INCOME TAXES (678) 343 42 665
--------- --------- -------- ---------
Net income (loss) $(1,000) $ 298 $ 69 $ 592
--------- --------- -------- ---------
--------- --------- -------- ---------
NET INCOME (LOSS) PER SHARE $ (0.13) $ 0.05 $ 0.01 $ 0.11
--------- --------- -------- ---------
--------- --------- -------- ---------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,820 5,521 8,379 5,486
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69 $ 592
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 626 447
Allowance for doubtful accounts 86 10
Non-cash compensation expense 347 290
Changes in operating assets and liabilities--
Accounts receivable (1,913) 380
Prepaid income taxes (39) (41)
Other current assets 215 (207)
Accounts payable (217) (237)
Accrued liabilities 778 (397)
Deferred revenue 612 1,449
--------- ---------
Net cash provided by operating activities 564 2,286
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (31,570) (994)
Sale of short-term investments 23,335 -
Issuance of note receivable - (250)
Collection of note receivable 250 -
Capital expenditures (682) (811)
--------- ---------
Net cash used for investing activities (8,667) (2,055)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (102) (56)
Payment of notes payable (227) (228)
Issuances of common stock, net of costs 613 26,810
Repayment of receivable from shareholder 122 -
Repurchases of common stock (957) (67)
--------- ---------
Net cash provided by (used for)
financing activities (551) 26,459
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,654) 26,690
CASH AND CASH EQUIVALENTS, beginning of period 21,074 3,284
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $12,420 $29,974
--------- ---------
--------- ---------
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
(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 third quarter of 1997 and 1996,
basic earnings per share would have been $(.13) and $.06 and diluted
earnings per share would have been $(.13) and $.05, respectively. If SFAS
No. 128 had been applied by the Company for the nine months ended September
30, 1997 and 1996, both basic and diluted net income per share would have
been $.01 and $.11, 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
statement disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal periods beginning after December 15,
1997. The Company anticipates that this adoption will not have a material
effect on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. The Company anticipates
that this adoption will not have a material effect on its financial
statements.
3. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
outstanding common shares plus, when their effect is dilutive, 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 and nine months ended
September 30, 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
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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).
4. ACQUISITION OF PRECIM CORPORATION
On August 29, 1997 the Company issued 387,000 shares of the Company's
common stock to acquire Precim Corporation ("Precim"). The transaction was
accounted for as a pooling of interests acquisition. Financial information
for periods prior to the merger have not been restated to include the
results of Precim as the results are not material to the overall operations
or financial position of the Company. Accordingly, the results of Precim
have been included in the financial statements commencing on the date of
acquisition. Precim, located in Portland, OR, develops computer-automated
products for optimizing the performance and quality of semiconductor
tooling (pattern transfer) activities in wafer fabrication. Precim tools
are used to construct or modify design layouts to improve yield and circuit
performance.
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 thirteen
products in six product groups and strives to offer regular updates for its
products.
In September 1997 the Company and Avant! Corporation ("Avant!") signed a
definitive agreement to merge. The merger agreement provides that Avant! will
issue shares of Avant! common stock in exchange for all outstanding TMA equity.
The proposed merger transaction is intended to be a tax-free reorganization and
is intended to be accounted for as a pooling of interests and is expected to
close in the fourth quarter of 1997. The closing of the merger is subject to
regulatory and stockholder approval, the availability of pooling-of-interests
accounting treatment, and other customary closing conditions. During the
fourth quarter of 1997, the Company will hold a Special Meeting of Shareholders
to approve the merger. Upon completion of the merger, the Company will become a
wholly-owned subsidiary of Avant!. Avant! develops, markets, and supports
integrated circuit design automation (ICDA) software for the simulation layout,
verification, and analysis of deep submicron ICs including microprocessors,
microcontrollers, application-specific standard products (ASSPs) and complex
application-specific integrated circuits (ASICs).
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.
On September 30, 1997 the Company terminated its representative
relationship with C&G Technology, Inc. ("C&G"), its Korean sales
representative. The Company subsequently established a wholly owned
subsidiary in Korea in October 1997. The subsidiary, Technology Modeling
Associates Korea, Inc. ("TMAK") will serve primarily as a sales and
engineering applications support office for the Company's
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customers in Korea. The Company does not expect there to be a material
adverse effect on the Company's revenue from Korea in future periods.
