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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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
Commission file number 0-22044
WONDERWARE CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 33-0304677
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 Technology Drive, Irvine, CA 92618
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(Address of principal executive (Zip Code)
offices)
(714) 727-3200
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(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. [X] Yes [ ] No
As of June 30, 1997, there were 14,083,202 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
WONDERWARE CORPORATION
FORM 10-Q INDEX
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ materially
from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding market
acceptance of new products and product enhancements, delays in the introduction
of new products or product enhancements, size and timing of individual orders,
competition and pricing in the software industry, general economic conditions in
the Company's geographic markets, seasonality of revenues, litigation involving
the Company, and the management of the Company's growth, as well as those
factors discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and Registration Statement on Form S-3 (No. 333-xxxx).
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations (unaudited)
for the Three and Six Month Periods Ended June 30,
1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited)
for the Six Month Periods Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 23,379,838 $ 26,487,553
Short-term investments ............................................... 25,208,090 25,681,766
Accounts receivable, net ............................................. 14,096,162 12,377,041
Inventories 1,156,878 1,100,056
Deferred tax assets 2,184,687 2,184,687
Prepaid expenses and other current assets 2,937,724 2,796,136
------------ ------------
Total current assets ............................................. 68,963,379 70,627,239
Property and equipment, net .............................................. 12,847,466 13,395,833
Goodwill, net 4,587,292 4,829,792
Noncurrent deferred tax assets 3,736,296 3,736,296
Other assets 992,043 1,099,703
------------ ------------
Total assets ..................................................... $ 91,126,476 $ 93,688,863
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ....................................................... $ 441,440 $ 289,446
Accounts payable ..................................................... 3,358,538 5,210,079
Accrued employee incentive compensation 696,077 977,793
Accrued commissions 258,189 309,845
Income taxes payable 622,162 80,247
Accrued payroll and related liabilities 2,133,551 2,845,333
Other accrued liabilities 1,276,658 3,728,163
Deferred revenue 2,112,637 1,641,605
------------ ------------
Total current liabilities ........................................ 10,899,252 15,082,511
Commitments
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
14,083,202 and 13,865,896 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 14,083 13,866
Additional paid-in capital ........................................... 87,425,927 86,424,172
Unrealized loss on short-term investments (34,269) (14,905)
Accumulated translation loss (368,829)
Accumulated deficit (6,809,688) (7,816,781)
------------ ------------
Total stockholders' equity ....................................... 80,227,224 78,606,352
------------ ------------
Total liabilities and stockholders' equity ....................... $ 91,126,476 $ 93,688,863
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Total revenues $ 20,885,385 $ 14,867,944 $ 39,188,793 $30,790,820
Cost of sales 1,923,002 1,000,303 3,075,760 2,029,340
---------------- ---------------- ---------------- ----------------
Gross profit 18,962,383 13,867,641 36,113,033 28,761,480
Operating expenses:
Research and development 5,032,843 4,364,576 9,688,415 8,498,243
Selling, general and administrative 13,284,998 12,057,466 26,228,160 21,214,588
---------------- ---------------- ---------------- ----------------
Operating income (loss) 644,542 (2,554,401) 196,458 (951,351)
Other income, net 645,967 687,365 1,192,813 1,352,176
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for
income taxes 1,290,509 (1,867,036) 1,389,271 400,825
Provision for income taxes 355,025 (634,916) 382,185 136,276
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 935,484 $ (1,232,120) $ 1,007,086 $ 264,549
================ ================ ================ ================
Net income (loss) per common and
common equivalent share $ 0.07 $ (0.09) $ 0.07 $ 0.02
Weighted average common and
common equivalent shares 14,343,822 13,631,639 14,179,103 14,221,122
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
---------------------------------------
1997 1996
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,007,086 $ 264,549
