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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 June 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)
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 July 31, 1997, there were 7,683,952 shares of the
Registrant's Common Stock outstanding.
<PAGE>
TECHNOLOGY MODELING ASSOCIATES, INC.
FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
For the three months and six months ended 4
June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 5
For the six months ended June 30, 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 Disclosures about Market Risk 14
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 27.1 Financial Data Schedule
</TABLE>
2
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TECHNOLOGY MODELING ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $13,486 $21,074
Short-term investments 20,269 13,929
Accounts receivable, net 5,457 2,671
Prepaid income taxes 310 271
Other current assets 897 1,259
------- -------
Total current assets 40,419 39,204
LONG TERM ASSETS 250 250
PROPERTY AND EQUIPMENT, net 2,658 2,511
------- -------
$43,327 $41,965
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 303 $ 303
Current portion of capitalized lease obligations 144 138
Accounts payable 114 662
Accrued liabilities 2,556 1,738
Deferred revenue 2,470 1,909
------- -------
Total current liabilities 5,587 4,750
------- -------
LONG-TERM LIABILITIES, net of current portion:
Notes payable 273 425
Capitalized lease obligations 359 433
------- -------
Total long-term liabilities 632 858
------- -------
SHAREHOLDERS' EQUITY:
Common stock 32,994 33,661
Notes receivable from shareholders (296) (474)
Deferred compensation (870) (1,041)
Retained earnings 5,280 4,211
------- -------
Total shareholders' equity 37,108 36,357
------- -------
$43,327 $41,965
------- -------
------- -------
</TABLE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
License $3,343 $ 2,953 $ 6,665 $ 5,722
Maintenance and other 1,423 1,045 2,824 1,959
Professional services 498 100 830 100
------- -------- -------- --------
Total product revenue 5,264 4,098 10,319 7,781
Funded development 0 146 0 227
------- -------- -------- --------
Total revenue 5,264 4,244 10,319 8,008
------- -------- -------- --------
COST OF REVENUE:
License 358 254 643 508
Maintenance and other 166 179 406 409
Professional services 250 102 511 159
Funded development 0 130 0 265
------- -------- -------- --------
Total cost of revenue 774 665 1,560 1,341
------- -------- -------- --------
Gross profit 4,490 3,579 8,759 6,667
------- -------- -------- --------
OPERATING EXPENSES:
Sales and marketing 1,902 1,456 3,630 2,720
Research and development 1,665 1,331 3,298 2,477
General and administrative 417 430 908 856
------- -------- -------- --------
Total operating expenses 3,984 3,217 7,836 6,053
------- -------- -------- --------
Income from operations 506 362 923 614
OTHER INCOME, net 421 (8) 866 2
------- -------- -------- --------
Income before provision for income taxes 927 354 1,789 616
PROVISION FOR INCOME TAXES 367 180 720 322
------- -------- -------- --------
Net income $ 560 $ 174 $ 1,069 $ 294
------- -------- -------- --------
------- -------- -------- --------
NET INCOME PER SHARE $ 0.07 $ 0.03 $ 0.13 $ 0.05
------- -------- -------- --------
------- -------- -------- --------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 8,222 5,426 8,344 5,468
------- -------- -------- --------
------- -------- -------- --------
</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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,069 $ 294
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 391 279
Allowance for doubtful accounts 25 30
Non-cash compensation expense 231 180
Changes in operating assets and liabilities--
Accounts receivable (2,811) (39)
Prepaid income taxes (39) (41)
Other current assets 112 (225)
Accounts payable (548) (273)
Accrued liabilities 818 188
Deferred revenue 561 595
-------- -------
Net cash provided by (used for) operating
activities (191) 988
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (18,740) (974)
Sale of short-term investments 12,400 -
Collection of note receivable 250 -
Capital expenditures (538) (571)
-------- -------
Net cash used for investing activities (6,628) (1,545)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (68) 17
Payment of notes payable (152) (152)
Issuances of common stock 290 282
Repayment of receivable from shareholder 118 -
Repurchases of common stock (957) (63)
-------- -------
Net cash provided by (used for) financing
activities (769) 50
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,588) (507)
CASH AND CASH EQUIVALENTS, beginning of period 21,074 3,284
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 13,486 $ 2,777
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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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 second quarter of
1997 and 1996, basic net income per share would have been $.07 and $.04
and diluted net income per share would have been $.07 and $.03,
respectively. If SFAS No. 128 had been applied by the Company for the
six months ended June 30, 1997 and 1996, basic net income per share would
have been $.14 and $.07 and diluted net income per share would have been
$.13 and $.05, 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
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 and six months ended June 30, 1996
6
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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).
