Document/Exhibit Description Pages Size
1: 10-K Report on Form 10-K for Wonderware Corporation 50 289K
2: EX-10 Exhibit 10.10 Licns & Conslt Agrmt - Microsoft 20± 69K
3: EX-10 Exhibit 10.11 Devel & Licns Agrmnt - Microsoft 8± 31K
4: EX-10 Exhibit 10.13 Lease Agreement W/ Aetna Life 28± 113K
5: EX-10 Exhibit 10.14 Employment Agreement - Roy H. Slavin 4± 23K
6: EX-10 Exhibit 10.15 Separation Agreement - Wilson 14± 70K
7: EX-21 Exhibit 21.1 Subsidiaries of the Registrant 1 5K
8: EX-23 Exhibit 23.1 Independent Auditor's Consent 1 6K
9: EX-27 Financial Data Schedule 1 8K
10-K — Report on Form 10-K for Wonderware Corporation
Document Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File Number: 0-22044
WONDERWARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-03046777
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
100 Technology Drive Irvine, CA 92618 714) 727-3200
(Address of principal executive offices, (Registrant's telephone number,
including Zip code) including area code)
None Common Stock, $.001 par value
(Securities registered pursuant (Securities registered pursuant
to Section 12(b) of the Act) to Section 12(g) of the Act)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1997 was $131,029,000, based on the last sales
price on that date as reported on the NASDAQ National Market System.*
As of February 28, 1997, there were 14,013,438 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference
(to the extent indicated herein)
Proxy Statement for Annual Meeting of Stockholders
to be held May 12, 1997 Part III
* Excludes 60,795 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds ten percent of the shares
outstanding at February 28, 1997. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
1
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The actual future results of Wonderware
Corporation ("Wonderware" or the "Company") could differ materially from those
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those factors discussed in Item 1, "Business - Risk
Factors," Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Report.
PART I
Item 1. Business
Wonderware supplies Microsoft Windows-based software products for the
industrial automation market. The Company's object-oriented software development
tools enable customers to rapidly develop personal computer applications that
provide dynamic, graphical representations of physical processes in a factory.
These applications gather and display information about an automated
manufacturing process and can interact with and control that process. Wonderware
has offered industrial automation software development tools since 1989 that
feature ease-of-use and an intuitive operator interface typical of Windows
applications. The Company's products enable customers to reduce operating costs
and improve product quality by providing access to real-time information
throughout a manufacturing enterprise.
The Company has shipped its Wonderware InTouch products to a wide range
of industries, including chemical, oil and gas, food, public utility,
pharmaceutical, pulp and paper, automobile, aerospace, electronics,
telecommunications, water treatment, transportation and numerous other
industries. End user customers include Anheuser Busch, AT&T, Boeing, Coca-Cola,
Ford, Lockheed, Mercedes Benz, Nestle, Philip Morris, Procter & Gamble, Shell
Oil, Texaco and Weyerhaeuser.
Wonderware was formed as a partnership in April 1987 and was
incorporated in California in June 1988 as Wonderware Software Development
Corporation. The Company reincorporated in Delaware in July 1993.
Background
In the 1960s, electronic equipment and computers were generally
believed to be unsuitable for the manufacturing environment, primarily because
of their insufficient reliability for mission-critical production management and
control tasks. Pneumatic controls and electromechanical devices were the
preferred methods for controlling production equipment. However, as improvements
were made in the capability and reliability of analog and digital electronics,
production control tasks were increasingly assumed by controllers employing
integrated circuits and early microprocessors. In the 1970s, the programmable
logic controller (PLC) was introduced. PLCs were thought of as "hard hat"
computers, designed to function in the hostile environment of the factory floor
and to be programmed by electricians. PLCs found early acceptance in "discrete"
manufacturing segments, such as the automotive industry. In parallel with this
trend, distributed control systems (DCSs) evolved to provide computerized
control capabilities for "continuous" processes such as oil refining and
chemical production. Both PLCs and DCSs were based on proprietary hardware and
software technology. Today, these and other computer-based control systems are
widely used throughout both the discrete and continuous process manufacturing
industries.
Initially, the operator interface for PLCs was provided by dedicated
panels of buttons, lights and indicators known as operator interface panels. For
DCSs, this interface capability was typically provided by special purpose
devices or proprietary graphics consoles supplied by the DCS vendor. Because of
their proprietary, closed architectures and primitive operator interfaces, these
approaches were generally expensive, inflexible, difficult to program, limited
in capability and unable to communicate easily with other systems.
On the plant management side of manufacturing, computers began to
replace the manual recording of production data and other hand written reports
in the 1960s. In the 1970s, vendors of mainframe and minicomputers identified
manufacturing industries as potentially significant markets for their hardware
and software products. These companies developed applications, such as materials
resource planning, cost accounting, inventory control and production scheduling,
that offered improved functionality but were closed and tedious to program,
cumbersome to use
2
and difficult to integrate with other systems. Also, these applications did not
address the problem of tracking and allocating factory resources, such as
materials, equipment and labor, nor did they address the tracking of work in
process inventory.
As PLCs, DCSs and computer systems became increasingly prevalent in the
manufacturing environment throughout the 1980s, several serious problems became
apparent. Most of these systems were proprietary and built on platforms that
lacked the ability to communicate outside their own environment. For example,
PLCs, while greatly improving control of individual processes, created multiple
"islands of information" that were generally unable to communicate or share data
with other systems throughout the manufacturing enterprise. Software for a
manufacturing operation typically had to be developed or customized to satisfy
the unique requirements for that operation. In addition, mastery of multiple
proprietary programming languages was required to modify and maintain
applications once developed. As a result, high initial cost and high cost of
ownership have characterized the application of computer hardware and software
to each facet of the manufacturing enterprise.
Manufacturers have also become aware of the importance of accurate and
timely data capture on the factory floor and the value of the data for decision
making throughout the manufacturing enterprise. Manufacturers increasingly need
cost-effective mechanisms to connect the "islands of information" that have
characterized manufacturing automation throughout the 1980s and early 1990s.
With the advent of low-cost, high-performance, standard personal computers and
open operating environments, such as Microsoft Windows, the economics of the
mass market can now be brought to the factory floor to solve the problems
inherent in the traditional automation solutions.
Personal computers have become the platform of choice for man-machine
interface and other manufacturing automation functions, including PLC and DCS
capabilities. However, low-cost, standard platforms alone do not address the
problem of delivering cost-effective solutions to complex industrial process and
control problems. Manufacturers are increasingly seeking software products that
allow the rapid development and deployment of automation systems built on
standard hardware, operating system and networking platforms.
Strategy
The Company's overall business strategy is to offer manufacturing
enterprises innovative, easy-to-use and open software solutions that exploit
advances in hardware, software and communications technologies. The key elements
of this strategy are as follows:
Offer easy-to-use tools for developing industrial automation applications.
Since 1989, Wonderware has offered intuitive, object-oriented,
graphical software tools for the industrial automation market. The Company
believes that the substantial improvements in application development
productivity resulting from the use of the Company's products will lead to
increased acceptance of its products.
Focus on Microsoft Windows.
Recognizing the strategic importance of Microsoft Windows, in 1987
Wonderware chose Windows as the primary operating platform for its products. The
Company believes that the subsequent proliferation of Windows in the
manufacturing environment has fueled the Company's recent growth and has
favorably positioned Wonderware as Windows continues to penetrate the industrial
automation market. Its early commitment to and focus on Windows has enabled the
Company to develop a high degree of expertise in developing Windows
applications. For example, recognizing a need for easy communications among
Windows applications on networks, Wonderware developed its NetDDE connectivity
products. This technology has been licensed to Microsoft for inclusion in
Windows, Windows NT and Windows 95. The Company believes that Microsoft's
licensing of NetDDE has enhanced the Company's reputation among end-users and
has established NetDDE as a de facto standard for dynamic data exchange over
networks.
3
Exploit emerging client/server technologies.
The acceptance of the client/server architecture in the industrial
automation market creates additional opportunities for the Company. Wonderware
believes that the growing acceptance of Microsoft Windows NT will accelerate the
migration in the industrial automation market from systems based on proprietary
architectures to open client/server architectures based on personal computers
and standard networking technologies. The Company also believes that Windows NT
offers personal computer users operating system functionality comparable to
mini- or mainframe computers with the ease-of-use and economics typical of the
desktop marketplace. Wonderware intends to capitalize on this transition to
client/server architectures and its leadership position in the Windows
environment to expand into additional segments of the industrial automation
market. Through a series of acquisitions during 1995, Wonderware acquired the
rights to an object-oriented, client/server application software product for the
manufacturing execution systems market, an object-oriented, client/server batch
processing software product, and a client/server-based, real-time data historian
software product that enhances the performance of Microsoft's SQL Server
database software to meet the real-time data demands of manufacturing processes.
Provide enterprise-oriented solutions.
The Company believes that its commitment to an open architecture
provides its customers with the flexibility to integrate the Company's products
into enterprise-wide information systems. To this end, the Company continually
evaluates new technologies for inclusion in its products. Since Microsoft
platforms continue to dominate the Company's market and Microsoft technologies
have become de facto industry standards, special attention is directed to these
technologies. Current product offerings by the Company exploit technologies such
as the Open Data Base Connectivity (ODBC) standard, Object Linking &
Embedding/Common Object Model (OLE/COM) technology and the Dynamic Data Exchange
(DDE) protocol. As an example, the Wonderware InTrack product uses both ODBC and
OLE Automation to perform production tracking functions with popular relational
data base management systems (RDBMS) such as Microsoft SQL Server and Oracle 7.
The company continues to build upon the Microsoft technologies. The new
Wonderware IndustrialSQL Server product adds extensions to Microsoft SQL Server
to make it acceptable for industrial applications where high speed and large
volumes of information are required.
Maintain high levels of customer satisfaction.
Wonderware generally sells its products through distributors to large
manufacturing organizations, each of which has the potential to purchase
significant quantities of the Company's products over time. As a result, repeat
business is a very important factor in the Company's growth. Wonderware's goal
is to achieve extremely high levels of customer satisfaction, and therefore
repeat business, by delivering high quality products and support at competitive
prices. In addition, the Company strives to maintain application compatibility
from its entry-level to its high-end products and from one release of a product
to the next as it continually improves the capabilities and performance of those
products. The Company believes that the scalability and compatibility provided
by Wonderware products have not traditionally been available in the industrial
automation market.
Leverage worldwide network of distributors.
The Company sells its products worldwide through a network of more than
135 technically skilled, independent distributor offices specializing in sales
of industrial automation products. Many of these distributors represent other
lines of products, some of which are competitive with the Company's products,
and the Company's distributors are not obligated to purchase products from the
Company. However, the Company's products contribute a substantial portion of
revenues for a number of these distributors. The Company believes that because
these distributors are highly focused on sales of its products, this sales
channel represents a significant competitive advantage for the Company. During
1996 this channel was upgraded to provide sales and support for client/server
application tools. The Company believes that it has the only distribution
channel in the industrial automation market with this high level of capability.
In December 1996, the Company completed the acquisition of all of the
shares of ICT-Wonderware Gmbh which it did not already own. ICT-Wonderware Gmbh
is the distributor of the Company's products in Germany (see
4
Note 12 of Notes to Consoldiated Financial Statements). This transaction may
serve as a model for future investments in other distributors.
As of December 31, 1996, the Company had a 212 person sales, marketing
and technical support organization that, among other responsibilities,
supplements the selling efforts of the Company's distributors by targeting large
end-user customers, system integrators and OEMs. Furthermore, the Company is
pursuing additional OEM agreements to broaden the distribution of its products
to new market segments. The Company believes that for certain types of end-users
and markets, this complementary sales effort enhances the Company's market
penetration. In 1996 the Company invested in this organization to provide
support for client/server products.
Products
Wonderware supplies easy-to-use application development tools and
connectivity products, rather than finished applications. The Company's products
incorporate object-oriented, graphical user interface concepts, support popular
communication standards, and run on low-cost, high-performance personal computer
hardware. Each new release of a Wonderware product is typically designed to
offer users application compatibility with all prior releases, providing
continuity as the capabilities and performance of the product are improved. In
addition, the Company's product families are scalable from entry-level through
high-end products, permitting end-users to upgrade easily as their requirements
increase.
Wonderware InTouch
Wonderware InTouch is a man-machine interface application generator.
Applications developed using Wonderware InTouch allow personal computers to act
as "dashboards" that are used by operators to monitor and manage
computer-controlled processes. With Wonderware InTouch, a developer uses an
object-oriented graphics editor to create an animated, graphical representation
of a manufacturing process. Changes in data values cause immediate changes in
the appearance of the graphics images. The size, color, location, orientation,
or other attributes of objects, such as tanks, gauges or pumps, may change in
response to changes in the data values acquired via DDE. Objects can also act as
"buttons" or "sliders" that cause data values to change when the objects are
pressed or moved with a mouse or touchscreen. Wonderware InTouch also includes
features such as distributed trending, alarming and security:
Real-time and historical trending. Trend objects graphically
display historical data. Each graph can track up to four parameters
with variable size, shape, background and color. Numerous trend
displays may be configured on a single Wonderware InTouch screen.
Historical data may be logged to disk or printed.
Alarms. Wonderware InTouch provides for up to 999 levels of
alarm priority which may be configured by the end-users. Alarm
conditions and alarm summaries are displayed as alarm objects on the
screen. These alarm objects can be grouped in alarm hierarchies and
include color changes for various alarm states. Alarm points may also
be logged to a disk file or printed.