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,351,341 2,111,981
Provision for doubtful accounts 156,950
Deferred taxes 260,455
Compensation costs related to stock option grants 93,961 485,410
Changes in operating assets and liabilities:
Accounts receivable (2,152,894) 26,688
Income tax refund receivable (876,164)
Inventories (98,455) (587,221)
Prepaid expenses and other current assets (219,636) (52,938)
Accounts payable (1,811,368) 897,205
Accrued employee incentive compensation (266,993) (271,130)
Accrued commissions (51,656) (78,842)
Income taxes payable 568,285 (438,548)
Accrued payroll and other accrued liabilities (3,068,005) (1,818,631)
Deferred revenue 471,032 360,522
------------------ -----------------
Net cash provided by (used in) operating
activities (2,177,302) 440,286
Cash flows from investing activities:
Purchases of property and equipment (2,439,257) (6,541,635)
Sales and maturities of short-term investments 15,042,171 24,276,033
Purchases of short-term investments (14,587,859) (30,310,800)
------------------ -----------------
Net cash used in investing activities (1,984,945) (12,576,402)
Cash flows from financing activities:
Proceeds from exercise of stock options 376,774 670,064
Tax benefit related to exercise of stock options 583,071
Borrowings on line of credit 190,492
Net proceeds from issuance of common stock 531,237 723,109
------------------ -----------------
Net cash provided by financing activities 1,098,503 1,976,244
------------------ -----------------
Effect of exchange rate changes on cash (43,971)
------------------ -----------------
Net decrease in cash and cash equivalents (3,107,715) (10,159,872)
Cash and cash equivalents, beginning of period 26,487,553 22,637,986
------------------ -----------------
Cash and cash equivalents, end of period $ 23,379,838 $ 12,478,114
================== =================
Supplemental cash flow information:
Interest paid $ 22,753
Income taxes paid $ 77,008 $ 491,412
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WONDERWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim condensed consolidated financial statements included herein have
been prepared by Wonderware Corporation ("Wonderware" or the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "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 SEC rules
and regulations; nevertheless, the management of the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed with the SEC in March 1997. In the opinion of management, the
condensed consolidated financial statements included herein reflect all
adjustments necessary to present fairly the consolidated financial position of
the Company as of June 30, 1997, the results of its operations for the three and
six month periods ended June 30, 1997 and 1996, and its cash flows for the six
month periods ended June 30, 1997 and 1996. The results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year.
2. Stockholders' Equity and Earnings Per Share
Net income per common and common equivalent share for the three month period
ended June 30, 1997 and the six month periods ended June 30, 1997 and 1996 are
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. Weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method.
Net loss per common and common equivalent share for the three month period ended
June 30, 1996 is computed by dividing net loss by the weighted average number of
common shares outstanding. Common equivalent shares are not included as the
effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the statement is not permitted. The
Company has determined that the adoption of this statement would not have had a
material impact on the earnings per share calculations for the periods
presented.
3. Legal Proceedings
In July 1996, the Company filed a complaint in the Superior Court of California
for the County of Orange against Constantin S. Delivanis and Vladimir Preysman,
formerly the Vice President and Vice President-Engineering, respectively, of the
Company's Cupertino Development Center. This complaint alleged fraud, negligent
misrepresentation, duress, securities fraud, breach of the implied covenant of
good faith and fair dealing, and breach of fiduciary duty against Messrs.
Delivanis and Preysman and sought compensatory and punitive damages with respect
to the Company's claims, as well as the costs incurred in pursuing these claims.
Mr. Delivanis and Mr. Preysman's employment with the Company was terminated.
Both Mr. Delivanis and Mr. Preysman answered the complaint, asserted
cross-claims against the Company, and requested relief in the form of
compensatory and punitive damages as well as the costs incurred in pursuing
their cross-claims. In addition, in September 1996, Mr. Delivanis, Mr. Preysman,
and the Delivanis-Kibrick Family Trust filed a complaint for declaratory
judgment and specific performance, seeking registration of certain Wonderware
common stock. The Company filed an answer and cross-complaint in response.