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
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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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
License . . . . . . . . . . . . . . . . . . 63.5% 69.6% 64.6% 71.5%
Maintenance and other . . . . . . . . . . . 27.0 24.6 27.4 24.5
Professional services . . . . . . . . . . . . 9.5 2.4 8.0 1.2
----- ----- ----- -----
Total product revenue . . . . . . . . . 100.0 96.6 100.0 97.2
Funded development . . . . . . . . . . . . . 0.0 3.4 0.0 2.8
----- ----- ----- -----
Total revenue . . . . . . . . . . . . . 100.0 100.0 100.0 100.0
----- ----- ----- -----
COST OF REVENUE:
License . . . . . . . . . . . . . . . . . . . 6.8 6.0 6.2 6.3
Maintenance and other . . . . . . . . . . . . 3.2 4.2 3.9 5.1
Professional services . . . . . . . . . . . . 4.7 2.4 4.9 2.0
Funded development . . . . . . . . . . . . . 0.0 3.1 0.0 3.3
----- ----- ----- -----
Total cost of revenue . . . . . . . . . 14.7 15.7 15.0 16.7
----- ----- ----- -----
Gross profit . . . . . . . . . . 85.3 84.3 85.0 83.3
----- ----- ----- -----
OPERATING EXPENSES:
Sales and marketing . . . . . . . . . . . . . 36.1 34.3 35.2 34.0
Research and development . . . . . . . . . . 31.6 31.4 32.0 30.9
General and administrative . . . . . . . . . 8.0 10.1 8.8 10.7
----- ----- ----- -----
Total operating expenses . . . . . . . . 75.7 75.8 76.0 75.6
----- ----- ----- -----
Income from operations . . . . . . . . . 9.6 8.5 9.0 7.7
OTHER INCOME (EXPENSE), NET . . . . . . . . . . . 8.0 (0.2) 8.4 0.0
----- ----- ----- -----
Income before provision for income taxes 17.6 8.3 17.4 7.7
PROVISION FOR INCOME TAXES . . . . . . . . . . . . 7.0 4.2 7.0 4.0
----- ----- ----- -----
Net income . . . . . . . . . . . . . . . 10.6% 4.1% 10.4% 3.7%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 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 increased 24.0% to $5.3 million for the three months ended June
30, 1997 from $4.2 million for the three months ended June 30, 1996 and
increased 28.8% to $10.3 million for the six months ended June 30, 1997 from
$8.0 million for the six months ended June 30, 1996.
8
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International sales were $3.8 million and $2.7 million for the three months
ended June 30, 1997 and 1996, respectively, representing 71.9% and 64.5% of
total revenue for the respective periods. International sales were $7.2
million and $5.5 million for the six months ended June 30, 1997 and 1996,
respectively, representing 69.6% and 68.6% 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.
License revenue increased 13.2% to $3.3 million for the three months ended
June 30, 1997 from $3.0 million for the three months ended June 30, 1996 and
increased 16.5% to $6.7 million for the six months ended June 30, 1997 from
$5.7 million for the six months ended June 30, 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,
offsetting a decrease in Europe. Europe accounts for only 4% of total
product revenue.
Maintenance and other revenue increased 36.2% to $1.4 million for the three
months ended June 30, 1997 from $1.0 million for the three months ended June
30, 1996 and increased 44.1% to $2.8 million for the six months ended June
30, 1997 from $2.0 million for the six months ended June 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 increased to $498,000 for the three months
ended June 30, 1997 from $100,000 for the three months ended June 30, 1996
and increased to $830,000 for the six months ended June 30, 1997 from
$100,000 for the six months ended June 30, 1996. 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 or six months ended
June 30, 1997.
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 percentage of
license revenue increased to 10.7% for the three months ended June 30, 1997
from 8.6% of license revenue for the three months ended June 30 1996. Cost
of license revenue as a percentage of license revenue increased to 9.6% for
the six months ended June 30, 1997 from 8.9% of license revenue for the six
months ended June 30, 1996. Cost of license revenue increased 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
percentage of maintenance and other revenue decreased to 11.7% for the three
months ended June 30, 1997 from 17.1% for the three months ended June 30,
1996. Cost of maintenance and other revenue as a percentage of maintenance
and other revenue decreased to 14.4% for the six months ended June 30, 1997
from 20.8% for the six months ended June 30, 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 $250,000 for the
three months ended June 30, 1997 from $102,000 for the three months ended
June 30, 1996 and increased to $511,000 for the six months ended June 30,
1997 from $159,000 for the six months ended June 30, 1996, as the Company
hired additional personnel to meet the obligations under the revenue
contracts obtained by the Company.