Security. Wonderware InTouch provides built-in application
security. Up to 9,999 access levels may be assigned to restrict
access.
Wonderware also offers add-in modules that complement Wonderware
InTouch:
SPC module. The statistical process control (SPC) add-in
module enables Wonderware InTouch to provide statistical process
control functionality at both the plant operation and plant management
levels. The module allows the Wonderware InTouch application to compare
actual process performance against statistical standards to maintain
the desired quality of the end product. The module collects and
analyzes SPC data, which can then be displayed using any of several
standard SPC charts. The module's alarm feature alerts the operator if
a process exceeds statistically normal bounds. The module also includes
reporting and historical review features which enhance its value in an
enterprise's total quality management program.
5
SQL Access module. The structured query language (SQL) add-in
module enables Wonderware InTouch to create and modify tables in any
ODBC-compliant relational database, including Oracle, Sybase,
Microsoft's SQL Server and Microsoft Access. The module allows the
Wonderware InTouch application to down-load data from an SQL data
source to the application or to up-load run-time, alarm status or
historical trend data from Wonderware InTouch to the SQL database.
Recipe module. The Recipe add-in module for Wonderware InTouch
makes it easy to set up, modify and download recipes of process
variables from within the Wonderware InTouch application. The module's
recipe manager program allows the user to easily create recipe files
specifying ingredients, quantities and other variables. The recipe
files can then be accessed from Wonderware InTouch via recipe function
calls.
InSupport. The InSupport module is a complete support solution
that integrates expert diagnostics, on-line documentation and training
in an easy-to-use package. InSupport utilizes advanced expert system
technology and the latest in multimedia capabilities in a system that
not only quickly identifies problems but also interactively
demonstrates solutions using video, text, schematics and sound.
Technicians can quickly pinpoint problems and apply user-proven
solutions on a 24-hour a day basis, all via Windows-based,
point-and-click interaction. InSupport integrates with Wonderware
InTouch to provide an ideal response mechanism to system alarms
generated within a Wonderware InTouch application.
The IDEA (InTouch Database External Access) software development kit
allows users to adapt their existing software modules or develop new modules to
manipulate data in the Wonderware InTouch runtime database. In a DOS program,
users can work in C, FORTRAN, Turbo Pascal or QuickBASIC. In a Microsoft Windows
program, users can work in C, Visual Basic or Turbo Pascal.
I/O servers
I/O servers are input/output drivers that provide seamless data sharing
among Wonderware InTouch, other Windows-based programs (e.g., spreadsheets and
word processing programs), and more than 250 PLCs, DCSs and other control
devices used in process automation. These devices can then be configured as
servers in a client/server architecture. The need to support a broad range of
controllers in the industrial automation market has been a significant barrier
to entry to providers of general purpose application development tools. The
Company believes that its ability to develop, acquire and support such a broad
range of controllers is a significant competitive advantage.
I/O server toolkit
The Wonderware I/O server toolkit is a software development kit that
enables programmers to quickly and easily develop their own I/O servers to
connect Wonderware InTouch with custom equipment or communications protocols not
served by the Company's line of I/O servers. The toolkit, which is the same
toolkit Wonderware uses to develop all of the Company's I/O servers for
Wonderware InTouch, consists of a set of libraries, utilities and source code
examples.
NetDDE
NetDDE is a family of network connectivity products that extends
data-sharing capabilities over networks of computers and workstations and can
support protocols such as NetBIOS, DECnet, TCP/IP, IPX and serial links, and
multiple operating environments, such as Windows, Windows NT, UNIX and VAX/VMS.
The Company licensed NetDDE to Microsoft for inclusion in Windows, Windows NT
and Windows 95. NetDDE toolkits for VAX/VMS and UNIX allow software developers
to add DDE functionality to applications running on the VAX/VMS and UNIX
operating systems, respectively. These applications are then able to communicate
with Wonderware InTouch or any other DDE-aware application connected via NetDDE.
6
Wonderware InTrack
Wonderware InTrack(TM) is a production management and tracking
application generator. Applications developed using Wonderware InTrack allow
client/server architectures to model computer-controlled manufacturing processes
and then track material flow and resource usage through that process. The
Wonderware InTouch graphical user interface provides operators with a "window"
into the manufacturing process at each work station. Information collected
provides a production history of events, such as yields, material consumed, and
actual process conditions, for each operation.
The Wonderware InTrack graphical build-time module uses object
technology to model the manufacturing process. Objects are used to represent
process variables such as raw materials, work-in-process, operations, bills of
materials, equipment, operators, finished goods, and quality data. The
build-time module also creates all files, tables and data in a relational
database that resides on the server. The graphical interface that allows
operators and the process controllers to interact with the model is developed
using Wonderware InTouch.
Wonderware InBatch
Wonderware InBatch is flexible, sustainable and scalable batch
management software designed specifically for the modeling and automation of
batch-oriented production processes, such as in the chemical, pharmaceutical and
food processing industries. Wonderware InBatch applications provide recipe
control, equipment modeling, sequence control and scheduling of batch processes.
Wonderware FactorySuite
In January 1996, the Company announced the integration of its complete
family of industrial automation software products into two new packages,
Wonderware FactorySuite and Wonderware FactorySuite Plus, that provide multiple
application development tools at cost-effective new pricing. The Wonderware
FactorySuite is intended to provide core technology modules for process
visualization, PC-based machine and process control, real-time plant data
management, Internet/Intranet data viewing capabilities and a complete library
of I/O servers. The Wonderware FactorySuite will include the following modules:
* Wonderware InTouch
* Wonderware InControl, a PC-based real-time control system;
* Wonderware IndustrialSQL Server, a PC-based real-time plant data
manager, which incorporates Microsoft SQL server;
* the Scout family of visualization tools for remote viewing of plant
applications via the Internet or corporate Intranets;
* and all Wonderware I/O servers for interfacing to factory equipment
and processes.
The Wonderware Factory Suite Plus will incorporate all of the above
technologies and will add modules for production management and work-in-process
tracking (Wonderware InTrack) and flexible batch management (Wonderware
InBatch).
The Company expects to begin shipping the FactorySuite products in
April 1997. The Wonderware FactorySuite will be sold at a greatly reduced price
when compared to the cost of buying each of the components of the suite
separately. The large discount available to customers when buying the
FactorySuite packages is designed to produce additional volume, but could have
an adverse effect on the Company's future revenues for other products. Further
it is expected that some of the Company's competitiors, some of whom have much
greater resources than the Company, will offer similar suites of products. There
can be no assurance that the FactorySuite will gain acceptance in the industrial
automation market.
7
Technology
To meet its users' complex and evolving needs and to maintain a
leadership position in its markets, Wonderware intends to exploit and improve
upon three core competencies: man-machine interface development technology,
connectivity technology and data acquisition technology. Wonderware's products
are designed to run on Microsoft Windows, Windows 95 and Windows NT operating
systems, and to interface with any other DDE-aware software. Wonderware InTrack
runs on Microsoft Windows clients and interfaces to any database server that
supports Windows clients. Key technology features include:
Man-Machine Interface Technology
Object-oriented graphics. Devices or industrial controls such
as pumps, gauges and levers can be graphically represented as objects
on a computer screen. Unlike character-based graphics, these objects
can be moved, re-sized, animated and manipulated in many ways. They can
be re-used in other applications and used at any resolution. The
resulting impact on development cost, time, and application quality can
be significant.
Simple-to-use graphics development toolbox. The Wonderware
InTouch toolbox supplies powerful drawing and editing tools that allow
developers to complete designs rapidly with precision and creativity.
Wonderware InTouch real-time database. This is a repository
for system data around which all system functions are organized. For
example, the "run/stop" status of a process might be monitored by the
Wonderware InTouch server for the real-time control device and assigned
to a "tagname" (i.e., a real number, integer or string variable) in the
database. An object on the viewing screen might then have its color
attribute linked directly to this tagname. When the real status is
"run," the object could appear green. When it has stopped, the object
could appear red. The Wonderware InTouch database accommodates over
32,000 tagnames.
Animation links. Wonderware InTouch provides easy and
intuitive procedures for linking the color attributes, position,
orientation, visibility and size of screen objects with values in the
database. These values may reflect real factory status or may be
manipulated by the application developer. These animation links provide
the ability to easily achieve numerous animation effects for
communicating status to operators and system users.
Powerful and extensible scripting language. Wonderware InTouch
scripts allow rapid development of calculation routines, animation
sequences and logic required for automated processes. These scripts can
be driven by events, by variable status or by other scripts. For
example, the touching of a "button" object on the screen might cause a
calculation to be performed on selected values in the database. These
recalculated values might then be displayed within another screen
object or passed on to yet another object/device for further action.
Connectivity Technology
Dynamic data exchange. Wonderware InTouch applications can
share data with any DDE-aware Windows application. This enables the
user to employ a powerful, yet low cost application like Microsoft's
Excel spreadsheet program as a means to display, manipulate and report
changing manufacturing data in real time.
NetDDE. NetDDE was developed by Wonderware to extend the DDE
protocol to networks. NetDDE was licensed directly to Microsoft for
inclusion in Windows, Windows NT and Windows 95. Wonderware believes
that Microsoft's adoption of NetDDE has established NetDDE as a de
facto standard for dynamic data exchange over networks.
OLE/COM. Wonderware makes use wherever possible of new
Microsoft connectivity technologies such as OLE/COM to provide the most
advanced open architecture capabilities to its customers.
8
Data Acquisition Technology
FastDDE. Wonderware's products support FastDDE, which is a
proprietary technology providing enhanced data transfer rates between
DDE-aware applications.
Automatically optimized polling. Wonderware has developed
technology to optimize system performance. Whenever a window is
displayed in Wonderware InTouch, the DDE server automatically acquires
only the data needed to be displayed on that particular window. This
feature eliminates the need for users to specify poll lists manually in
advance for each window displayed.
Marketing, Sales and Distribution
Wonderware's products are sold in more than 55 countries through a
network of more than 80 technically skilled, independent distributors
specializing in industrial automation products. Except for Wonderware GmbH, the
Company's German distributor, the Company's distributors are not within the
control of the Company and are not obligated to purchase products from the
Company. However, sales of the Company's products constitute a substantial
portion of revenues for a number of these distributors. The Company believes
that its relationships with its distributors represent a significant competitive
advantage for the Company.
Many of these distributors represent other lines of products, some of
which compete with the Company's products. While the Company encourages its
distributors to focus primarily on the promotion and sale of the Company's
products, there can be no assurance that these distributors will not give higher
priority to the sale of other products, including products developed by existing
or potential competitors. A reduction in sales efforts or discontinuance of
sales of the Company's products by its distributors could lead to reduced sales
and could adversely affect the Company's operating results. There can be no
assurance as to the continued viability or financial stability of the Company's
distributors, the Company's ability to retain its existing distributors or the
Company's ability to add new distributors in the future. In addition, as a
result of new product introductions or pricing actions by the Company or others,
the Company's distributors or end-users may alter the expected timing of their
product purchases, thereby exacerbating the possible variability of the
Company's quarterly operating results.
Wonderware maintains a 212 person sales, marketing and technical
support organization to support the distribution channel. The Company's sales
staff also targets large end-user customers, system integrators and OEMs to
complement the selling efforts of the Company's distributors. The Company
believes that, for certain customers and markets, this supplemental sales effort
enhances the Company's penetration. The Company has a sales office at its
headquarters in Irvine, California and six domestic field offices. To enhance
its presence in international markets, the Company maintains several sales and
support offices throughout Europe, Asia and Latin America. International sales
accounted for 42%, 43% and 38% of total revenues in 1996, 1995 and 1994,
respectively. See Note 6 of Notes to Consolidated Financial Statements.
Wonderware seeks to establish relationships with OEM providers of
industrial automation solutions to broaden the distribution of its products and
to pursue additional market segments. The Company has established relationships
with several OEMs, including Motorola, Yokogawa, Moore Products, Hewlett Packard
and Philips Weighing. Motorola bundles Wonderware InTouch with Motorola's remote
monitoring and control terminals. Yokogawa purchases Wonderware InTouch for use
in their Darwin product which is part of their line of chart recorders. Hewlett
Packard licenses NetDDE for resale with its computers and systems. Moore
Products and Philips Weighing both use the InBatch product as the batch software
in process systems which they sell. The Company is pursuing additional OEM
relationships to broaden the distribution of its products to new market
segments.
Supplying premium quality product support to every customer is a
primary Wonderware objective. The Company offers several customer support
services including the Wonderware Information Exchange, a bulletin board service
designed to facilitate communications with and among end-users. Users who dial
into the bulletin board can leave or retrieve messages or files and can access a
library of "How To Notes." The Company maintains a World Wide
9
Web site on the Internet that offers hundreds of pages of corporate, marketing
and product information to any interested browser around the world. The Company
offers six to eighteen month comprehensive support agreements to its end-user
customers entitling them to software upgrades and numerous other benefits
distributed via CD-ROM. The Company also supports a user group that has
established a Program Information Exchange to allow users to share their
evaluations of third-party hardware and software devices for use with Wonderware
InTouch. The user group is led by an Advisory Board of Directors comprised of
representatives from a number of Wonderware end-user customers including Philip
Morris, Lockheed Missiles & Space, Texaco, Weyerhaeuser and Nestle. Wonderware
has a comprehensive training department that offers a number of different
courses covering each of the Company's products and communications technologies.
Backlog
The Company typically ships its products within a very short period
after acceptance of purchase orders from distributors. Accordingly, 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. Any
significant weakening in customer demand would therefore have an almost
immediate adverse impact on the Company's operating results and on the Company's
ability to maintain profitability.