Further, in December 1996, Mr. Delivanis, Mr. Preysman and the Delivanis-Kibrick
Family Trust filed a complaint in the U.S. District Court for the Northern
District of California. This complaint was served on the Company in January
1997, and alleged securities law violations, fraud and deceit, and negligent
misrepresentation.
6
<PAGE>
In August 1997, all matters in the immediately preceding paragraph were finally
concluded in an out of court settlement binding all parties. The settlement
includes mutual and general releases of all claims by all parties and cash
payments by the Company to Messrs. Delivanis and Preysman. The settlement will
result in a one-time charge to earnings of approximately $1.9 million, including
attorneys' fees and related costs, to be recorded by the Company in the third
quarter of 1997.
In October 1996, the Company filed a complaint in the U.S. District Court for
the Central District of California against Cyberlogic Technologies, Inc.
("Cyberlogic") and Intellution, Inc. ("Intellution"). The complaint alleges that
Cyberlogic and Intellution have infringed the copyright of particular software
programs which Cyberlogic originally developed under contract for the Company,
and seeks preliminary and permanent injunctive relief as well as actual and
punitive damages and attorneys fees. In October 1996, the Court issued a
temporary restraining order against Cyberlogic and Intellution, and pursuant to
the Court's order, U.S. Marshals seized and copied certain materials at the
offices of Cyberlogic and Intellution. In January 1997, the Court entered its
preliminary injunction which generally bars Cyberlogic and Intellution from
marketing or otherwise distributing any infringing copies of the computer
software at issue in the proceeding. In February 1997, Intellution filed its
appeal of the preliminary injunction to the U.S. Court of Appeals for the Ninth
Circuit, and the Court denied the defendants' requests to stay the injunction
pending appeal. Cyberlogic has also appealed the injunction.
In December 1996, Cyberlogic submitted a demand for arbitration of the
underlying contractual issues involved in these proceedings. The U.S. District
Court for the Central District of California has ordered the case to arbitration
in Michigan before the American Arbitration Association. Dates for hearing the
arbitration and other related events have not yet been set. The Company intends
to vigorously prosecute its claims in the arbitration. It is too early to
determine the impact, if any, of these proceedings on the Company, its financial
condition or the results of the Company's operations.
In January 1997, the Company received a copy of a complaint which Cyberlogic
filed in the U.S. District Court for the Eastern District of Michigan. Among
other claims, this complaint purports to claim damages in excess of $40 million
and injunctive relief for the Company's alleged infringement of certain software
programs which Cyberlogic contends it owns. The Company believes the allegations
in Cyberlogic's complaint to be without merit and intends to vigorously defend
itself against these claims. Further, the Company believes that these claims
arise out of or relate to the proceeding pending in the U.S. District Court of
the Central District of California and the anticipated arbitration proceeding,
and the Company has moved the U.S. District Court for the Eastern District of
Michigan to compel arbitration of that action. The Court has taken the Company's
motion under submission. It is too early to determine the impact, if any, of
this proceeding on the Company, its financial condition or the results of the
Company's operations.
In June 1997, the Company received a copy of a complaint (the "TES Complaint")
filed in Massachusetts Superior Court in Worcester County by Flagship
Automation, a division of EMX Controls, Inc., and Total Enterprises Solutions,
Inc. (collectively, "TES"). The TES Complaint alleges that the Company breached
its contract with TES, breached an implied covenant of good faith, wrongfully
terminated TES' distributorship relationship, committed fraud, misappropriated
trade secrets, intentionally interfered with TES' contractual and advantageous
relationships and committed unfair and deceptive acts or practices under Chapter
93A of the Massachusetts General Laws. The TES Complaint seeks monetary damages.
