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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
[ ] 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
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0304677
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 Technology Drive, Irvine, California 92618
- ------------------------------------------ ----------------------------------
(Address of principal executive offices) (Zip Code)
(714) 727-3200
- --------------------------------------------------------------------------------
(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 September 30, 1997, there were 14,211,398 shares of the Registrant's
Common Stock outstanding.
================================================================================
<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.
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations (unaudited) for the
Three and Nine Month Periods Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Month Periods Ended September 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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
---------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,598,188 $ 26,487,553
Short-term investments 29,950,728 25,681,766
Accounts receivable, net 13,084,037 12,187,041
Inventories 881,020 1,100,056
Deferred tax assets 2,184,687 2,184,687
Prepaid expenses and other current assets 3,439,047 2,796,136
---------------- ----------------
Total current assets 69,137,707 70,437,239
Property and equipment, net 12,576,286 13,395,833
Goodwill, net 4,466,042 4,829,792
Noncurrent deferred tax assets 3,736,296 3,736,296
Other assets 1,772,882 1,099,703
---------------- ----------------
Total assets $ 91,689,213 $ 93,498,863
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 190,555 289,446
Accounts payable 1,702,106 5,210,079
Accrued employee incentive compensation 872,921 977,793
Accrued commissions 115,611 309,845
Income taxes payable 491,601 80,247
Accrued payroll and related liabilities 1,897,803 2,845,333
Other accrued liabilities 3,387,776 3,538,163
Deferred revenue 1,766,726 1,641,605
---------------- ----------------
Total current liabilities 10,425,099 14,892,511
Commitments
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized; 14,211,398 and 13,865,896 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 14,211 13,866
Additional paid-in capital 88,500,669 86,424,172
Unrealized gain (loss) on short-term investments 21,434 (14,905)
Accumulated translation loss (394,977)
Accumulated deficit (6,877,223) (7,816,781)
---------------- ----------------
Total stockholders' equity 81,264,114 78,606,352
---------------- ----------------
Total liabilities and stockholders' equity $ 91,689,213 $ 93,498,863
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Sept. 30, Nine months ended Sept. 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total revenues $ 19,650,864 $ 15,169,435 $ 58,839,656 $ 45,960,255
Cost of sales 1,509,383 990,007 4,585,142 3,019,347
---------------- ---------------- ---------------- ----------------
Gross profit 18,141,481 14,179,428 54,254,514 42,940,908
Operating expenses:
Research and development 4,959,045 5,298,194 14,647,455 13,796,438
Selling, general and administrative 11,961,863 12,506,908 38,189,981 33,721,496
---------------- ---------------- ---------------- ----------------
Operating income (loss) before legal
settlement 1,220,573 (3,625,674) 1,417,078 (4,577,026)
Legal settlement 1,900,000 1,900,000
---------------- ---------------- ---------------- ----------------
Operating loss
(679,427) (3,625,674) (482,922) (4,577,026)
Other income, net 586,251 610,311 1,779,065 1,962,487
---------------- ---------------- ---------------- ----------------
Income (loss) before provision (benefit)
for income taxes (93,176) (3,015,363) 1,296,143 (2,614,539)
Provision (benefit) for income taxes (25,641) (1,025,223) 356,591 (888,947)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (67,535) $(1,990,140) $ 939,552 $(1,725,592)
================ ================ ================ ================
Net income (loss) per common and
common equivalent share $ - $ (0.15) $ 0.06 $ (0.13)
Weighted average common and
common equivalent shares 14,143,643 13,690,198 14,468,800 13,589,024
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
---------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 939,552 $ (1,725,592)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 5,151,572 3,643,476
Provision for doubtful accounts 152,642 131,550
Deferred taxes (138,694)
Compensation costs related to stock option grants 93,961 566,296
Changes in operating assets and liabilities:
Accounts receivable (1,501,296) 345,555
Income tax refund receivable (1,545,872)
Inventories (462,057) (590,234)
Prepaid expenses and other current assets (1,393,793) (965,105)
Accounts payable (3,464,023) 1,483,221
Accrued employee incentive compensation (88,075) (25,035)
Accrued commissions (194,234) (157,648)
Income taxes payable 1,055,055 (438,548)
Accrued payroll and other accrued liabilities (997,103) (2,493,267)
Deferred revenue 125,121 99,326
------------------ -----------------
Net cash used in operating activities (582,678) (1,810,571)
Cash flows from investing activities:
Purchases of property and equipment (3,846,009) (9,374,990)
Investment in affiliate (108,070) (6,489)
Sales and maturities of short-term investments 23,161,084 40,799,376
Purchases of short-term investments (27,393,707) (46,420,521)
------------------ -----------------
Net cash used in investing activities (8,186,702) (15,002,624)
Cash flows from financing activities:
Proceeds from exercise of stock options 729,469 753,610
Tax benefit related to exercise of stock options 583,071
Payments on line of credit (66,774)
Net proceeds from issuance of common stock 1,253,413 1,581,377
------------------ -----------------
Net cash provided by financing activities 1,916,108 2,918,058
------------------ -----------------
Effect of exchange rate changes on cash (36,093)
------------------ -----------------
Net decrease in cash and cash equivalents (6,889,365) (13,895,137)
Cash and cash equivalents, beginning of period 26,487,553 22,637,986
------------------ -----------------
Cash and cash equivalents, end of period $ 19,598,188 $ 8,742,849
================== =================
Supplemental cash flow information:
Interest paid $ 38,073
Income taxes paid $ 107,308 $ 495,168
</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 September 30, 1997, the results of its operations for the
three and nine month periods ended September 30, 1997 and 1996, and its cash
flows for the nine month periods ended September 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 nine month period
ended September 30, 1997 is 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 periods
ended September 30, 1997 and 1996 and the nine month period ended September 30,
1996 are 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.