Product Development
The Company believes that its success will depend in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
requirements. In 1995, the Company acquired EnaTec Software Systems, Inc. and
Soft Systems Engineering, Inc. and established development centers in Cupertino,
California and York, Pennsylvania, respectively to maintain and further develop
the technologies acquired in those transactions. In February 1997, the Company
closed its Cupertino development center and consolidated the development of it
production management products in the York development center (see Note 13 of
Notes to Consolidated Financial Statements). The Company also maintains a
product development and research facility in Johnson City, Tennessee where
employees focus on the development of software products for the industrial
controls market. As of December 31, 1996, the Company's research and development
group consisted of 152 full-time employees. During 1996, 1995 and 1994, research
and development expenses were approximately $18.9 million, $10.6 million and
$6.2 million, respectively. The Company anticipates that it will continue to
commit substantial resources to research and development in the future. See Note
2 of Notes to Consolidated Financial Statements for a discussion of the
Company's policy regarding capitalization of software development expenses.
Competition
The market for industrial automation and process control software
products is intensely competitive and is characterized by rapid changes in
technology and frequent introductions of new platforms and features. To maintain
or improve its position in this industry, the Company must continue to enhance
its current products and develop new products in a timely fashion.
The Company competes generally on the basis of product features and
functions, product architecture, the ability to run on a variety of industry
standard platforms, local technical support and other related services, ease of
product integration with third party applications software and
price/performance. The Company competes with a number of independent software
suppliers as well as large PLC and DCS manufacturers that provide interface
software along with their hardware products. Many of the Company's existing and
potential competitors have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources than the Company.
Certain of these organizations may also have greater name recognition and a
larger installed base than the Company. The Company's competitors could in the
future introduce products with more features and lower prices than the Company's
product offerings. These organizations could also bundle existing or new
products with other products or systems to compete with the Company. The Company
expects competition to increase and the Company's market share may decline as
other companies introduce additional and more competitive Microsoft
Windows-based products in this emerging market segment. As the market for
industrial automation and process control software products develops, a
10
number of companies with significantly greater resources than the Company could
attempt to increase their presence in this market by acquiring, or forming
strategic alliances with, competitors of the Company. There can be no assurance
that the Company will be able to compete successfully in the future.
Proprietary Rights
The Company regards its software as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws and restrictions on
disclosure, copying and transferring title. However, the Company has no patents
and existing copyright laws afford only limited practical protection for its
software. Furthermore, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. The Company licenses its products primarily under "shrink wrap" license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of certain foreign jurisdictions. In addition, in some instances
the Company licenses its products under agreements that give licensees limited
access to the source code of the Company's products. Accordingly, despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to obtain and use
information that the Company regards as proprietary.
The Company believes that, due to the rapid pace of innovation within
its industry, factors such as the technological and creative skills of its
personnel are more important to establishing and maintaining a technology
leadership position within the industry than are the various legal protection of
its technology. As the number of software products in the industry increases and
the functionality of these products further overlaps, the Company believes that
its software will become increasingly the subject of claims that such software
infringes the rights of others. See Note 9 of Notes to Consolidated Financial
Statements for a description of legal proceedings involving the Company
pertaining to proprietary rights and the Company's intellectual property.
Employees
As of December 31, 1996, the Company employed 443 full-time employees,
of which 212 were engaged in sales, marketing and technical support, 35 in
general management, administration and finance, 144 in software development and
engineering and 52 in operations. None of the Company's employees is subject to
a collective bargaining agreement, and the Company has not experienced any work
stoppage. The Company believes that its employee relations are good.
Executive Officers
Roy H. Slavin, 51, has served as Chairman, President and Chief
Executive Officer since December 1995. From July 1995 to November 1995, he
served as President and Chief Operating Officer of the Company. From October
1993 to June 1995, he was President and Chief Executive Officer of Siemens
Industrial Automation, Inc., a manufacturer of industrial automation components
and systems. From January 1986 to September 1993, he was President and Chief
Executive Officer of Potter and Brumfield, Inc. (A Siemens Company), a
manufacturer of electronic components.
Sam M. Auriemma, 44, has served as Vice President of Finance, Chief
Financial Officer and Secretary since April 1996. From September 1990 to March
1996, he served as Vice President of Finance and Chief Financial Officer of
Locus Computing Corporation, a software and software services company.
Joe L. Cowan, 47, has served as Vice President of Marketing since
December, 1995. From December 1993 to November 1995, he held various sales and
marketing positions with the Company. From April 1992 to November 1993, Mr.
Cowan was Director of Automation Business for Lanex, Inc., a system integration
company for industrial automation. From January 1989 to March 1992, he was Vice
President of Systems for Eurotherm, Inc., a process control company.
11
Risk Factors
In addition to the other information set forth in this Report, the
following risk factors should be considered carefully in evaluating the Company
and its business.
Short Operating History; Fluctuations in Quarterly Operating Results
The Company has a limited operating history and, although the Company
has experienced significant growth in recent periods, such growth rates are not
sustainable and are not indicative of future 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
introduction of products or product enhancements by the Company, its competitors
or other providers of hardware, software and components for the industrial
automation market; costs associated with product or technology 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 operating expenses; changes in Company strategy; personnel changes;
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 products 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.
Product Concentration
Although the Company has introduced several new products over the last
year, the bulk of the Company's revenues are still concentrated in the
Wonderware InTouch family of products for industrial automation applications.
The Company introduced the initial version of Wonderware InTouch in August 1989.
Revenues from the Wonderware InTouch family of products have grown rapidly and
represented over 85% of the Company's total revenues since 1990. The Company
expects that revenues from these products will continue to account for a
substantial portion of the Company's revenues. The life cycles of the Company's
products are difficult to estimate due in large measure to the recent emergence
some of the Company's market, the future effect of product enhancements and
future competition. Declines in demand for these products, whether as a result
of competition, technological change or otherwise, or price reductions would
have a material adverse effect on the Company's operating results.
Competition
The market for the Company's products is intensely competitive. The
Company expects competition to increase and the Company's market share to
decline as other companies introduce additional and more competitive Microsoft
Windows-based products in this emerging market segment. This trend is expected
to accelerate with the release by Microsoft of Windows 95 and Windows NT 4.0.
Many of the Company's present or anticipated competitors have substantially
greater financial, technical, marketing and sales resources than the Company.
There can be no assurance that the Company will be able to compete successfully
in the future.
12
Dependence on Microsoft Windows
The Company's software development tools are designed for use with
personal computers running in the Microsoft Windows operating environment, and
future sales of the Company's products are dependent upon continued use of
Windows and Windows NT. In addition, changes to Windows (such as the release of
Windows 95) or Windows NT require the Company to continually upgrade its
products. Any inability to produce upgrades or any material delay in doing so
would adversely affect the Company's operating results. The successful
introduction of new operating systems or improvements of existing operating
systems that compete with Windows or Windows NT also could adversely affect
sales of the Company's products and have a material adverse effect on the
Company's operating results.
Rapid Technological Change
The market for the Company's products is characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. While the
Company to date has been committed to the Microsoft Windows and Windows NT
platforms, the introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products currently under development obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, respond to evolving end-user requirements and
achieve market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenues. In the past, the Company occasionally
experienced delays in the introduction of new products and product enhancements.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis or that the
Company will not experience significant delays in the future, which could have a
material adverse effect on the Company's results of operations. In addition,
there can be no assurance that new products or product enhancements developed by
the Company will achieve market acceptance.
Integration of Recent Acquisition
In December 1996, the Company purchased all outstanding shares of
ICT-Wonderware GmbH not already owned by the Company. ICT-Wonderware GmbH is the
distributor of the Company's products in Germany. The acquisition of
ICT-Wonderware GmbH will divert some of the Company's management resources for
an indefinite period of time. There can be no assurance that difficulties will
not arise in integrating the operations of ICT Wonderware GmbH or that the
Company will realize increased revenues as a result of the acquisition of
ICT-Wonderware GmbH. The failure to accomplish any of the goals of this
acquisition or the failure to successfully integrate the operations of
ICT-Wonderware GmbH would have a material adverse effect on the Company's
operating results and financial condition.
Non-Recurring Charges
As a result of the acquisition of ICT-Wonderware GmbH, the Company
incurred a charge in fiscal 1996 of approximately $1.3 million to reflect the
write-off of purchased in-process research and development costs. There can be
no assurance that the Company would not incur additional charges in subsequent
periods to reflect costs associated with this acquisition. All of such costs may
adversely affect the market price of the Common Stock.
Management of Growth
The Company has recently experienced rapid growth in the number of
employees, the scope of its operating and financial systems and the geographic
area of its operations. This growth has resulted in an increase in the level of
responsibility for both existing and new management personnel. To manage its
growth effectively, the Company will be required to continue to implement and
improve its operating and financial systems and to expand, train and manage its
employee base. There can be no assurance that the management skills and systems
currently in place will be adequate if the Company continues to grow. The
Company may make additional acquisitions in the future. The
13
Company's management has only limited experience with acquisitions, which
involve numerous risks, including difficulties in the assimilation of the
operations and products of the acquired companies, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired companies.
Key Employees
The Company's continued success will depend upon its ability to retain
a number of key employees, most of whom are not subject to employment agreements
or agreements that restrict their ability to compete with the Company following
the termination of their employment. In addition, the Company believes that its
future success will depend in large part on its ability to attract and retain
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. The loss of certain
key employees or the Company's inability to attract and retain other qualified
employees could have a material adverse effect on the Company's business.
Reliance upon Distribution Channel
The Company has relied and expects to continue to rely primarily on
independent distributors for the marketing and distribution of its products.
These distributors may also represent other lines of products, some of which may
be complementary to or competitive with the Company's products. The Company's
distributors are not within the control of the Company and are not obligated to
purchase products from the Company. While the Company encourages its
distributors to focus primarily on the promotion and sale of the Company's
products, there can be no assurance that these distributors will not give higher
priority to the sale of other products, including products developed by existing
or potential competitors. A reduction in sales efforts or discontinuance of
sales of the Company's products by its distributors could lead to reduced sales
and could adversely affect the Company's operating results. There can be no
assurance as to the continued viability or financial stability of the Company's
distributors, the Company's ability to retain its existing distributors or the
Company's ability to add new distributors in the future. In addition, as a
result of new product introductions or pricing actions by the Company or others,
the Company's distributors or end-users may alter the expected timing of their
product purchases, thereby exacerbating the possible variability of the
Company's quarterly operating results.
Dependence on General Economic Conditions
Based in part on the growth in the overall market for and the Company's
penetration of the industrial automation software market, as well as the
geographic and industry diversity of the Company's customers, the Company
believes that general economic conditions have not had a material adverse effect
on the Company's results of operation to date. There can be no assurance,
however, that economic conditions will not have a material adverse effect on the
Company in the future.
International Sales
The Company derived approximately $27.0 million (42%) of its total
revenues from international sales during 1996. The Company expects that
international sales will continue to represent a significant percentage of its
total revenues. The Company's international operations are subject to various
risks, including exposure to currency fluctuations, regulatory requirements,
political and economic instability and trade restrictions. With the acquisition
of ICT-Wonderware GmbH, the Company now operates directly in Germany is now
exposed to the risks of fluctuations in the deutsch mark relative to the dollar.
Although the Company's sales in other international markets are typically made
in U.S. dollars, a weakening in the value of foreign currencies relative to the
U.S. dollar could have an adverse impact on the effective price of the Company's
products in its international markets. In addition, the Company's business may
be adversely affected by lower sales levels in Europe, which typically occur
during the summer months.
Dependence on Proprietary Rights
The Company regards its software as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws and restrictions on
disclosure, copying and transferring title. However, the Company has no patents,
and
14
existing copyright laws afford only limited practical protection for the
Company's software. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. The Company licenses its products primarily under "shrink
wrap" license agreements that are not signed by licensees and therefore may be
unenforceable under the laws of certain foreign jurisdictions. In addition, in
some instances the Company licenses its products under agreements that give
licensees limited access to the source code of the Company's products.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to obtain and use information that the Company regards as proprietary. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that such software will
become increasingly the subject of claims that such software infringes the
rights of others.
Although the Company does not believe that its products infringe on the
rights of third parties, there can be no assurance that third parties will not
assert infringement claims against the Company in the future or that any such
assertion will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. In addition, there
can be no assurance that such licenses will be available on reasonable terms, or
at all. See Note 9 of Notes to Consolidated Financial Statements for a
description of litigation involving the Company pertaining to proprietary rights
and the Company's intellectual property.
Potential Volatility of Stock Price
The Company believes factors such as quarterly fluctuations in results
of operations and announcements of new products by the Company or by its
competitors may cause the market price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
shares of technology companies in particular, have experienced extreme price
fluctuations. These broad market and industry fluctuations may adversely affect
the market price of the Company's Common Stock.
Anti-Takeover Effects of Certain Charter Provisions, Unissued Preferred Stock
and Delaware Law
The Company's Board of Directors has the authority, without action by
the stockholders, to fix the rights and preferences of and to issue shares of
Preferred Stock. In February 1996, the Board of Directors adopted a Preferred
Share Purchase Rights Plan (commonly known as a "poison pill"), which may have
the effect of delaying or preventing a change in control of the Company. The
Company is also subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. Furthermore, certain provisions of the
Company's Certificate of Incorporation and Bylaws may discourage certain types
of transactions involving an actual or potential change in control of the
Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current prices, and may limit the
ability of the stockholders to approve transactions that they deem to be in
their best interests.