The copy of the TES Complaint was forwarded to the Company by the President of
TES who indicated in his cover letter a willingness to seek an alternative
resolution of the matter. As of July 28, 1997, the TES Complaint had not been
served on the Company, and the Company has obtained removal of the complaint to
the U.S. District Court for the District of Massachusetts. The Company believes
that the allegations in the TES Complaint are without merit and intends to
vigorously defend itself against the claims stated in the TES Complaint if it is
served. It is too early to determine the impact, if any, of the TES Complaint on
the Company, its financial condition or the results of the Company's operations.
7
<PAGE>
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following table sets forth the percentage of total revenues represented by
certain consolidated statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 9.2% 6.7% 7.8% 6.6%
---------------- ---------------- ---------------- ----------------
Gross profit 90.8% 93.3% 92.2% 93.4%
Operating expenses:
Research and development 24.1% 29.4% 24.7% 27.6%
Selling, general and administrative 63.6% 81.1% 66.9% 68.9%
---------------- ---------------- ---------------- ----------------
Operating income (loss) 3.1% -17.2% 0.6% -3.1%
Other income, net 3.1% 4.6% 3.0% 4.4%
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for
income taxes 6.2% -12.6% 3.6% 1.3%
Provision for income taxes 1.7% -4.3% 1.0% 0.4%
---------------- ---------------- ---------------- ----------------
Net income (loss) 4.5% -8.3% 2.6% 0.9%
================ ================ ================ ================
</TABLE>
Total revenues. Total revenues include sales of software licenses and services,
less promotional discounts, refunds and sales returns. Revenues for the three
months ended June 30, 1997 increased 40 percent to $20.9 million from $14.9
million for the comparable quarter of 1996. For the six months ended June 30,
1997, revenues increased 27 percent to $39.2 million from $30.8 million in the
comparable period of 1996. The increases were primarily due to sales of the
Wonderware FactorySuite. The Wonderware FactorySuite began shipping in April
1997. The Wonderware FactorySuite bundles most of the development versions of
the Company's products into one package at a significantly reduced price when
compared to buying such development systems separately. Sales of the Wonderware
FactorySuite, including upgrade revenues, totaled $4.9 million during the
quarter. Revenues for the Wonderware InTouch product line during the second
8
<PAGE>
quarter totaled $13.8 million, which is approximately equal to such sales in the
second quarter of 1996. For the six months ended June 30, 1997, Wonderware
InTouch sales totaled $29.6 million as compared to $28.0 million for the
comparable period of 1996. The Company expects that its product mix will
continue to change in the future as new products, such as the Wonderware
FactorySuite, are introduced and gain market acceptance and that the share of
revenues contributed by the Wonderware InTouch line will decline as sales of
Wonderware InTouch development systems are replaced by sales of the Wonderware
FactorySuite. The discount available to customers that purchase the Wonderware
FactorySuite could have a material adverse impact on the Company's future
revenues from its other products and on the Company's results of operations and
financial condition. The Company also expects that some of its competitors will
offer similar suites of products. There can also be no assurance that the
Wonderware FactorySuite will gain further market acceptance.
International sales increased to $9.7 million, or 48 percent of total revenues,
for the three months ended June 30, 1997 from $5.4 million, or 36 percent of
total revenues, for the comparable quarter of 1996. For the six months ended
June 30, 1997, international sales totaled $18.6 million, or 47 percent of total
revenues, as compared to $12.5 million, or 40 percent of total revenues, for the
comparable period of 1996. The increase in international revenues resulted
primarily from sales growth in Asia and the elimination of the distributor
discount on certain sales in Europe following the Company's acquisition of its
German distributor in December 1996. The Company expects that international
sales will continue to represent a significant portion of its total revenues.