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 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.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
License 53.9% 69.3% 61.9% 70.6%
Maintenance and other 41.0 22.8 30.8 23.8
Professional services 5.1 6.2 7.3 3.2
------ ----- ----- -----
Total product revenue 100.0 98.3 100.0 97.6
Funded development 0.0 1.7 0.0 2.4
------ ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
------ ----- ----- -----
COST OF REVENUE:
License 9.0 7.1 6.9 6.6
Maintenance and other 5.8 4.5 4.4 4.8
Professional services 10.5 4.4 6.4 3.0
Funded development 0.0 1.4 0.0 2.6
------ ----- ----- -----
Total cost of revenue 25.3 17.4 17.7 17.0
------ ----- ----- -----
Gross profit 74.7 82.6 82.3 83.0
------ ----- ----- -----
OPERATING EXPENSES:
Sales and marketing 50.0 35.1 38.9 34.4
Research and development 57.8 27.1 38.5 29.5
General and administrative 19.7 7.6 11.4 9.5
Cost of mergers 8.7 0.0 2.2 0.0
------ ----- ----- -----
Total operating expenses 136.2 69.8 91.0 73.4
------ ----- ----- -----
Income (loss) from operations (61.5) 12.8 (8.7) 9.6
OTHER INCOME (EXPENSE), NET 13.0 0.5 9.5 0.2
------ ----- ----- -----
Income (loss) before provision
for (benefit from) income
taxes (48.5) 13.3 0.8 9.8
PROVISION FOR (BENEFIT FROM)
INCOME TAXES (19.6) 7.1 0.3 5.2
------ ----- ----- -----
Net income (loss) (28.9)% 6.2% 0.5% 4.6%
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
8
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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 decreased 28.2% to $3.5 million for the three months ended
September 30, 1997 from $4.8 million for the three months ended September 30,
1996 and increased 7.4% to $13.8 million for the nine months ended September
30, 1997 from $12.8 million for the nine months ended September 30, 1996.
International sales were $1.8 million and $3.9 million for the three
months ended September 30, 1997 and 1996, respectively, representing 51.5%
and 81.4% of total revenue for the respective periods. International sales
were $9.0 million and $9.4 million for the nine months ended September 30,
1997 and 1996, respectively, representing 65.0% and 73.4% of total revenue
for the respective periods. The decrease in both total and international
revenue for the three months ended September 30, 1997 compared to 1996 was
due primarily to the delay of a number of orders, primarily in the U.S. and
by the Company's exclusive distributor in Japan, Innotech. Additionally, the
poor economic climate for semiconductor companies in Korea continued in the
third quarter, resulting in lower Korean revenue. The increase in total
revenue for the nine months ended September 30, 1997 compared to 1996 was due
primarily to increased licensing and maintenance and other revenue from North
America. Despite a shortfall in revenue from Korea that is expected to
continue into the foreseeable future, 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 causing their purchasing patterns to be hard to
predict.
License revenue decreased 44.1% to $1.9 million for the three months
ended September 30, 1997 from $3.3 million for the three months ended
September 30, 1996 and decreased 5.8% to $8.5 million for the nine months
ended September 30, 1997 from $9.1 million for the nine months ended
September 30, 1996. The primary reason for the decrease in license revenue
was lower licensing of the Company's process simulation and device simulation
products in the Japan, Korea and Europe.
Maintenance and other revenue increased 28.9% to $1.4 million for the
three months ended September 30, 1997 from $1.1 million for the three months
ended September 30, 1996 and increased 38.7% to $4.2 million for the nine
months ended September 30, 1997 from $3.1 million for the nine months ended
September 30, 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 decreased to $177,000 for the three months
ended September 30, 1997 from $300,000 for the three months ended September
30, 1996 but increased to $1.0 million for the nine months ended September
30, 1997 from $400,000 for the nine months ended September 30, 1996. Revenue
from professional service contracts is not recognized until such contracts
are finalized and signed by the customer and the work, thereunder, is
performed. In the three months ended September 30, 1997, work on several
contracts commenced late in the quarter, resulting in lower recognized
revenue, as compared to the three months ended September 30, 1996. It was
only during 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.
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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 or nine months ended
September 30, 1997.