Item 2. Properties
The Company's principal sales, marketing, technical support,
administration, product development and support facilities occupy an aggregate
of 100,000 square feet in four office buildings in Irvine, California. The lease
agreements with respect to such space expire between July 1998 and January 2002.
In addition, the Company leases sales office space in the metropolitan areas of
several cities. The Company also leases office space for its development centers
in York, Pennsylvania; and Johnson City, Tennessee. The Company considers its
leased real property adequate for its current and reasonably foreseeable needs.
Item 3. Legal Proceedings
In July 1995, The Foxboro Company ("Foxboro") initiated litigation
against SSE in the U.S. District Court for the District of Massachusetts to
delay the acquisition of SSE by the Company and subsequently amended its
15
complaint to assert additional claims with respect to Foxboro's ownership
interest in certain software developed by SSE, which interest is subject to a
repurchase right in favor of SSE. Following the completion of the acquisition of
SSE by the Company, Foxboro withdrew its initial claims related directly to the
acquisition. SSE has tendered payment to Foxboro for the repurchase of Foxboro's
asserted ownership interest in the subject software, which Foxboro has rejected.
In January 1996 SSE filed its answer and counterclaim to Foxboro's amended
complaint, seeking damages based upon SSE's allegation that Foxboro breached its
contractual obligation to sell its interest in the subject software. In January
1997, the parties negotiated an agreement for the mutual dismissal, without
prejudice, of the claims asserted in the litigation. Further proceedings in the
litigation have been stayed pending execution of the written agreement of
dismissal.
In December 1995, RWT Corporation (RWT) filed an action in the U.S. District
Court for the Northern District of Illinois against the Company alleging that
the Company's use of the term "INTRACK" violated RWT's alleged federal trademark
and related rights to the term "ONTRACK." In its answer, the Company denied
RWT's allegations and asserted a counterclaim seeking that the "ONTRACK"
trademark be declared invalid. In October 1996, the parties entered into a
settlement of these proceedings, the specific terms of which are confidential,
and the action was dismissed with prejudice.
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 alleges 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. The Cupertino Development Center was established in 1995
upon the Company's acquisition of EnaTec Software Systems, Inc., in which
Messrs. Delivanis and Preysman owned a substantial majority of the stock. The
Company is seeking compensatory and punitive damages with respect to its 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 and asserted cross-claims against the
Company, alleging breach of contract, termination in violation of public policy,
defamation (slander per se), intentional infliction of emotional distress,
negligent infliction of emotional distress, negligence, common law fraud and
deceit, and civil conspiracy. Both 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 Family Trust filed a complaint for declaratory judgment and
specific performance, seeking registration of certain Wonderware common stock.
The Company intends to file 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 United States District Court, Northern District
of California. This complaint was served on the Company in late January 1997 and
alleges securities law violations, fraud and deceit, and negligent
misrepresentation. The Company also intends to file an answer and
cross-complaint in this action. The Company intends to vigorously defend the
allegations made against it; however, 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 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 in a particular software
program 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. Although Intellution has filed its answer to the Company's
complaint in this proceeding, Cyberlogic has yet to file an answer. 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.
16
In December 1996, Cyberlogic submitted a demand for arbitration of the
underlying contractual issues involved in these proceedings. Cyberlogic's
arbitration demand purports to seek damages and attorneys' fees in unspecified
amounts and injunctive relief. The Company has generally agreed to proceed to
arbitration based upon the current status of these proceedings. Dates for
hearing the arbitration and other related events have not yet been set. The
Company believes the allegations in Cyberlogic's arbitration demand to be
without merit and intend to vigorously defend itself against these claims. 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 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 has not yet filed its
formal response to this complaint. 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,
where they should be adjudicated. 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 was notified that a complaint 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 SSE,
which was acquired by the Company in a stock-for-stock merger in August 1995.
Mr. Voit alleges in the complaint that the Company and certain of its officers
who have also been named as defendants in the action made or caused to be made
materially false and misleading statements and concealed material information in
connection with the acquisition of SSE by the Company. In the complaint, Mr.
Voit claims that these alleged misrepresentations and omissions constitute
violations of the Securities Exchange Act of 1934, as amended, Rule 10b-5
thereunder and various state securities laws, common law fraud, negligent
misrepresentation, fraudulent inducement to enter into a contract and inducement
to enter into a contract by material misrepresentation and request 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. No hearing date has been set on the motion. The
case is in a preliminary stage, and no discovery has been conducted to date. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1996.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on the NASDAQ National Market System
under the symbol "WNDR." The following table sets forth for the periods
indicated the high and low sale prices for the common stock reported by the
NASDAQ National Market System. These prices do not include retail markups,
markdowns or commissions.
1996 High Low
---- ------ -----
Fourth Quarter $11 1/4 $ 7
Third Quarter $19 3/8 $ 7 7/8
Second Quarter $24 5/8 $17 7/8
First Quarter $24 3/4 $14 1/4
1995 High Low
---- ------ -----
Fourth Quarter $39 1/4 $12 3/4
Third Quarter $42 1/4 $33 3/4
Second Quarter $42 3/4 $27 1/2
First Quarter $33 1/2 $26 1/4
1994 High Low
---- ------ -----
Fourth Quarter $35 1/2 $20 1/2
Third Quarter $23 $13 1/4
Second Quarter $17 3/4 $12
First Quarter $23 3/4 $16
There were approximately 303 holders of record of the common stock as of
February 28, 1997. The Company has never declared or paid any cash dividends on
its capital stock. The Company currently intends to retain future earnings to
finance the growth and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's bank line of credit prohibits the Company from paying cash dividends
without the bank's prior approval. See Note 10 of Notes to Consolidated
Financial Statements.
The Company believes factors such as quarterly fluctuations in the results of
operations and announcements of new products by the Company or by its
competitors may cause the market price of the common stock to fluctuate, perhaps
substantially. In addition, the stock market in general, and the shares of
technology stocks in particular, have historically experienced extreme price
fluctuations. These broad market and industry fluctuations may adversely affect
the market price of the Company's common stock.
18
Item 6. Selected Financial Data
The following information should be read in conjunction with the
consolidated financial statements and related notes.
[Enlarge/Download Table]
(In thousands, except per share data) 1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
Total revenues ................................... $ 64,924 $ 55,011 $ 35,705 $ 21,328 $ 11,329
Operating income (loss) before
acquired in-process research
and development costs ........................ (8,940) 11,388 9,772 5,603 2,702
Operating income (loss) .......................... (10,240) (21,703) 9,772 5,603 2,702
Net income (loss) ................................ (6,121) (14,302) 7,575 3,823 1,642
Net income (loss) per share (1) .................. $ (0.45) $ (1.13) $ 0.58 $ 0.36 $ 0.17
Weighted average common shares (1) ............... 13,658 12,650 13,131 10,695 9,625
Cash generated from operations ................... $ 358 $ 5,528 $ 8,825 $ 4,000 $ 2,054
As of December 31
Cash and short-term investments .................. $ 52,169 $ 66,925 $ 58,482 $ 36,359 $ 2,720
Working capital .................................. 55,545 71,393 59,532 37,274 2,933
Total assets ..................................... 93,689 91,362 71,613 42,000 6,449
Long-term obligations ............................ 61
Stockholders' equity (2) ......................... 78,606 81,841 65,749 39,433 3,655
<FN>
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of shares used in calculating net income (loss) per share.
(2) Includes amounts attributable to preferred stock outstanding through 1992.
</FN>
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion for Wonderware Corporation (the Company)
contains forward-looking statements that involve risks and uncertainties. The
Company's actual future results could differ materially from those
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section, as
well as elsewhere in this Report.
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:
[Download Table]
Year Ended December 31,
1996 1995 1994
----------------------------
Total revenues 100% 100% 100%
Cost of sales 7% 5% 6%
----------------------------
Gross profit 93% 95% 94%
Operating expenses:
Research and development 29% 19% 17%
Selling, general and administrative 74% 53% 50%
Restructuring and severance costs 3% 2%
----------------------------
Operating income (loss) before acquired in-process
research and development costs -13% 21% 27%
Acquired in-process research and development costs 2% 60%
----------------------------
Operating income (loss) -15% -39% 27%
Other income, net 4% 5% 5%
----------------------------
Income (loss) before provision for income taxes -11% -34% 32%
Provision (benefit) for income taxes -2% 8% 11%
----------------------------
Net income (loss) -9% -26% 21%
============================
Comparison of 1996 to 1995
Total revenues. Total revenues include sales of software licenses and
services, less promotional discounts and sales returns. The Company's revenues
for 1996 increased 18 percent to $64.9 million from $55.0 million in 1995. This
increase resulted primarily from increased unit sales of the Wonderware InTouch
product line. The revenue increase also reflected to a lesser extent increased
sales of the Wonderware InTrack products and the introduction of Wonderware
InBatch. Revenues also increased slightly due to the acquisition of
ICT-Wonderware GmbH (ICT-Wonderware), the Company's distributor in Germany.
Revenues subsequent to the close of the acquisition in mid-December 1996 reflect
higher unit sales prices because there is no longer a distributor markdown
associated with such sales.
Revenues from the Wonderware InTouch product line represented
approximately 85 percent of the Company's total sales in 1996 as compared to 90
percent in 1995. The Company expects that revenues from these products will
continue to account for a substantial portion of the Company's total sales in
future periods, but that the share of revenues derived from other products will
increase if new products introduced by the Company gain market acceptance.
International sales increased to $27.0 million in 1996 from $23.6
million in 1995. Despite overall growth in international sales during 1996,
international sales growth has slowed relative to total sales, contributing 42
percent of total revenues for 1996 as compared to 43 percent in 1995. The
decline in international sales growth is primarily due to the increased
competitive pressures and a recessionary economy in Europe. 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
20
economic instability and trade restrictions. Although the Company's sales have
been typically made in US dollars, the Company's recently acquired German
operation conducts its business in German marks. Therefore, a portion of the
Company's revenues are now 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 other international markets. The Company expects that
it will increasingly be required to transact in local currencies in order to
further its growth internationally and 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
future effect of product enhancements and future competition. Declines in demand
for these 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 operating margins will resume or, if resumed, will be
sustained in the future.
During 1997, the Company plans to begin shipment of the Wonderware
FactorySuite. There will be two versions of the FactorySuite. These suites will
bundle together the development versions of most of the Company's products into
a single package. The Wonderware Factory Suite will be sold at a greatly reduced
price when compared to buying each of the Company's current products separately.
The large discount available to the customer when buying the Wonderware
FactorySuite could have an adverse impact on the Company's future revenues from
its other products. Also, it is expected that some of the Company's competitors,
some of whom have greater resources than the Company, will offer similar suites
of products. There can also be no assurance that the Wonderware FactorySuite
will gain market acceptance.
Gross profit. Cost of sales includes the costs of manuals, diskettes
and duplication, packaging materials, assembly, paper goods, third party
royalties and shipping. Cost of sales for the years ended December 31, 1996 and
1995 include the amortization of developed technology acquired as part of the
acquisition of Soft Systems Engineering, Inc. (SSE) in 1995 (see Note 2 of Notes
to Consolidated Financial Statements). All internal costs related to research
and development of software products and enhancements to existing products are
expensed as incurred.
The Company's gross margin decreased to 93 percent in 1996 from 95
percent in 1995. The decrease was primarily due to increased documentation
included with recent releases of the Company's products. The product
documentation is being converted to an electronic format, and the Company
anticipates that this will result in cost savings, contingent upon the
acceptance of the electronic documentation format by its customers. Gross margin
is expected to decline over the next fiscal year as new products incorporating
additional third party software royalties begin shipping. Gross profit increased
16 percent to $60.6 million in 1996 from $52.4 million in 1995 primarily due to
increased revenues.
Research and development expenses. Research and development expenses
consist primarily of personnel and equipment costs required to conduct the
Company's development effort. Research and development expenses for 1996
increased 77 percent to $18.8 million in 1996, from $10.6 million in 1995, and
increased as a percentage of revenues to 29 percent from 19 percent.
Approximately half of the increase in cost is attributable to operating expenses
of entities acquired during the latter half of 1995. The remaining increase is
primarily due to the addition of development personnel associated with the
Company's core product line, as well as other products. The Company believes
that the introduction of new technologies and products to the industrial
automation market in a timely manner is crucial to its success. As a
consequence, the Company has increased the 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 both 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
Statement of Financial
21
Accounting Standards 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 December 31, 1996. 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 increased 66 percent to $48.4 million in 1996 from $29.1
million in 1995, and increased as a percentage of revenue to 74 percent from 53
percent. The increase in the dollar amount of selling, general and
administrative expenses was primarily due to the increased staffing in field
sales and marketing required to further penetrate current and new markets for
the Company's products; increased staffing in technical support to provide
service to the Company's new product lines; increased staffing and other costs
in administrative functions to support the overall growth of the Company; and
operating costs associated with the entities acquired in the second half of
1995. The Company expects that such expenses will continue to increase in
absolute dollars as it expands its worldwide sales distribution and customer
support network to penetrate new markets for its production management products,
as well as to increase worldwide market penetration for its Wonderware InTouch
product line.
Restructuring and severance costs. During the fourth quarter of 1996,
the Company recorded a charge of $2.4 million for restructuring costs associated
with the closure of its Cupertino, California, development center and the
consolidation of its Manufacturing Business Systems group into the Company's
York, Pennsylvania, development center. The charge includes accruals for
severance, real property lease termination, transition bonuses and the costs of
transferring development of the Wonderware InTrack product line from Cupertino
to York.