9
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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 $1.9 million for the three months ended June 30, 1997 from $1.5
million for the three months ended June 30, 1996 and increased as a
percentage of total revenue to 36.1% from 34.3% for the three months ended
June 30, 1997 and 1996, respectively. Sales and marketing expenses increased
to $3.6 million for the six months ended June 30, 1997 from $2.7 million for
the six months ended June 30, 1996 and increased as a percentage of total
revenue to 35.2% from 34.0% for the six months ended June 30, 1997 and 1996,
respectively. Sales and marketing expenses increased 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 $1.7 million for the three months ended June 30, 1997
from $1.3 million for the three months ended June 30, 1996, and increased as
a percentage of total revenue to 31.6% from 31.4% for the three months ended
June 30, 1997 and 1996, respectively. Research and development expenses
increased to $3.3 million for the six months ended June 30, 1997 from $2.5
million for the six months ended June 30, 1996, and increased as a percentage
of total revenue to 32.0% from 30.9% for the six months ended June 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 decreased slightly to
$417,000 for the three months ended June 30, 1997 from $430,000 for the three
months ended June 30, 1996, and decreased as a percentage of total revenue to
7.9% from 10.1% for the three months ended June 30, 1997 and 1996,
respectively, due to costs associated with the move to a new corporate
facility in 1996. For the six months ended June 30, 1997 and 1996, general
and administrative expenses increased to $908,000 from $856,000, but
decreased as a percentage of total revenue to 8.8% from 10.7% for the six
months ended June 30, 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.
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 $447,000
and $27,000 for the three months ended June 30, 1997 and 1996, respectively,
and $921,000 and $61,000 for the six months ended June 30, 1997 and 1996,
respectively. Other expense was $26,000 and $35,000 for the three months
ended June 30, 1997 and 1996, respectively, and $55,000 and $59,000 for the
six months ended June 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 40.3% for the six months ended June
30, 1997 as compared with 52.4% for the six months ended June 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 increases in domestic
10
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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 six months ended June 30, 1997, the Company used $191,000 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 $6.4
million was primarily for net purchases of short-term investments and capital
equipment.
As of June 30, 1997, the Company had working capital of $34.8 million and cash
and equivalents and short-term investments of $33.8 million. As of June 30,
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 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. 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
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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, operating results and financial
12
<PAGE>
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 six 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 58.0%, 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.
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 six 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
13
<PAGE>
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
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held May 22, 1997, the shareholders of
the Company approved the following matters:
(a) A proposal to elect five directors of the Company to serve for the
ensuing year and until their successors are elected or until such directors'
earlier resignation or removal. Below is a summary of the votes cast.
NOMINEE IN FAVOR WITHHELD
Roy E. Jewell 6,624,470 100
Robert W. Dutton 6,624,470 100
William E. Drobish 6,624,470 100
Louis A. Delmonico 6,624,470 100
Ronald A. Rohrer 6,624,470 100
(b) A proposal for the ratification of the selection of Arthur Andersen
LLP as independent public accountants was approved by a vote of 6,617,270 for
7,300 abstained and none withheld.
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 June 30, 1997.
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: August 12, 1997 By: /s/ Roy E. Jewell
----------------------- ---------------------------------------
ROY E. JEWELL
President and Chief Executive Officer
DATE: August 12, 1997 By: /s/ Bennet L. Weintraub
----------------------- ---------------------------------------
BENNET L. WEINTRAUB
Chief Financial Officer and
Vice President of Finance and
Administration
15
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<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.
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<PERIOD-TYPE> 6-MOS
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 20,269
<RECEIVABLES> 5,457
<ALLOWANCES> 200
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<CURRENT-ASSETS> 40,419
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0
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<COMMON> 32,994
<OTHER-SE> 4,114
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<TOTAL-REVENUES> 10,319
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<TOTAL-COSTS> 1,560
<OTHER-EXPENSES> 7,836
<LOSS-PROVISION> (20)
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<INCOME-PRETAX> 1,789
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