COST OF REVENUE. Cost of revenue consists primarily of the costs of media
and shipping of licensed products, royalties payable, the costs of providing
maintenance support to the Company's customers and the cost of the Company's
professional services group. Cost of license revenue as a percentage of license
revenue increased to 16.6% for the three months ended September 30, 1997 from
10.3% for the three months ended September 30 1996. Cost of license revenue as
a percentage of license revenue increased to 11.2% for the nine months ended
September 30, 1997 from 9.4% for the nine months ended September 30, 1996. The
increase corresponds to decreases in revenue in the third quarter. Cost of
license revenue increased primarily due to royalty expenses incurred on revenues
from third party software products sold by the Company. Cost of maintenance and
other revenue as a percentage of maintenance and other revenue decreased to
14.3% for the three months ended September 30, 1997 from 19.5% for the three
months ended September 30, 1996. Cost of maintenance and other revenue as a
percentage of maintenance and other revenue decreased to 14.4% for the nine
months ended September 30, 1997 from 20.4% for the nine months ended September
30, 1996, as maintenance and other 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 $363,000 for the three months ended September
30, 1997 from $215,000 for the three months ended September 30, 1996 and
increased to $874,000 for the nine months ended September 30, 1997 from $623,000
for the nine months ended September 30, 1996, as the Company hired additional
personnel to meet the contractual obligations under 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 remained constant at
$1.7 million for the three months ended September 30, 1997 and 1996, but
increased as a percentage of total revenue to 49.9% from 35.1% for the three
months ended September 30, 1997 and 1996, respectively. Sales and marketing
expenses increased to $5.4 million for the nine months ended September 30, 1997
from $4.4 million for the nine months ended September 30, 1996 and increased as
a percentage of total revenue to 38.9% from 34.4% for the nine months ended
September 30, 1997 and 1996, respectively, primarily due to the addition of
sales and marketing personnel, the costs associated with the sales
reorganization completed in the second quarter of 1997 and the ongoing expenses
of sales offices opened in mid-1996 in Boston, Portland and Milan, Italy.
RESEARCH AND DEVELOPMENT. Research and development expenses include
engineering and operations personnel, 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 $2.0
million for the three months ended September 30, 1997 from $1.3 million for the
three months ended September 30, 1996, and increased as a percentage of total
revenue to 57.8% from 27.1% for the three months ended September 30, 1997 and
1996, respectively. Research and development expenses increased to $5.3 million
for the nine months ended September 30, 1997 from $3.8 million for the nine
months ended September 30, 1996, and increased as a percentage of total revenue
to 38.5% from 29.5% for the nine months ended September 30, 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 increased to $681,000
for the three months ended September 30, 1997 from $363,000 for the three months
ended September 30, 1996, and increased as a percentage of total revenue to
19.7% from 7.5% for the three months ended September 30, 1997 and 1996,
respectively. For the nine months ended September 30, 1997 and 1996, general
and administrative expenses increased to $1.6 million from $1.2 million, and
increased as a percentage of total revenue to 11.5% from 9.5% for the nine
months ended September 30, 1997 and 1996,
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respectively. General and administrative expenses increased for the three
and nine months ended September 30, 1997 from the same periods in 1996 due to
increased headcount, the costs of being a public company, additional
increases to bad debt reserves and compensation accruals.
COST OF MERGERS. During the third quarter of 1997, the Company completed
its merger with Precim Corporation and announced its intent to merge with
Avant!. The Company incurred approximately $300,000 of costs associated with
the mergers, primarily legal and accounting fees.
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
$473,000 and $64,000 for the three months ended September 30, 1997 and 1996,
respectively, and $1.4 million and $132,000 for the nine months ended September
30, 1997 and 1996, respectively. Other expense was $24,000 and $39,000 for the
three months ended September 30, 1997 and 1996, respectively, and $78,000 and
$105,000 for the nine months ended September 30, 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 during the third quarter of 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 37.8% for the nine months ended
September 30, 1997 as compared with 52.9% for the nine months ended September
30, 1996. Because the Company generates a significant portion of its total
revenue from international sales, the Company historically has had 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 1996 tax provision, which
resulted in an effective rate of taxation in excess of the U.S. statutory rate.
Because of anticipated increases in domestic income and the anticipated
utilization of available tax credits, the Company's effective tax rate in 1997
has declined.
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 nine months ended September 30, 1997, the Company generated
$564,000 from operating activities. The funds resulted primarily from net
income and an increase in accrued liabilities and deferred revenue, offset by an
increase in accounts receivable. Cash used in investing activities of $8.7
million was primarily for net purchases of short-term investments and capital
equipment.