During the fourth quarter of 1995, the Company accrued severance costs
totaling $1.3 million, including compensation and benefits expense, incurred in
conjunction with the resignation of seven former executives of the Company.
Acquired in-process research and development costs. As a result of the
acquisition of ICT-Wonderware in December 1996, the Company incurred an
after-tax charge of $1.3 million related to the allocation of purchase price to
in-process research and development costs acquired in the transaction. As a
result of the acquisitions of EnaTec Software Systems, Inc. (EnaTec) and SSE in
July and August 1995, respectively, the Company incurred charges of $23.4
million ($33.1 million, net of taxes of $9.7 million) to reflect direct
transaction costs and the allocation of purchase price to in-process research
and development costs.
Provision for income taxes. The Company recognized had an effective tax
rate of 19 percent in 1996. The change in the rate for 1996 from 1995, exclusive
of the tax effect related to the write-off on in-process research and
development costs, was due to an increase in the valuation allowance recorded
against the Company's deferred tax assets based on an evaluation of the
recoverability of such deferred tax assets. Any tax benefits not realized by the
Company in 1996 may be recoverable in future years should the Company generate
taxable income in those years.
Net loss. 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 when the Company's operations
return to profitability, net income as a percentage of total revenues will
continue to be lower than historical levels. There can be no assurance as to
when, if ever, the Company will resume profitable operations.
Comparison of 1995 to 1994
Total revenues. The Company's revenues for 1995 increased 54 percent to
$55.0 million from $35.7 million in 1994. The increase in revenues resulted
primarily from increased unit sales of the Wonderware InTouch product line, due
in part to investments in the Company's worldwide sales distribution and
customer support
22
network. Revenues from the Wonderware InTouch product line represented
approximately 90 percent of the Company's total sales.
International sales were $23.6 million, or 43 percent of total
revenues, in 1995 and $13.7 million, or 38 percent of total revenues, in 1994.
The growth in international sales was the result of increased market
penetration, as well as expansion of the Company's presence in both Europe and
Asia.
The strategic acquisitions completed during the second half of 1995 did
not result in significant additional revenue streams in 1995.
Gross profit. The Company's gross margin increased to 95 percent in
1995 from 94 percent in 1994. The increase was primarily due to cost control
measures implemented in the area of inventory purchasing, including the
execution of volume purchase agreements. Gross profit increased 56 percent to
$52.4 million in 1995 from $33.7 million in 1994 primarily due to increased
revenues.
Research and development expenses. Research and development expenses
increased 72 percent to $10.6 million in 1995, from $6.2 million in 1994, and
increased as a percentage of revenues to 19 percent from 17 percent. The Company
believes that the introduction of new technologies and products to the
industrial automation market in a timely manner is crucial to its success. As a
consequence, the Company increased the amount of its expenditures on research
and development in 1995, primarily through the employment of additional
development personnel.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 64 percent to $29.1 million in 1995 from $17.8
million in 1994, and increased as a percentage of revenue to 53 percent from 50
percent. The increase in the dollar amount of selling, general and
administrative expenses was primarily due to the increased staffing in field
sales and marketing and administrative functions to support the overall growth
of the Company, as well as the operating costs associated with the acquisitions.
Acquired in-process research and development costs. As a result of the
acquisitions of EnaTec and SSE the Company incurred an aggregate after-tax
charges of $23.4 million in 1995 to reflect direct transaction costs and the
allocation of purchase price to acquired in-process research and development
costs.
Provision for income taxes. The Company recognized income tax benefit
at an effective rate of 24 percent in 1995, as compared to income tax expense at
an effective rate of 34 percent in 1994. The change in the rate was due to the
tax effect of in-process research and development costs.
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 in the current year. The Company expects to experience
significant fluctuations in future quarterly operating results that may be
caused by many factors, including, among others: delays in 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 product or technology 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; 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
23
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.
Based in part on the growth in the overall industrial automation
software market and the Company's penetration of that market, as well as the
geographic and industry diversity of the Company's customers, the Company
believes that general economic conditions have not had a material adverse effect
on the Company's results of operations to date. There can be no assurance,
however, that economic conditions will not have a material adverse effect on the
Company in the future.
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. The short-term investments consist of highly
rated, taxable, short-term securities selected to maximize the Company's
after-tax return on its excess funds at a relatively low risk level. In 1996,
operating activities provided cash totaling $358,000 primarily related to
depreciation and amortization expense, an increase in accounts payable and the
write-off of acquired in-process research and development costs offset by
operating losses and increases in deferred taxes, other assets and inventory. In
1995, operating activities provided cash totaling $5.5 million primarily related
to operating income before acquired in-process research and development costs,
depreciation and amortization expense and increases in accrued expenses, offset
by increases in deferred taxes, accounts receivable, and other assets. The net
loss in 1995 resulted from the write-off of acquired in-process research and
development costs. As these were non-cash transactions, the Company's liquidity
was not impacted. In 1994, operating activities provided cash totaling $8.8
million primarily related to net income and depreciation and amortization
expense and increases in accounts payable, accrued expenses and deferred
revenues, offset by an increase in accounts receivable due to higher sales
levels. At December 31, 1996, the Company's cash, cash equivalent and short-term
investment balances totaled $52.2 million.
During 1996, the Company generated cash from investing activities
totaling $2.1 million. Net proceeds from sales and maturities of short-term
investments generated approximately $18.4 million in cash. This was offset by
$11.5 million used for the purchase of property and equipment and $4.8 million
used for the purchase of the outstanding shares of ICT-Wonderware (see Note 12
of Notes to Consolidated Financial Statements). During 1995, the Company used
cash in investing activities totaling $11.0 million. Of this amount, $4.8
million was used to purchase property and equipment, $555,000 was used in
acquisitions and $5.7 million was used for the purchase of short-term
investments. During 1994, the Company used cash in investing activities totaling
$38.2 million. Of this amount, $32.8 million was used to purchase short-term
investments, $2 million was invested in EnaTec and $800,000 was invested in
ICT-Wonderware. The remaining cash used in investing activities in 1994 was
primarily for the purchase of property and equipment.
During 1996, the Company generated cash from financing activities of
$1.4 million, primarily from funds generated through the exercise of stock
options and sale of stock through the employee stock purchase plan. This was
offset by payments of approximately $1.0 million against the credit line of
ICT-Wonderware. During 1995, the Company generated cash from financing
activities of $8.0 million, including tax benefits from the exercise of stock
options totaling $6.0 million. The remaining cash was generated primarily
through the exercise of stock options and the sale of common stock through the
employee stock purchase plan. During 1994, the Company generated cash from
financing activities of $18.8 million, primarily from the sale of common stock
in its public offering completed
24
in February 1994. Also, the Company realized tax benefits in 1994 totaling $2.9
million related to the exercise of stock options.
The Company maintains an unsecured bank line of credit with a domestic
bank expiring in May 1997 that provides for borrowings up to $5 million at the
bank's prime rate. No borrowings were outstanding under the line of credit at
December 31, 1996. The Company plans to renew the line of credit at terms
comparable to the current agreement. The Company's new German subsidiary
maintains a separate bank line of credit in Germany which expires in October
1997. This line of credit provides for maximum borrowings of DM900,000 at the
German bank's prime rate. Approximately $289,000 of borrowings against the
German credit line were outstanding as of December 31, 1996.
The Company's principal commitments as of December 31, 1996 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 December 31, 1996, and
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Annual Report:
Page
Independent Auditors' Report 26
Consolidated Balance Sheets as of December 31, 1996 and 1995 27
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 29
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 30
Notes to Consolidated Financial Statements 31
25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wonderware Corporation
Irvine, California
We have audited the accompanying consolidated balance sheets of
Wonderware Corporation and its subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,1996. Our
audits also included the financial statement schedule listed in the index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Wonderware Corporation and
its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 30, 1997
26
[Enlarge/Download Table]
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1996 1995
----------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 26,487,553 $ 22,637,986
Short-term investments ....................................... 25,681,766 44,287,316
Accounts receivable, less allowance for
doubtful accounts of $1,132,010 and
$903,839 at December 31, 1996 and 1995 ................... 12,377,041 7,402,071
Accounts receivable from a related party ..................... 3,037,108
Inventories .................................................. 1,100,056 460,663
Deferred tax assets .......................................... 2,184,687 2,139,690
Prepaid expenses and other current assets .................... 2,796,136 948,387
------------ ------------
Total current assets ..................................... 70,627,239 80,913,221
Property and equipment, net ...................................... 13,395,833 6,272,399
Investments ...................................................... 800,000
Goodwill, net .................................................... 4,829,792
Noncurrent deferred tax assets ................................... 3,736,296 1,967,711
Other assets ..................................................... 1,099,703 1,408,265
------------ ------------
Total assets ............................................. $ 93,688,863 $ 91,361,596
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit .......................................... $ 289,446
Accounts payable ............................................. 5,210,079 $ 1,532,721
Accrued employee incentive compensation ...................... 977,793 833,627
Accrued commissions .......................................... 309,845 450,287
Income taxes payable ......................................... 80,247 438,548
Accrued payroll and related liabilities ...................... 2,845,333 2,939,677
Other accrued liabilities .................................... 3,728,163 2,090,756
Deferred revenue ............................................. 1,641,605 1,234,640
------------ ------------
Total current liabilities ................................ 15,082,511 9,520,256
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
shares authorized; no shares issued or
outstanding as of December 31, 1996 and 1995
Common stock, $.001 par value; 50,000,000 shares
authorized; 13,865,896 and 13,247,610 shares
issued and outstanding at December 31, 1996 and 1995 ..... 13,866 13,248
Additional paid-in capital ................................... 86,424,172 83,331,383
Unrealized gain (loss) on short-term investments ............. (14,905) 192,698
Accumulated deficit .......................................... (7,816,781) (1,695,989)
------------ ------------
Net stockholders' equity ................................. 78,606,352 81,841,340
------------ ------------
Total liabilities and stockholders' equity ............... $ 93,688,863 $ 91,361,596
============ ============
See accompanying notes to consolidated financial statements.
27
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CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Revenues:
Product and license revenue ........................... $ 59,392,416 $ 46,339,271 $32,809,231
Product and license revenue from a related party ...... 2,472,834 6,697,668 2,042,548
Service contract revenue .............................. 3,059,092 1,973,994 853,501
------------ ------------ -----------
Total revenues .................................... 64,924,342 55,010,933 35,705,280
Cost of sales ......................................... 4,298,174 2,581,032 2,022,042
------------ ------------ -----------
Gross profit ...................................... 60,626,168 52,429,901 33,683,238
Operating expenses:
Research and development .............................. 18,788,930 10,607,252 6,155,473
Selling, general and administrative ................... 48,427,057 29,114,618 17,755,308
Restructuring and severance costs ..................... 2,350,000 1,319,624
------------ ------------ -----------
Operating income (loss) before acquired
in-process research and development costs ......... (8,939,819) 11,388,407 9,772,457
Acquired in-process research and development costs .... 1,300,000 33,091,626
------------ ------------ -----------
Operating income (loss) ........................... (10,239,819) (21,703,219) 9,772,457
Other income, net ..................................... 2,713,807 2,815,232 1,627,611
------------ ------------ -----------
Income (loss) before provision for income taxes ... (7,526,012) (18,887,987) 11,400,068
Provision (benefit) for income taxes .................. (1,405,220) (4,586,320) 3,824,731
------------ ------------ -----------
Net income (loss) ................................. $ (6,120,792) $(14,301,667) $ 7,575,337
============ ============ ===========
Net income (loss) per common and common
equivalent share .................................. (0.45) (1.13) 0.58
Weighted average common and common
equivalent shares ................................. 13,658,344 12,650,347 13,131,448
See accompanying notes to consolidated financial statements.
28
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) .................................................. $ (6,120,792) $(14,301,667) $ 7,575,337
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................................. 5,326,483 2,214,285 979,166
Provision for doubtful accounts ................................ 241,302 558,306 224,539
Deferred taxes ................................................. (1,813,582) (10,940,515) (413,712)
Compensation costs related to stock options .................... 636,177 283,485 149,027
Acquired in-process research and development costs ............. 1,300,000 33,091,626
Changes in operating assets and liabilities, net of
the effect of acquisitions:
Accounts receivable ........................................ (318,700) (5,637,205) (3,019,642)
Income tax refund receivable ............................... 248,255
Inventories ................................................ (519,248) (82,316) (219,687)
Prepaid expenses and other current assets .................. (597,856) (1,778,372) (279,506)
Accounts payable ........................................... 1,540,929 315,174 688,061
Accrued employee incentive compensation .................... (6,979) 5,136 4,895
Accrued commissions ........................................ (140,442) 71,245 162,508
Income taxes payable ....................................... (353,788) 185,693 247,275
Accrued payroll and other accrued liabilities .............. 777,049 1,225,011 1,839,778
Deferred revenue ........................................... 406,965 318,235 638,426
------------ ------------ ------------
Net cash provided by operating activities .................. 357,518 5,528,121 8,824,720
Cash flows from investing activities:
Purchases of property and equipment ................................ (11,536,732) (4,787,285) (2,351,729)
Investment in affiliate ............................................ (2,800,000)
Net effect of pooling of interests ................................. (243,320)
Cash paid for acquisitions, net of cash acquired ................... (4,808,388) (554,533)
Sales and maturities of short-term investments ..................... 94,685,231 67,855,628 13,962,055
Purchases of short-term investments ................................ (76,287,284) (73,544,027) (46,768,274)
------------ ------------ ------------
Net cash provided by (used in) investing activities ........ 2,052,827 (11,030,217) (38,201,268)
Cash flows from financing activities:
Proceeds from exercise of stock options ............................ 875,853 1,621,552 167,998
Tax benefit related to exercise of stock options ................... 5,994,301 2,904,143
Payments on bank line of credit .................................... (1,018,008) (592,989)
Repayment of loan payable to employee .............................. (283,418)
Deferred offering costs ............................................ 142,302
Net proceeds from issuance of common stock ......................... 1,581,377 969,470 15,834,434
------------ ------------ ------------
Net cash provided by financing activities ................... 1,439,222 7,992,334 18,765,459
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... 3,849,567 2,490,238 (10,611,089)
Cash and cash equivalents, beginning of period ......................... 22,637,986 20,147,748 30,758,837
------------ ------------ ------------
Cash and cash equivalents, end of period ............................... $ 26,487,553 $ 22,637,986 $ 20,147,748
============ ============ ============
Supplemental cash flow information:
Interest paid ...................................................... $ 7,931 $ 1,830 $ 33,334
Income taxes paid .................................................. $ 748,625 $ 215,712 $ 813,759
Detail of businesses acquired in purchase business
combinations:
Acquired in-process research and development costs ................. $ 1,300,000 $ 33,091,626
Goodwill ........................................................... 4,850,000
Fair value of assets acquired (net of previous
investment) ........................................................ 3,132,171 645,632
Common stock issued in acquisitions ................................ 21,260,477
Cash paid for acquisitions, net of cash acquired ................... 4,808,388 554,533
Liabilities assumed or created ..................................... 4,473,783 11,922,248
See accompanying notes to consolidated financial statements.