The Company's international operations are subject to various risks, including
seasonality, regulatory requirements, political and economic instability, and
trade restrictions. Although the Company's sales have typically been made in US
dollars, the Company's German subsidiary conducts its operations in German
marks. Therefore, a portion of the
Company's revenues is directly subject to the risk of currency fluctuations in
that market. In addition, a weakening in the value of foreign currencies
relative to the US dollar could have an adverse impact on the effective price of
the Company's products in its international markets. The Company also expects
that it will increasingly be required to transact in local currencies in order
to further its growth internationally and, therefore, will become more directly
exposed to the risk of foreign currency fluctuations.
The life cycles of the Company's products are difficult to estimate due in large
measure to the recent emergence of some of the Company's markets, the impact of
new product offerings, such as the Wonderware FactorySuite, and product
enhancements, and the future effect of competition. Declines in demand for the
Company's products, whether as a result of competition, technological change,
price reductions or otherwise, would have a material adverse effect on the
Company's operating results. There can be no assurance that the Company's
historical growth rates or its operating margins will be sustained in the
future.
Gross profit. Cost of sales includes the cost of manuals, diskettes and
duplication, packaging materials, assembly, paper goods, third-party software
royalties, amortization of acquired technology and shipping. All internal costs
related to research and development of software products and enhancements to
existing products are expensed as incurred.
The Company's consolidated gross margin for the three months ended June 30, 1997
decreased to 91 percent from 93 percent for the second quarter of 1996. For the
six months ended June 30, 1997, gross margin decreased to 92 percent from 93
percent in the comparable period of 1996. The decreases in gross margin were due
to lower pricing related to upgrades for initial shipments of the Wonderware
FactorySuite and higher third party royalty costs associated with the Wonderware
FactorySuite when compared to the Company's other product lines. These decreases
were partially offset by the elimination of the distributor discount on certain
sales as a result of the Company's acquisition of its distributor in Germany.
Gross profit for the quarter ended June 30, 1997 increased to $19.0 million from
$13.9 million for the second quarter of 1996, primarily due to increased sales
volume. Gross margin is expected to be adversely affected in future periods as
sales of new products incorporating additional third party royalties increase.
Declines in gross margins may be partially offset by increased selling prices as
upgrade programs expire. There can be no assurance that the Company will be able
to achieve historical gross margins in the future.
Research and development expenses. Research and development expenses consist
primarily of personnel and equipment costs required to conduct the Company's
development effort. For the three months ended June 30, 1997, research and
development expenses increased 15 percent to $5.0 million from $4.4 million for
the same quarter of 1996 while decreasing as a percentage of total revenues to
24 percent from 29 percent. For the six months ended June 30, 1997, such
expenses increased 14 percent to $9.7 million from $8.5 million for the
comparable period of 1996 while decreasing as a percentage of revenues to 25
percent from 28 percent The increase in absolute spending is primarily
attributable to costs related to contract programmers and software translation,
as well as to depreciation on fixed asset purchased during 1996 in support of
the development effort. This increase was offset by reduced operating expenses
resulting from the closure of the Company's development center in Cupertino,
California in February 1997. The Company believes that the introduction of new
technologies and products to the industrial automation market in a timely manner
is critical to its success and, as a consequence, the Company has increased the
absolute amount of its expenditures on research and development. For the
foreseeable future, the Company anticipates that it will continue to increase
spending in absolute dollars on research and development for the enhancement of
current products, the addition of new product capabilities and the integration
efforts associated with the Wonderware FactorySuite.
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed. Because the Company believes that its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no internal software development costs were
capitalized as of June 30, 1997. Significant new products developed in the
future may require the capitalization of internal software development expenses.