3. New Accounting Pronouncements
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, and replaces the presentation of "primary" earnings per
share with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. Early adoption of the
statement is not permitted. When adopted, all previously reported earnings per
share amounts must be restated based on the provisions of the new standard. Pro
forma basic and diluted earnings per share calculated in accordance with SFAS
No. 128 are provided in the schedule below.
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic earnings per share $ 0.00 $ (0.15) $ 0.07 $ (0.13)
================ ================ ================ ================
Diluted earnings per share $ 0.00 $ (0.15) $ 0.06 $ (0.13)
================ ================ ================ ================
</TABLE>
For the fiscal years beginning after December 15, 1997, the Company will adopt
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information." The Company is
reviewing the impact of such statements on its financial statements.
6
<PAGE>
4. Subsequent Events
In October 1997, the Company acquired minority interests in two of its
distributors. The Company acquired a 19.9 percent interest in SoftCell, Inc., a
North Carolina corporation, for $598,000. The Company also acquired a 19.9
percent interest in Standard Automation & Control LLC, a Texas limited liability
company, for $1.5 million. In addition to the investments, the Company is
obligated to loan or guarantee loans up to $1.5 million to each distributor. The
Company also obtained options to purchase the remaining ownership interests in
each distributor at a value based upon its financial performance. The option
with respect to SoftCell, Inc. is exercisable by the Company at any time during
the two years commencing October 21, 2000 and is exercisable only for cash. The
option with respect to Standard Automation & Control LLC is exercisable by the
Company at any time during the three years commencing October 28, 1999 and is
exercisable for cash or shares of the Company's Common Stock, at the election of
the Company.
5. Legal Proceedings
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 also appealed the injunction. In September 1997, the
Court of Appeals affirmed the preliminary 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 December 1996, the Company received a copy of a complaint that had been filed
in the U.S. District Court for the Eastern District of Pennsylvania by Otto M.
Voit, III. In the complaint, Mr. Voit purports to be acting on behalf of all
former holders of common stock, or options to acquire common stock, of Soft
Systems Engineering, Inc. ("SSE"). Mr. Voit alleges in the complaint that the
Company and certain of its officers made false and misleading statements and
concealed material information in connection with the Company's acquisition of
SSE. In the complaint, Mr. Voit claims that these alleged misrepresentations and
omissions constitute violations of various federal and state securities laws,
fraud, negligence and inducement to enter into a contract by material
7
<PAGE>
misrepresentation, and he requests relief in the form of compensatory and
punitive damages as well as the costs incurred in pursuing his claims. In
January 1997, the Company filed a motion to dismiss the complaint on several
grounds. In September 1997, the court denied the Company's motion to dismiss,
and discovery has commenced. The trial of the case is set to commence at some
point during or after March 1998. The Company believes the allegations in the
complaint to be without merit and intends to vigorously defend itself and the
other defendants, each of whom has been previously indemnified by the Company in
connection with his employment as an officer of the Company, against the claims
stated in the complaint. 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 initially 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. In July 1997, the Company obtained removal
of the TES complaint to the U.S. District Court for the District of
Massachusetts. The TES Complaint was served in October 1997, and TES has granted
the Company an extension to answer until January 1998. 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. 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.
In August 1997, all matters in the various proceedings involving Constantin S.