29
[Enlarge/Download Table]
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrealized
Common stock Additional Gain (Loss) Retained Net
----------------------- Paid-in Short-term Earnings Stockholders'
Shares Amount Capital Investments (Deficit) Equity
-------------------------------------------------------------------------------------------
Balance, January 1, 1994 ............. 10,836,056 $ 10,836 $ 34,138,908 $ 5,283,661 $ 39,433,405
Acquisition accounted for as
pooling of interests ............... 78,137 78 9,922 (253,320) (243,320)
Compensation costs related to
stock option grants ................ 149,027 149,027
Stock options exercised .............. 338,405 339 167,659 167,998
Tax benefit related to exercise
of stock options ................... 2,904,143 2,904,143
Proceeds from sale of common
stock .............................. 845,576 845 15,833,589 15,834,434
Unrealized loss on short-term
investments ........................ $ (71,883) (71,883)
Net income ........................... 7,575,337 7,575,337
-------------------------------------------------------------------------------------------
Balance, December 31, 1994 ........... 12,098,174 12,098 53,203,248 (71,883) 12,605,678 65,749,141
Common stock issued in
acquisitions ....................... 571,168 571 21,259,906 21,260,477
Compensation costs related to
stock option grants ................. 283,485 283,485
Stock options exercised .............. 527,728 528 1,621,024 1,621,552
Tax benefit related to exercise
of stock options ................... 5,994,301 5,994,301
Proceeds from sale of common
stock .............................. 50,540 51 969,419 969,470
Unrealized gain on short-term
investments ...................... 264,581 264,581
Net loss ............................. (14,301,667) (14,301,667)
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 ........... 13,247,610 13,248 83,331,383 192,698 (1,695,989) 81,841,340
Compensation costs related to
stock option grants ................ 636,177 636,177
Stock options exercised .............. 472,640 473 875,380 875,853
Proceeds from sale of common
stock .............................. 145,646 145 1,581,232 1,581,377
Unrealized loss on short-term
investments ...................... (207,603) (207,603)
Net loss ............................. (6,120,792) (6,120,792)
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 ........... 13,865,896 $ 13,866 $ 86,424,172 $ (14,905) $ (7,816,781) $ 78,606,352
===========================================================================================
See accompanying notes to consolidated financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended December 31,
1996, 1995 and 1994
1. General
Nature of Operations - Wonderware Corporation (the Company) is primarily engaged
in the development and marketing of microcomputer software for use in the
worldwide industrial automation market. Its customers include end users, system
integrators and original equipment manufacturers. The Company markets its
products principally through distributors and grants credit to customers in a
wide range of industries.
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Significant Accounting Policies
Cash and Equivalents - The Company considers all highly-liquid, short-term
investments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments - The Company's short-term investments, consisting
entirely of highly rated, taxable debt securities, have been classified as
"available for sale" and, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, have been recorded at fair value as of December 31, 1996 and 1995.
Unrealized gains or losses on such investments as of December 31, 1996 and 1995
have been recorded as a separate component of stockholders' equity (see Note 3).
Fair Value of Financial Instruments - SFAS No. 107, Disclosures About Fair Value
of Financial Instruments, requires management to disclose the estimated fair
value of certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as cash
or a contractual obligation that both conveys to one entity a right to receive
cash or other financial instruments from another entity, and imposes on the
other entity the obligation to deliver cash or other financial instruments to
the first entity. At December 31, 1996, the Company believes that the carrying
amounts of cash and cash equivalents, receivables, bank line of credit and trade
payables approximate fair value because of the short maturity of these financial
instruments.
Inventories - Inventories, consisting primarily of software program storage
media, related user manuals, and packaging materials are valued at the lower of
cost, determined on the first-in, first-out method, or market.
Depreciation and Amortization - Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the related assets, ranging from three to five years. Leasehold improvements
are amortized using the straight-line method over the lesser of the economic
useful lives of the assets or the related lease term. Intangible assets,
including goodwill, are amortized over the estimated useful life of the asset.
Goodwill - Goodwill is amortized over ten years on a straight line basis. The
Company will periodically review the value of goodwill to determine whether or
not an impairment to such value has occurred.
Other Assets - Other assets include the cost of technology procured in the
acquisition of Soft Systems Engineering, Inc. (SSE) in 1995, technology acquired
from Professional Technology Management (PTM) in 1995, and the cost of
non-compete agreements executed with certain former shareholders of PTM. The
Company is amortizing these assets over an estimated useful life of three years.
31
Software Development Costs - 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 internally
generated software development costs have been capitalized as of December 31,
1996 or 1995.
Long-Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed. In accordance
with SFAS 121, long-lived assets to be held are reviewed for events or changes
in circumstances which indicate that their carrying value may not be
recoverable. The Company will periodically review the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred.
Revenue Recognition - Revenues from the licensing of computer software products
are recognized upon delivery of the products to customers in accordance with
Statement of Position 91-1, Software Revenue Recognition, as there are no
significant vendor obligations remaining and collection of the related
receivable is probable. The Company accounts for insignificant vendor
obligations and post-contract support at the time of product delivery by
accruing such costs and recognizing them ratably on completion of performance.
The Company also offers its customers a 60-day right of return on sales (returns
over 30 days from shipment are subject to restocking charges) and records an
estimate of such returns at the time of product delivery based on historical
experience. Revenues related to version support contracts with customers are
deferred and amortized over the terms of the contracts, which range from six to
eighteen months.
Income Taxes - The provision for income taxes is determined in accordance with
SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities
arise from temporary differences between the tax basis of assets and liabilities
and their reported amounts in the consolidated financial statements that will
result in taxable or deductible amounts in future years.
Translation of Foreign Currencies - Assets and liabilities of foreign operations
are translated into U.S. dollars at the fiscal year end exchange rate. The
related translation adjustments are recorded in the statement of operations
because the functional currency is considered to be U.S. dollars. Revenues and
expenses are translated using average exchange rates prevailing during the year.
Foreign currency transaction gains and losses are included in net income (loss).
Realized and unrealized foreign currency gains and losses for the years
presented were not material.
Net Income (Loss) Per Share - Net income (loss) per share is computed based on
the weighted average number of common shares outstanding each year using the
treasury stock method. Outstanding stock options are excluded from the
calculation of net loss per share for 1996 and 1995 as they are anti-dilutive.
Outstanding stock options are considered common stock equivalents and are
included in the calculation of net income per share for 1994.
3. Short Term Investments
The Company's short-term investments as of December 31, 1996 and 1995 consist
almost entirely of debt securities issued by the United States or its agencies,
states of the United States and political subdivisions of the states and are
recorded at an aggregate fair value of $25,681,766 and $44,287,316,
respectively. The amortized cost basis of these investments was $25,696,671 at
December 31, 1996 and $44,094,618 at December 31, 1995. Gross unrealized holding
gains and losses, respectively, were $3,029 and $17,934 at December 31, 1996 and
$196,547 and $3,849 at December 31, 1995. The net unrealized holding gain (loss)
as of the end each year is included in stockholders' equity.
During 1996, proceeds from the sale of short-term investments totaled
$94,685,231. Gross realized gains and losses from these sales were $192,341 and
$21,273, respectively. During 1995, proceeds from the sale of short-term
32
investments totaled $67,855,628. Gross realized gains and losses from these
sales were $53,363 and $8,203, respectively. The cost of the investments sold
was determined through specific identification.
4. Property and Equipment
The following table summarizes the components of property and equipment:
[Download Table]
December 31,
-----------------------------
1996 1995
------------ ------------
Leasehold improvements $ 3,162,692 $ 1,554,132
Data processing equipment 14,911,819 6,211,081
Furniture, fixtures and other equipment 4,514,703 2,724,014
------------ ------------
22,589,214 10,489,227
Less: accumulated depreciation (9,193,381) (4,216,828)
============ ============
Property and equipment, net $ 13,395,833 $ 6,272,399
============ ============
5. Stockholders' Equity
Public Stock Offerings - In February 1994, the Company completed a public stock
offering in which it sold 800,000 shares of its common stock at a price of
$20.50 per share. The net proceeds raised by the Company in the offering were
approximately $15 million.
Stock-Based Compensation Plans- At December 31, 1996 the Company has two types
of stock-based compensation plans, which are described below. The Company
accounts for these plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations (APB 25). Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for stock options
granted at below fair market value, and for stock options granted in connection
with a guaranteed gain contract. Options were granted at below fair market value
to selected employees at various times from 1992 to 1995. The compensation
expense that has been charged against income for options granted at below market
rates was $486,703, $157,828, and $149,027 in 1996, 1995 and 1994, respectively.
In 1995 the Company entered into a guaranteed gain contract with the Chief
Executive Officer of the Company in connection with the grant of 200,000 options
under the Wonderware Corporation 1989 Stock Option Plan (1989 Plan) (see Note
7). Under the terms of the contract, the officer will receive a minimum gain of
$1,250,000 related to the options. The guaranteed gain amount is reduced by the
maximum total gain achieved by the vested options during the vesting period. The
compensation expense that has been recognized in connection with the guaranteed
gain contract was $149,474 and $125,657 in 1996 and 1995, respectively. A credit
is recorded to additional paid-in capital to reflect the stock option
compensation expense amounts recognized. The income tax effect of any difference
between the market price of the Company's common stock at the grant date and the
market price at the exercise date is credited to additional paid-in capital.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). As permitted by SFAS No.
123, the Company has chosen to continue to account for its stock-based
compensation plans under APB 25 and provide the expanded disclosures specified
in SFAS No. 123.
Had compensation cost been determined using the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
------------- -------------
Net loss As reported $ (6,120,792) $(14,301,667)
Pro forma $ (9,175,244) $(16,020,383)
Loss per share As reported $ (0.45) $ (1.13)
Pro forma $ (0.67) $ (1.27)
33
Fixed option plans
The Company has five fixed option plans. The 1989 Plan provides for granting
incentive stock options or non-statutory stock options to all employees,
non-employee members of the Board of Directors (the Board) and consultants who
provide valuable services to the Company. The 1989 Plan allows for the issuance
of options covering 4,000,000 shares of common stock. The option price per share
may not be less than 100 percent of the fair market value of a share of common
stock on the grant date as determined by the Board for incentive stock options
and 85 percent of fair market value for non-statutory stock options. For
incentive stock options, the exercise price may not be less than 110 percent of
the fair market value of a share of common stock on the grant date for any
individual possessing 10 percent or more of the voting power of all classes of
stock of the Company. The timing of exercise for individual option grants is at
the discretion of the Board, and the options expire no later than ten years
after the grant date (five years in the case of incentive stock options granted
to individuals possessing 10 percent or more of the voting power of all classes
of stock of the Company).
The 1994 Non-Employee Directors' Stock Option Plan (the Directors' Plan) allows
for the issuance of options covering 200,000 shares of common stock. The
Directors' Plan provides for the granting of stock options to directors of the
Company who are not otherwise employed by the Company or any affiliate of the
Company. Option grants under the Directors' Plan are non-discretionary. Each
person who is elected a non-employee director of the Company after adoption of
the Directors' Plan is granted upon such election options to purchase 10,000
shares of common stock. These options vest 25 percent one year after the date of
grant and 6.25 percent for each full three-month period thereafter. In addition,
on the date of each annual meeting of stockholders, each non-employee director
is granted options to purchase 10,000 shares of common stock. Such options vest
25 percent one year from the date of grant and 6.25 percent for each full
three-month period thereafter. The exercise price of all options granted under
the Directors' Plan shall be equal to 100 percent of the fair market value of
the Company's common stock on the date of grant. Unexercised options issued
under the Directors' Plan expire ten years from the date of grant.
In April 1993, the Company issued an option to purchase 90,000 shares of common
stock at $1.82 per share outside of the 1989 Plan to an executive of the
Company. Such option vests at the rate of 24 percent after 12 months and 2
percent per month thereafter. The recipient of this option resigned as an
officer of the Company in December, 1995. Under the terms of the former
officer's separation agreement, the options will continue vesting for an
additional twelve months, and the former officer will have until March 1997 to
exercise all vested options, subject to the terms of the separation agreement.