9
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of compensation costs of
administrative, sales and marketing personnel; advertising and promotional
expenses; and customer service and technical support costs. Selling, general and
administrative expenses increased 10 percent to $13.3 million for the three
months ended June 30, 1997 from $12.1 million for the same quarter of 1996,
while decreasing as a percentage of total revenues to 64 percent from 81
percent. For the six months ended June 30, 1997, such expenses increased 24
percent to $26.2 million from $21.2 million for the comparable period of 1996,
while decreasing as a percentage of sales to 67 percent from 69 percent. The
increase in the dollar amount of selling, general and administrative expenses
was primarily due to increased staffing in field sales and product marketing
required to further penetrate current and new markets for the Company's
products, increased promotional costs associated with the introduction of the
Wonderware FactorySuite, and increased staffing in technical support to provide
service to users of the Company's new product lines. The Company expects that
such expenses will continue to increase in absolute dollars as it expands its
worldwide sales distribution and customer support network for the Wonderware
FactorySuite product line.
Provision for income taxes. The Company's effective tax rate for the second
quarter of 1997 was 28 percent as compared to 34 percent for the same quarter of
1996. The decrease is primarily the result of the utilization of operating loss
and tax credit carryforwards.
Net income (loss). Net income for the three months ended June 30, 1997 totaled
$935,000, or $0.07 per share, as compared to a net loss of $1.2 million, or
$0.09 per share, in the second quarter of 1996. For the six months ended June
30, 1997, net income totaled $1.0 million, or $0.07 per share, compared to net
income of $265,000, or $0.02 per share, for the comparable period in 1996. Due
to the increasing level of spending in the areas of research and development,
and in selling, general and administrative functions as discussed above, the
Company anticipates that net income as a percentage of total revenues will
continue to be lower than historical levels. There can be no assurance that the
Company will sustain profitable operations in the future.
Fluctuations in quarterly operating results
Many software companies experience seasonal variations in revenues, with soft
domestic sales in the first quarter and soft European sales in the third
quarter. Although the significant growth in the Company's total revenues over
the past several years may have masked seasonal variations in the Company's
operating results, the Company believes that its results of operations are
subject to similar quarterly variations.
The Company has experienced significant fluctuations in its quarterly operating
results. The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including, among
others: delays in the introduction of products or product enhancements by the
Company, the Company's competitors or other providers of hardware, software and
components for the industrial automation market; costs associated with
acquisitions and the integration of such acquisitions; the size and timing of
individual orders; software "bugs" or other product quality problems;
competition and pricing in the software industry; seasonality of revenues;
customer order deferrals in anticipation of new products; market acceptance of
new products; reductions in demand for existing products and shortening of
product life cycles as a result of new product introductions; changes in
distributors' ordering patterns; changes in operating expenses; changes in
Company strategy; personnel changes; litigation expenses and judgments resulting
from litigation involving the Company; foreign currency exchange rates;
regulatory requirements and political and economic instability in foreign
markets; mix of products sold; and general economic conditions. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance.
Because the Company ships software within a short period after receipt of an
order, the Company typically does not have a material backlog of unfilled orders
and revenues in any quarter are substantially dependent on orders booked in that
quarter. The Company's expense levels are based in part on its expectations as
to future revenues and the Company may be unable to adjust spending in a timely
manner to compensate for any revenue shortfall. Accordingly, operating results
would be adversely affected by a reduction in revenues in that quarter since the
10
<PAGE>
majority of the Company's expenses are fixed. Any significant weakening in
demand would have an almost immediate adverse impact on the Company's operating
results and on the Company's ability to achieve profitability. Fluctuations in
operating results may also result in volatility in the price of the Company's
common stock.
Liquidity and Capital Resources
The Company currently finances its operations (including capital expenditures)
primarily through cash flow from operations and its current cash and short-term
investment balances. For the six months ended June 30, 1997, operating
activities used cash of $2.2 million, primarily related to an increase in
accounts receivable and decreases in accounts payable and accrued liabilities,
offset by net income, depreciation and amortization, and increases in deferred
revenue and income taxes payable.
During the six months ended June 30, 1997, investing activities used cash of
$2.0 million, primarily related to capital expenditures offset by net sales and
maturities of short-term investments. The issuance of capital stock through the
Employee Stock Purchase Plan, proceeds from the exercise of stock options, and
borrowings on the German bank line of credit provided cash from financing
activities of $1.1 million.