Delivanis, Vladimir Preysman, Delivanis-Kibrick Family Trust and the Company
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
resulted in a one-time charge to earnings of $1.9 million, including attorneys'
fees and related costs, during the third quarter of 1997.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following table (unaudited) sets forth the percentage of total revenues
represented by certain consolidated statement of operations data for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 7.7% 6.5% 7.8% 6.6%
---------------- ---------------- ---------------- ----------------
Gross profit 92.3% 93.5% 92.2% 93.4%
Operating expenses:
Research and development 25.2% 34.9% 24.9% 30.0%
Selling, general and administrative 60.9% 82.4% 64.9% 73.4%
---------------- ---------------- ---------------- ----------------
Operating income (loss) before legal
settlement 6.2% -23.8% 2.4% -10.0%
Legal settlement 9.7% 3.2%
---------------- ---------------- ---------------- ----------------
Operating loss -3.5% -23.8% -0.8% -10.0%
Other income, net 3.0% 4.0% 3.0% 4.3%
---------------- ---------------- ---------------- ----------------
Income (loss) before provision
(benefit) for income taxes -0.5% -19.8% 2.2% -5.7%
Provision (benefit) for income taxes -0.1% -6.8% 0.6% -1.9%
---------------- ---------------- ---------------- ----------------
Net income (loss) -0.4% -13.0% 1.6% -3.8%
================ ================ ================ ================
</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 September 30, 1997 increased 30 percent to $19.7 million from $15.2
million for the comparable quarter of 1996. For the nine months ended September
30, 1997, revenues increased 28 percent to $58.8 million from $46.0 million in
the comparable period of 1996. The increases were primarily due to sales of the
Wonderware FactorySuite and the acquisition of the Company's German distributor
in December 1996.
The Wonderware FactorySuite began shipping in April 1997. The Wonderware
FactorySuite combines 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 $3.0 million and $8.0 million for the three and nine
month periods ended September 30, 1997, respectively. Revenues for the
Wonderware InTouch product line during the third quarter totaled $13.7 million,
an increase of $1.0 million from the third quarter of 1996. For the nine months
ended September 30, 1997, Wonderware InTouch sales totaled $43.3 million as
compared to $40.7 million for the comparable period of 1996. The Company began
entering into enterprise license agreements during the third quarter of 1997.
Revenues from such agreements totaled $870,000 for the quarter. Under an
enterprise license agreement, the customer pays a fixed license fee for
unlimited copies of specified components of the Wonderware FactorySuite and
runtimes for the term of the agreement. Under terms and conditions that are
separate from the license fee, the customer also pays annual maintenance
charges.
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 or who purchase under
enterprise license agreements 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
9
<PAGE>
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. The Company expects that
enterprise license agreements will represent a greater percentage of total
revenues in the future.
International sales increased to $8.5 million, or 44 percent of total revenues,
for the three months ended September 30, 1997 from $5.5 million, or 36 percent
of total revenues, for the comparable quarter of 1996. For the nine months ended
September 30, 1997, international sales totaled $27.2 million, or 46 percent of
total revenues, as compared to $17.9 million, or 39 percent of total revenues,
for the comparable period of 1996. The increase in international sales resulted
primarily from 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 and pricing structures, 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 and nine months ended
September 30, 1997 decreased to 92 percent from 93 percent for the three and
nine month periods ended September 30, 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 September 30, 1997 increased to $18.1 million
from $14.2 million for the third quarter of 1996, and increased to $54.3 million
for the nine months ended September 30, 1997 from $42.9 million for the
comparable period in 1996. The increases were 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.
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 September 30, 1997, research and
development expenses decreased 6 percent to $5.0 million from $5.3 million for
the same quarter of 1996 while decreasing as a percentage of total revenues to
25 percent from 35 percent. For the nine months ended September 30, 1997, such
expenses increased 6 percent to $14.6 million from $13.8 million for the
comparable period of 1996 while decreasing as a percentage of revenues to 25
percent from 30 percent. The decrease in absolute spending for the quarter is
primarily attributable to reduced operating expenses resulting from the closure
of the Company's development center in Cupertino, California in February 1997.
For the year to date period, these reduced operating expenses were partially
offset by costs related to contract programmers and software translation, as
well as to depreciation on fixed assets purchased during 1996 in support of the
development effort.
10
<PAGE>
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.
For the foreseeable future, the Company anticipates that it will 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 September 30, 1997. Significant new products developed in the
future may require the capitalization of internal software development expenses.