In connection with the acquisition of EnaTec Software Systems, Inc. (EnaTec) in
July 1995, the Company assumed all outstanding options to purchase shares of
EnaTec stock in exchange for options to purchase 72,882 shares of Wonderware
Corporation common stock. Such options are outside of the 1989 Plan and are
incentive stock options which vest 25 percent one year following the date of
grant, with the remaining vesting occurring ratably over the following 36
months. Option grant dates range from February 1992 to May 1995. There are
currently no shares available under this plan for future option grants.
In connection with the acquisition of certain assets of PTM in December 1995,
options to purchase 45,349 shares of common stock were issued to six of the
former shareholders of PTM at an exercise price of $3.00 per share. The options
vest one third on the date of grant and one third on each anniversary date
thereafter, contingent upon continued employment with the Company.
At December 31, 1996 and 1995, 2,803,368 and 3,229,442 shares, respectively, of
the Company's common stock were reserved for future exercise of stock options.
For purposes of estimating the compensation cost of the Company's option grants
in accordance with SFAS 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in the years 1996 and 1995, respectively:
expected volatility of 74.2 and
34
63.9 percent and risk-free interest rates of 5.5 and 5.9 percent. The expected
lives of the Company's option grants range from 4.5 to 5.0 years.
A summary of the status of the Company's fixed option plans as of December 31 is
presented below:
[Enlarge/Download Table]
1996 1995 1994
---------------------------- ---------------------------- -------------
Weighted Avg Weighted Avg
Fixed Options Shares Exercise Price Shares Exercise Price Shares
Outstanding, beginning of year 1,868,315 $ 14.27 1,756,777 $ 5.45 1,729,350
Granted at fair market value 1,155,100 $ 14.55 573,803 $ 31.85 556,400
Granted at less than fair
market value 45,349 $ 3.00 140,087 $ 22.69
Exercises (472,640) $ 1.89 (527,728) $ 3.01 (338,405)
Canceled (869,560) $ 24.06 (74,624) $ 20.24 (190,568)
============ ============ =============
Balance, end of year 1,726,564 $ 11.50 1,868,315 $ 14.27 1,756,777
============ ============ =============
Options exercisable at year-end 509,519 724,996 960,413
Weighted average fair value of
options granted during year $ 6.36 $ 14.42
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Range of Weighted Avg
Exercise Number Remaining Weighted Avg Number Weighted Avg
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$.01 - $3.99 347,394 5.3 $ 0.94 302,534 $ 0.69
$4.00 - $9.74 130,505 8.8 $ 7.80 32,026 $ 5.55
$9.75 - $10.24 405,900 9.7 $ 9.75
$10.25 - $17.12 517,065 8.4 $ 14.98 143,365 $ 13.82
$17.13 - $37.75 325,700 9.1 $ 20.88 31,594 $ 23.33
============ ============
1,726,564 8.2 $ 11.50 509,519 $ 6.10
============ ============
Employee Stock Purchase Plan
In May 1993, the Company adopted the Employee Stock Purchase Plan (the Purchase
Plan) covering an aggregate of 300,000 shares of common stock. The Purchase Plan
is intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
six-month offerings following the commencement of the Purchase Plan. The current
offering under the Purchase Plan commenced on August 16, 1996 and will terminate
on February 15, 1997. Employees are eligible to participate in the Purchase Plan
if they are employed by the Company or a subsidiary of the Company designated by
the Board for at least 20 hours per week and are customarily employed by the
Company or a subsidiary of the Company designated by the Board for at least five
months per calendar year. Participating employees may elect to have up to 15
percent of their earnings withheld pursuant to the Purchase Plan. The amount
withheld is then used to purchase shares of common stock on specified dates
determined by the Board. The price of common stock purchased under the Purchase
Plan is equal to 85 percent of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant purchase
date. Employees may end their participation in the offering at any time during
the offering period and participation ends automatically on termination of
employment with the Company.
35
In the event of a merger, reorganization, consolidation or liquidation involving
the Company, the Board has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the successor
corporation, or the Board may shorten the offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The Purchase Plan will terminate in
May 2003. The Board has the authority to amend or terminate the Purchase Plan,
provided, however, that no such action may adversely affect any outstanding
rights to purchase common stock.
At December 31, 1996, $670,949 had been withheld from employee earnings for
stock purchases under the Purchase Plan. The Company issued 145,646 shares of
common stock in 1996 in connection with the semi-annual offerings under the
Purchase Plan and raised net proceeds of approximately $1,581,377.
For purposes of estimating the compensation cost of employees' purchase rights
under the Purchase Plan in accordance with SFAS 123, the fair value of the
purchase rights has been estimated using the Black-Scholes model with the
following assumptions used for 1996 and 1995, respectively: expected volatility
of 74.2 and 63.9 percent; weighted average risk-free interest rates of 5.3 and
6.4 percent; and expected lives of six months. The weighted-average fair value
of those purchase rights granted in 1996 and 1995 was $5.28 and $8.63,
respectively.
Share Purchase Rights Plan - In February 1996, the Company adopted a Share
Purchase Rights Plan (the Rights Plan) designed to protect the Company's
stockholders should the Company become the target of coercive and unfair
takeover tactics. Upon adoption of the Rights Plan, the Company declared a
dividend distribution of preferred stock purchase rights at the rate of one
right for each share of common stock outstanding on February 29, 1996. A right
entitles the holder, upon occurrence of certain events, to purchase one-one
hundredth of a share of Series A Junior Preferred Stock at a purchase price of
$90, subject to adjustment. The rights, however, will not become exercisable
unless and until, among other things, any person or group acquires 15 percent or
more of the outstanding common stock of the Company or any person or group
announces its intent to launch a tender offer to acquire 15 percent or more of
the Company. Upon the occurrence of either of these events, the rights (other
than those held by any defined acquirer) will become exercisable for common
stock of the Company having a market value of twice the exercise price of a
right. Furthermore, if the Company is involved in a merger or other business
combination or sale of a specified percentage of assets or earnings power, the
rights (other than those held by any defined acquirer) may be used to purchase,
for the exercise price, that number of shares of the acquirer's common stock
having a market value of twice the exercise price of a right. The rights are
redeemable under certain circumstances at $.001 per right and, unless redeemed
earlier, expire on February 15, 2006.
6. Export Revenue
Product sales to customers located in Europe were $17,146,441, $17,585,465 and
$10,595,917 during the years ended December 31, 1996, 1995 and 1994,
respectively. Product sales to customers in other international geographic
locations were $9,825,839, $5,981,805 and $3,097,234 during the years ended
December 31, 1996, 1995 and 1994, respectively. The Company expects that
international sales will continue to represent a significant percentage of its
total revenues.
36
7. Transactions With Related Parties
Chief Executive Officer - The Company has entered into an agreement with its
President and Chief Executive Officer, who commenced service as President and
Chief Operating Officer in July 1995. Under the terms of the agreement, options
to purchase 200,000 shares of the Company's common stock under the 1989 Plan
were granted to the officer at an exercise price of $37.75, the market price of
the common stock as of July 31, 1995. Such options originally vested at the rate
of 24 percent one year from the date of grant and 2 percent per month
thereafter. On August 31, 1996, the terms of these options were revised such
that the exercise price was reduced to $9.75 (the market price of the common
stock on August 30, 1996) and the vesting schedule was revised so that 50
percent of the options vest two years from August 31, 1996 and 25 percent per
year thereafter. In addition, the Company has guaranteed the officer will
achieve a minimum gain of $1,250,000 (the "guaranteed amount") related to the
options. The guaranteed amount is reduced by the maximum total gain achieved by
vested options during the vesting period. At the end of the vesting period, any
remaining guaranteed amount would be due and payable.
Also under the terms of the agreement, the officer received a $200,000 loan to
assist in the relocation of his primary residence to Orange County, California.
In December 1995, the loan was forgiven and the officer received additional
funds to cover the effect of payroll taxes on the forgiveness. The total cost to
the Company of $400,139 was charged to compensation expense in 1995.
Severance Protection Agreements - In August 1996, the Compensation Committee of
the Board of Directors authorized severance protection agreements covering all
officers of the Company. Under the agreement covering the Chief Executive
Officer of the Company, such officer will receive 2.5 times his annual average
salary over the last three years in the event that he is either terminated other
than for cause, or a change of control of the Company occurs and he decides not
to continue his employment with the Company. The agreements covering officers
other than the Chief Executive Officer have essentially the same terms as the
agreement with the Chief Executive Officer except that the payment will be one
times the officers' average annual salary over the last three years. Under all
of the severance agreements, in the event of a change of control of the Company,
all unvested stock options held by the officers shall immediately vest and
become exercisable.
Ownership Interest in Major Distributor - During 1996, the Company purchased the
remaining 85 percent interest in ICT-Wonderware GmbH which it did not already
own (see Note 12). ICT-Wonderware GmbH is the principal distributor of
Wonderware's products in Germany. Revenues derived from ICT-Wonderware GmbH for
the years ended December 31, 1996 and 1995 amounted to 3.8 percent and 12.2
percent of net revenues, respectively.
Major Customer - During the year ended December 31, 1994, revenues derived from
a distribution customer who was also a stockholder amounted to 6 percent of net
revenues.
37
8. Income Taxes
The provision (benefit) for income taxes consists of the following:
[Download Table]
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994
---- ---- ----
Current:
Federal $ 700,792 $ 4,792,001 $ 3,116,778
State 485,343 1,562,194 1,121,665
Foreign 352,979
---------------------------------------------------------------
1,539,114 6,354,195 4,238,443
Deferred:
Federal (2,027,579) (8,500,845) (299,262)
State (916,755) (2,439,670) (114,450)
---------------------------------------------------------------
(2,944,334) (10,940,515) (413,712)
---------------------------------------------------------------
$ (1,405,220) $ (4,586,320) $ 3,824,731
===============================================================
A reconciliation of the statutory federal tax rate to the Company's effective
tax rate is as follows:
[Download Table]
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Income tax (benefit) at statutory rate -35% -35% 35%
State tax (benefit) net of federal effect -4% -3% 6%
Increase in deferred tax valuation allowance 29%
Acquired in-process research and development costs 18%
Nontaxable interest income -10% -4% -5%
Research and development credit -3% -1% -1%
Other 4% 1% -1%
------------------------------
-19% -24% 34%
==============================
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The significant portions of the Company's net deferred tax asset of
$5,920,983 and $4,107,401 at December 31, 1996 and 1995, respectively, are as
follows:
38
[Download Table]
December 31,
------------------------------------------
1996 1995
---- ----
Allowance for doubtful accounts $ 477,628 $ 391,362
Vacation accrual 450,796 218,951
Restructuring reserve 866,000
State income tax (561,526) (215,178)
Severance accrual 312,567 456,710
Other reserves and allowances 365,357 636,088
NOL carryforwards 3,431,422 1,548,449
Credit carryforwards 2,714,755 729,867
Depreciation and amortization 1,010,618 322,262
Other 337,907 201,890
------------------------------------------
9,405,524 4,290,401
Valuation allowance (3,484,541) (183,000)
------------------------------------------
$ 5,920,983 $ 4,107,401
==========================================
Based on the Company's assessment of future realizability of certain deferred
tax assets, a valuation allowance has been provided, primarily related to
acquired net operating loss carryforwards and credit carryforwards, as it is
more likely than not that sufficient taxable income will not be generated to
realize these temporary differences. Additionally, at December 31, 1996,
approximately $1,131,000 of the valuation allowance was attributable to the
potential tax benefit of stock option transactions, which will be credited
directly to stockholders' equity if realized.
At December 31, 1996, the Company had federal net operating loss carryforwards
of approximately $8,503,000 and federal research credit carryforwards of
approximately $561,000, both of which are subject to various limitations and
expire at various dates through 2011. The Company also has an alternative
minimum tax carryforward of approximately $1,474,000 which has no expiration
date.
As of December 31, 1996 and 1995, the Company believes that its net deferred tax
assets will be recoverable out of future taxable income.
9. Commitments and Contingencies
Lease Commitments - The Company leases its office facilities under
non-cancelable operating leases that expire at various dates through 2002.
Future minimum rental payments under non-cancelable operating leases as of
December 31, 1996 are summarized as follows:
Year Ended December 31,
---------------------------------------------------------
1997 $ 2,150,635
1998 1,696,602
1999 1,253,490
2000 1,045,326
2001 832,457
Thereafter 150,864
-----------------
$ 7,129,374
=================
Rent expense for all operating leases totaled $2,049,571, $997,434 and $687,203
for the years ended December 31, 1996, 1995 and 1994, respectively.
39
Employment Agreements - The Company has executed employment agreements with
certain former shareholders of PTM. The aggregate potential termination expense
under these agreements was $1.1 million at December 31, 1996.
Legal Proceedings - In 1995, The Foxboro Company ("Foxboro") initiated
litigation against SSE to delay the acquisition of SSE by the Company and
subsequently amended its complaint to assert additional claims with respect to
Foxboro's ownership interest in certain software developed by SSE, which
interest is subject to a repurchase right in favor of SSE. Following the
completion of the acquisition of SSE by the Company, Foxboro withdrew its
initial claims related directly to the acquisition. SSE has tendered payment to
Foxboro for the repurchase of Foxboro's asserted ownership interest in the
subject software, which Foxboro has rejected. In 1996, SSE filed its answer and
counterclaim to Foxboro's amended complaint, seeking damages based upon SSE's
allegation that Foxboro breached its contractual obligation to sell its interest
in the subject software. In January 1997, the parties negotiated an agreement
for the mutual dismissal, without prejudice, of the claims asserted in the
litigation. Further proceedings in the litigation have been stayed pending
execution of the written agreement of dismissal.