As of September 30, 1997, the Company had working capital of $34.3 million
and cash, cash equivalents and short-term investments of $34.6 million. 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 cash equivalents, short-term investments and funds generated
from operations will provide the Company with sufficient funds to finance its
operations for at least the next 12 months. If the Company's merger with Avant!
is consummated, it will become a wholly-owned subsidiary of Avant! and its
capital expenditure and funding needs will be determined by Avant!. If the
merger with Avant! is not consummated, 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.
11
<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.
UNCERTAINTY RELATED TO PROPOSED MERGER. The proposed merger between the
Company and Avant! is subject to shareholder approval, and if approved by the
shareholders, there can be no assurance that the process of integrating the
Company's business and personnel with Avant! can be effectively managed to
realize the synergies anticipated from the combination of the companies. The
Company and Avant! corporation have filed a joint Proxy Statement/Prospectus
which more fully describes the terms and conditions of the proposed merger.
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
12
<PAGE>
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 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.
GEOGRAPHICAL CONCENTRATION IN ASIA: DEPENDENCE UPON DISTRIBUTORS AND
REPRESENTATIVES. In 1996, 1995, 1994 and the first nine 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 49.7%, respectively, of the Company's total revenue. Sales of the
Company's product licenses to customers in Japan were and are made
exclusively through a single distributor, Innotech Corporation ("Innotech").
In Korea, until September 30, 1997, licenses to customers were 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 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.
On September 30, 1997 the Company terminated its representative
relationship with C&G. The Company subsequently established a wholly owned
subsidiary in Korea in October 1997. The subsidiary, Technology Modeling
Associates Korea, Inc. ("TMAK") will serve primarily as a sales and engineering
applications support office for the Company's customers in Korea. Although the
Company does not expect there to be a material adverse effect on the Company's
revenue from Korea in future periods, there can be no assurance that TMAK can
maintain the sales and support level of the past.
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
13
<PAGE>
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 nine 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 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 Disclosures about Market Risk
Not applicable
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds
On August 29, 1997, the Company entered into an Agreement and Plan of
Reorganization with Precim Corporation, pursuant to which the Company
issued 387,000 shares of its common stock to the two shareholders of Precim
in exchange for all of the capital stock of Precim. The issuance of shares
of the Company's Common Stock to the shareholders of Precim was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on section 4(2) of the Securities Act. The securities
were sold with no general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary
to evaluate the investment.
On September 20, 1996, the Company's registration statement on Form SB-2
(File No.33-5252-LA), related to the initial public offering of the
Company's Common Stock (the "Registration Statement"), was declared
effective by the Securities and Exchange Commission. The net offering
proceeds to the Company after expenses was $31,292,000 (the "Offering
Proceeds").
From the effective date of the Registration Statement to September 30, 1997, the
Offering Proceeds have been used for the purposes listed below:
<TABLE>
<CAPTION>
Direct or indirect payments to directors,
officers, general partners of the company
or their associates; to persons owning ten
(10) percent or more of any class of equity
securities of the Company; and to Direct or indirect
affiliates of the Company payments to others
------------------------- ------------------
<S> <C> <C>
Purchase and installation of machinery and equipment -- $ 782,000
Working capital -- 250,000
Purchase of short-term liquid securities -- 30,260,000
------------
-- $31,292,000
------------
------------
</TABLE>
ITEM 4 - Submission of Matters to a Vote of Security Holders
Not applicable
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 September 30, 1997.
15
<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 10, 1997 By: /S/ ROY E. JEWELL
--------------------------- -------------------------------
ROY E. JEWELL
President and Chief Executive Officer
DATE: NOVEMBER 10, 1997 By: /S/ BENNET L. WEINTRAUB
---------------------------- -------------------------------
BENNET L. WEINTRAUB
Chief Financial Officer and
Vice President of Finance and
Administration
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,420
<SECURITIES> 22,164
<RECEIVABLES> 4,498
<ALLOWANCES> 261
<INVENTORY> 0
<CURRENT-ASSETS> 40,118
<PP&E> 4,324
<DEPRECIATION> 1,689
<TOTAL-ASSETS> 43,004
<CURRENT-LIABILITIES> 5,933
<BONDS> 0
0
0
<COMMON> 33,362
<OTHER-SE> 3,189
<TOTAL-LIABILITY-AND-EQUITY> 43,004
<SALES> 0
<TOTAL-REVENUES> 13,778
<CGS> 0
<TOTAL-COSTS> 2,436
<OTHER-EXPENSES> 12,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,315)
<INCOME-PRETAX> 111
<INCOME-TAX> 42
<INCOME-CONTINUING> 69
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