As of June 30, 1997, the Company had cash, cash equivalents and short-term
investments totaling $48.6 million.
The Company maintains an unsecured bank line of credit expiring in May 1998 that
provides for borrowings of up to $5 million at the bank's prime rate. No
borrowings were outstanding under this line of credit at June 30, 1997. The
Company's German subsidiary maintains a separate bank line of credit in Germany
which expires in February 1998. This line of credit provides for maximum
borrowings of 2.5 million German marks at the German bank's prime rate.
Approximately $441,000 (DM750,000) of borrowings against the German credit line
were outstanding as of June 30, 1997.
The Company's principal commitments as of June 30, 1997 consisted primarily of
leases on its headquarters and other facilities, and there were no material
commitments for capital expenditures.
The Company believes that its cash and short-term investment balances and
availability under its bank lines of credit as of June 30, 1997, and cash flow
generated from operations will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 3 of Notes
to Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Wonderware Corporation (the
"Annual Meeting") was held on May 12, 1997 in Newport Beach,
California.
Proposal I - Election of Directors
Each of the candidates listed below were duly elected to the Board of
Directors at the Annual Meeting by the tally indicated.
Candidate Votes in Favor Votes Withheld
--------- -------------- --------------
F. Rigdon Currie 11,575,583 266,576
Harvard H. Hill, Jr. 11,575,658 266,501
Jay L. Kear 11,565,340 276,819
John E. Rehfeld 11,627,495 214,664
Roy H. Slavin 11,620,373 221,786
Proposal II - Approval of the Employee Stock Purchase Plan, as amended
Votes in Favor Votes Against Votes Abstained Non-Votes
11,120,304 333,670 46,567 341,618
Proposal III - Ratification of Selection of Independent Auditors
Votes in Favor Votes Against Votes Abstained
11,735,815 44,426 61,918
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 11 Statement Regarding Computation of Net Income Per Share.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WONDERWARE CORPORATION
----------------------------------------
(Registrant)
Date: August 13, 1997 /s/ Roy H. Slavin
-------------------------- -----------------------------------------
Roy H. Slavin
Chairman of the Board, President and
Chief Executive Officer
(Principal executive officer)
Date: August 13, 1997 /s/ Sam M. Auriemma
-------------------------- -----------------------------------------
Sam M. Auriemma
Vice President, Finance and Chief
Financial Officer
(Principal financial and accounting officer)
13
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during period 14,038,309 13,631,639 13,910,112 13,532,876
Exercise of outstanding stock options
(including "cheap stock" options), less
shares assumed repurchased 305,513 268,991 688,246
---------------- ---------------- ---------------- ----------------
Weighted average common and common
equivalent shares 14,343,822 13,631,639 14,179,103 14,221,122
================ ================ ================ ================
Net income (loss) $ 935,484 $(1,232,120) $ 1,007,086 $ 264,549
Net income (loss) per share $ 0.07 $ (0.09) $ 0.07 $ 0.02
</TABLE>
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,379,838
<SECURITIES> 25,208,090
<RECEIVABLES> 14,096,162
<ALLOWANCES> 0
<INVENTORY> 1,156,878
<CURRENT-ASSETS> 68,963,379
<PP&E> 12,847,466
<DEPRECIATION> 0
<TOTAL-ASSETS> 91,126,476
<CURRENT-LIABILITIES> 10,899,252
<BONDS> 0
0
0
<COMMON> 14,083
<OTHER-SE> 87,022,829
<TOTAL-LIABILITY-AND-EQUITY> 91,126,476
<SALES> 39,188,793
<TOTAL-REVENUES> 39,188,793
<CGS> 3,075,760
<TOTAL-COSTS> 3,075,760
<OTHER-EXPENSES> 9,688,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,389,271
<INCOME-TAX> 382,185
<INCOME-CONTINUING> 1,007,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007,086
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