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 decreased 4 percent to $12.0 million for the three
months ended September 30, 1997 from $12.5 million for the same quarter of 1996,
while decreasing as a percentage of total revenues to 61 percent from 82
percent. For the nine months ended September 30, 1997, such expenses increased
13 percent to $38.2 million from $33.7 million for the comparable period of
1996, while decreasing as a percentage of sales to 65 percent from 73 percent.
The decrease in the dollar amount of selling, general and administrative
expenses for the quarter was primarily due to decreased sales and marketing
costs resulting from the streamlining of the Company's product strategy from
many individual products into the single Wonderware FactorySuite product. The
increase in the dollar amount of selling, general and administrative expenses
for the year to date period 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, 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 increase in absolute dollars as it expands its
worldwide sales distribution and customer support network for the Wonderware
FactorySuite product line.
Legal settlement. In August 1997, the Company entered an out-of-court settlement
agreement in the matter of Delivanis, et. al. vs. Wonderware Corporation and all
related cases. 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 resulted in a one-time charge to earnings of $1.9
million, including attorneys' fees and related costs, during the third quarter
of 1997. See Note 5 of Notes to Consolidated Financial Statements.
Provision (benefit) for income taxes. The Company's effective tax rate for the
third 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 loss for the three months ended September 30, 1997
totaled $67,000, or $0.00 per share, as compared to a net loss of $2.0 million,
or $0.15 per share, in the third quarter of 1996. For the nine months ended
September 30, 1997, net income totaled $940,000, or $0.06 per share, compared to
a net loss of $1.7 million, or $0.13 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 lower
domestic sales in the first quarter and lower 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.
11
<PAGE>
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
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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than three years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Although the Company believes that its products and
internal systems are Year 2000 compliant, the Company's customers may be
affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those sold by the Company.
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 nine months ended September 30, 1997, operating
activities used cash of $583,000, primarily related to increases in accounts
receivable and prepaid expenses and a decrease in accounts payable, offset by
net income, depreciation and amortization, and an increase in income taxes
payable.
During the nine months ended September 30, 1997, investing activities used cash
of $8.2 million, primarily related to capital expenditures and net purchases of
short-term investments. The issuance of capital stock through the Company's
Employee Stock Purchase Plan and proceeds from the exercise of stock options
provided cash from financing activities of $1.9 million.
As of September 30, 1997, the Company had cash, cash equivalents and short-term
investments totaling $49.5 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 September 30, 1997. The
Company is in compliance with the terms of the unsecured bank line of credit.
The Company's German
12
<PAGE>
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 $191,000
(DM335,000) of borrowings against the German credit line were outstanding as of
September 30, 1997.
The Company's principal commitments as of September 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 September 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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 5 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
None
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
September 30, 1997.
14
<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: November 12, 1997 /s/ Roy H. Slavin
-------------------------- --------------------------------------------
Roy H. Slavin
Chairman of the Board, President and
Chief Executive Officer
(Principal executive officer)
Date: November 12, 1997 /s/ Sam M. Auriemma
-------------------------- --------------------------------------------
Sam M. Auriemma
Vice President, Finance and
Chief Financial Officer
(Principal financial and accounting officer)
15
<PAGE>
<TABLE>
<CAPTION>
WONDERWARE CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
Three months ended Sept. 30, Nine months ended Sept. 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding during period 14,143,643 13,690,198 14,048,066 13,589,024
Exercise of outstanding stock options
(including "cheap stock" options), less
shares assumed repurchased 420,734
---------------- ---------------- ---------------- ----------------
Weighted average common and common
equivalent shares 14,143,643 13,690,198 14,468,800 13,589,024
================ ================ ================ ================
Net income (loss) $ (67,535) $ (1,990,140) $ 939,552 $ (1,725,592)
Net income (loss) per share $ 0.00 $ (0.15) $ 0.06 $ (0.13)
</TABLE>
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,598,188
<SECURITIES> 29,950,728
<RECEIVABLES> 13,084,037
<ALLOWANCES> 0
<INVENTORY> 881,020
<CURRENT-ASSETS> 69,137,707
<PP&E> 12,576,286
<DEPRECIATION> 0
<TOTAL-ASSETS> 91,689,213
<CURRENT-LIABILITIES> 10,425,099
<BONDS> 0
0
0
<COMMON> 14,211
<OTHER-SE> 88,127,126
<TOTAL-LIABILITY-AND-EQUITY> 91,689,213
<SALES> 58,839,656
<TOTAL-REVENUES> 58,839,656
<CGS> 4,585,142
<TOTAL-COSTS> 4,585,142
<OTHER-EXPENSES> 14,647,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,296,143
<INCOME-TAX> 356,591
<INCOME-CONTINUING> 939,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 939,552
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