In December 1995, RWT Corporation (RWT) filed an action against the Company
alleging that the Company's use of the term "INTRACK" violated RWT's alleged
federal trademark and related rights to the term "ONTRACK." In its answer, the
Company denied RWT's allegations and asserted a counterclaim seeking that the
"ONTRACK" trademark be declared invalid. In October 1996, the parties entered
into a settlement of these proceedings, the specific terms of which are
confidential, and the action was dismissed with prejudice.
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 alleges 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. The Cupertino Development Center was established in 1995
upon the Company's acquisition of EnaTec Software Systems, Inc., in which
Messrs. Delivanis and Preysman owned a substantial majority of the stock. The
Company is seeking compensatory and punitive damages with respect to its 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 and asserted cross-claims against the
Company, alleging breach of contract, termination in violation of public policy,
defamation (slander per se), intentional infliction of emotional distress,
negligent infliction of emotional distress, negligence, common law fraud and
deceit, and civil conspiracy. Both 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 Family Trust filed a complaint for declaratory judgment and
specific performance, seeking registration of certain Wonderware common stock.
The Company intends to file 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 United States District Court, Northern District
of California. This complaint was served on the Company in late January 1997,
and alleges securities law violations, fraud and deceit, and negligent
misrepresentation. The Company also intends to file an answer and
cross-complaint in this action. The Company intends to vigorously defend the
allegations made against it; however, 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 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 in a particular software
program 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
40
the injunction pending appeal. Although Intellution has filed its answer to the
Company's complaint in this proceeding, Cyberlogic has yet to file an answer. 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, Cyberlogic submitted a demand for arbitration of the
underlying contractual issues involved in these proceedings. Cyberlogic's
arbitration demand purports to seek damages and attorneys' fees in unspecified
amounts and injunctive relief. The Company has generally agreed to proceed to
arbitration based upon the current status of these proceedings. Dates for
hearing the arbitration and other related events have not yet been set. The
Company believes the allegations in Cyberlogic's arbitration demand to be
without merit and intend to vigorously defend itself against these claims. 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 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 has not yet filed its
formal response to this complaint. 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,
where they should be adjudicated. 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 was notified that a complaint 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 SSE,
which was acquired by the Company in a stock-for-stock merger in August 1995.
Mr. Voit alleges in the complaint that the Company and certain of its officers
who have also been named as defendants in the action made or caused to be made
materially false and misleading statements and concealed material information in
connection with the acquisition of SSE by the Company. In the complaint, Mr.
Voit claims that these alleged misrepresentations and omissions constitute
violations of the Securities Exchange Act of 1934, as amended, Rule 10b-5
thereunder and various state securities laws, common law fraud, negligent
misrepresentation, fraudulent inducement to enter into a contract and inducement
to enter into a contract by material misrepresentation and request 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. No hearing date has been set on the motion. The
case is in a preliminary stage and no discovery has been conducted to date. 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.
10. Lines of Credit
The Company has an unsecured line of credit arrangement with a domestic bank
that provides for borrowings of up to $5 million expiring in May 1997.
Outstanding loans under the line of credit bear interest at the bank's prime
rate. As of December 31, 1996 and 1995, no amounts were outstanding under the
line of credit.
The line of credit agreement contains restrictive covenants, the most
significant of which relate to profitability, minimum tangible net worth, debt
to tangible net worth, and current asset to current liability requirements. At
December 31, 1996 and 1995, the Company was in compliance with such covenants.
The line of credit agreement also prohibits the Company from paying cash
dividends without the bank's prior approval.
The Company's German subsidiary has a secured, revolving line of credit with a
German bank that provides for borrowings of up to DM900,000 expiring in October,
1997. Outstanding loans under this line of credit bear interest
41
at the bank's prime rate. As of December 31, 1996, $289,446 was outstanding
under this line of credit. The Company has provided a guarantee of payment to
the bank in the event of default by the subsidiary.
11. Employee Benefit Plans
Incentive Compensation Program - Beginning in January 1996, the Company
instituted a discretionary, performance-based incentive compensation program
that provides additional compensation in the form of an annual bonus for certain
eligible employees. Bonus payments are based, in part, on the overall financial
performance of the Company and individual performance of the employee. Total
incentive compensation expense recognized during 1996 under this program was
$783,985.
Prior to 1996, the Company had a discretionary incentive compensation program
that provided additional compensation in the form of a quarterly bonus for
certain eligible employees and a semi-annual profit bonus for all employees as
determined by formulas in the program. Total incentive compensation expense
recognized under this program amounted to $1,618,118 and $1,322,149 for the
years ended December 31, 1995 and 1994.
Employee Savings Plan - The Company has a defined contribution retirement
savings plan (the 401(k) plan) covering substantially all full-time employees.
Annually, the Company may make a discretionary contribution to the 401(k) plan
as determined by the Board of Directors. No such discretionary contribution was
made for the years ended December 31, 1996, 1995 or 1994.
12. Acquisitions
On December 12, 1996, a wholly owned subsidiary of the Company purchased all
outstanding shares of ICT-Wonderware GmbH not already owned by the Company.
ICT-Wonderware GmbH is the distributor of the Company's products in Germany.
Under the terms of the acquisition agreement, the Company paid $4.85 million in
cash for all of the outstanding voting stock of ICT-Wonderware GmbH other than
shares held by the Company. The total value of the transaction was $5.87
million, which includes the Company's 1994 investment in ICT-Wonderware GmbH of
$800,000, and was accounted for under the purchase method of accounting.
Accordingly, the Company's total investment in ICT-Wonderware GmbH was allocated
to the assets acquired, including in-process research and development, and
liabilities assumed based on the estimated fair value of such assets and
liabilities. The purchase price allocated to in-process research and development
was charged to the Company's operations, resulting in a non-recurring charge of
$1.3 million. Approximately $4.85 million of the total purchase price has been
allocated to goodwill and is being amortized over 10 years from the acquisition
date on a straightline basis.
On July 28, 1995, the Company merged with EnaTec by issuing 398,570 shares of
its common stock in exchange for all of the outstanding voting stock of EnaTec
other than shares held by the Company. In addition, the Company assumed all
outstanding options to purchase EnaTec common stock, which resulted in the
reservation of 72,882 shares of common stock for issuance upon exercise of the
assumed options. The transaction was valued at approximately $16.9 million and
was accounted for as a purchase. The purchase price was allocated to the assets
acquired, including in-process research and development, and liabilities assumed
based on the estimated fair value. The purchase price allocated to in-process
research and development was charged to the Company's operations, resulting in a
non-recurring charge of $16.9 million (net of a $7.0 million tax benefit).
On August 31, 1995, the Company merged with SSE by issuing 172,598 shares of its
common stock in exchange for all of the outstanding common stock of SSE. The
transaction was valued at approximately $7.1 million and was accounted for as a
purchase. The purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair value. The purchase price
allocation included a $572,000 allocation to developed technology and an
allocation to in-process research and development that was charged to the
Company's operations, resulting in a non-recurring charge of $6.5 million (net
of a $2.7 million tax benefit).
42
The accompanying consolidated statements of operations include the results of
operations of ICT-Wonderware GmbH, EnaTec and SSE from their respective
acquisition dates. The following unaudited pro forma information presents
results of operations of the Company for the years ended December 31, 1996 and
1995 as if the ICT-Wonderware GmbH acquisition had been consummated as of the
beginning of 1995 and as if the EnaTec and SSE acquisitions had been consummated
as of the beginning of 1994. The pro forma information is presented for
information purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
enterprise.
Year Ended December 31,
-----------------------------------
1996 1995
---- ----
Total revenues $ 72,601,818 $ 57,902,090
Net income (loss) $ (3,433,769) $ 4,734,112
Earnings (loss) per common and common
equivalent share $ (0.25) $ 0.35
On December 1, 1995, the Company acquired certain assets of PTM for $500,000. In
addition, the Company hired six of the former shareholders of PTM, executing
employment and non-competition agreements with each. Pursuant to such employment
agreements, the former PTM shareholders received options to purchase 45,349
shares of common stock at an exercise price of $3.00 per share. The options vest
over a period of three years, contingent on continued employment with the
Company, and resulted in compensation expense equal to the difference between
the option exercise price and the market price of the Company's common stock on
the date of grant. Non-competition payments in the aggregate amount of $330,000
were paid to the former PTM shareholders on February 29, 1996.
13. Restructuring and Severance Costs
During the fourth quarter of 1996, the Company recorded a charge of $2.4 million
for restructuring costs associated with the closure of its Cupertino,
California, development center and the consolidation of its Manufacturing
Business Systems group into the Company's York, Pennsylvania, development
center. The charge includes accruals for severance, real property lease
termination, retention bonuses and the costs of transferring development of the
Wonderware InTrack product line from Cupertino to York. As of December 31, 1996,
approximately $2.0 million of the accrual has not been utilized. It is
anticipated that the remaining balance will be expended by the end of the first
quarter of 1997.
During the fourth quarter of 1995, the Company accrued severance costs,
including compensation and benefits expense, incurred in conjunction with the
resignation of seven former executives of the Company.
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is
contained in the Proxy Statement for the Company's annual meeting of
stockholders to be held May 12, 1997 and, except as modified herein, is
incorporated herein by reference. Information required with respect to executive
officers is contained in Part I, Item 1 of this Annual Report.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that Ron
C. Mehaffey, a former executive officer of the Company, filed a late Form 4 to
report his acquisition of shares through the Company's Employee Stock Purchase
Program.
Item 11. Executive Compensation
Information with respect to this item is contained in the Proxy
Statement for the Company's annual meeting of stockholders to be held May 12,
1997 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item is contained in the Proxy
Statement for the Company's annual meeting of stockholders to be held May 12,
1997 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item is contained in the Proxy
Statement for the Company's annual meeting of stockholders to be held May 12,
1997 and is incorporated herein by reference.
44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report.
1. Financial Statements
The financial statements listed in Part II, Item 8 on page 25 are filed as part
of this Annual Report.
2. Financial Statement Schedules
Page
Independent Auditors' Report 26
Schedule II - Valuation and Qualifying Accounts 48
Schedules not listed above have been omitted because the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because information required is included in the consolidated
financial statements or the notes thereto.
3. Exhibits
See Exhibit Index on page 49.
The following management compensatory plans and arrangements are required to be
filed as exhibits to this Annual Report pursuant to Item 14(c):
Exhibit
Number Description
10.2 Registrant's 1989 Stock Option Plan, as amended (the "Stock Option
Plan")(1)
10.3 Form of Incentive Stock Option grant under the Stock Option Plan(2)
10.4 Form of Supplemental Stock Option grant under the Stock Option Plan(2)
10.5 Registrant's Employee Stock Purchase Plan, as amended(3)
10.12 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
amended (4)
----------------
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-8 (No. 33-94030) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-72380) or amendments thereto and incorporated herein
by reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated
herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference.
45
(b) Reports on Form 8-K
In a report filed on Form 8-K on December 2, 1996, the Company reported the
filing of a complaint against the Company by Otto M. Voit, III. See Note 9 of
Notes to Consolidated Financial Statements included in Part II, Item 8 herein.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of
March, 1997.
WONDERWARE CORPORATION
By: /s/ ROY H. SLAVIN
------------------------------
Roy H. Slavin
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Roy H. Slavin and Sam M. Auriemma, or
either of them, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Roy H. Slavin March 27, 1997
------------------------
Roy H. Slavin Chairman of the Board,
President and Chief Executive Officer
(Principal executive officer)
/s/ Sam M. Auriemma March 27, 1997
------------------------
Sam M. Auriemma Vice President, Finance and
Chief Financial Officer
(Principal financial and
accounting officer)
/s/ F. Rigdon Currie Director March 27, 1997
------------------------
F. Rigdon Currie
/s/ Harvard H. Hill, Jr. Director March 27, 1997
------------------------
Harvard H. Hill, Jr.
/s/ Jay L. Kear Director March 27, 1997
------------------------
Jay L. Kear
/s/ John E. Rehfeld Director March 27, 1997
------------------------
John E. Rehfeld
47
[Enlarge/Download Table]
WONDERWARE CORPORATION AND SUBSIDIARY
Schedule II--Valuation and Qualifying Accounts
Additions
Balance, Charged to Additions Balance,
Beginning Costs and Charged to End of
Description of Period Expenses Revenues Deductions Period
------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Allowance for doubtful accounts $ 903,839 $ 241,302 $ (13,131) $ 1,132,010
Sales returns allowance 190,000 $ 1,030,377 (1,030,377) 190,000
Year ended December 31, 1995:
Allowance for doubtful accounts 402,426 558,290 (56,877) 903,839
Sales returns allowance 455,000 334,043 (599,043) 190,000
Year ended December 31, 1994:
Allowance for doubtful accounts 212,190 224,539 (34,303) 402,426
Sales returns allowance 50,000 907,814 (502,814) 455,000
48
EXHIBIT INDEX
Exhibit
Number Description
3.1 Registrant's Amended and Restated Certificate of Incorporation(1)
3.2 Registrant's Amended Bylaws(1)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen stock certificate(2)
4.3 Specimen Right Certificate (3)
4.4 Rights Agreement, dated February 15, 1996, between the Registrant and
the First National Bank of Boston, as Rights Agent (3)
10.1 Form of Indemnity Agreement entered into between the Registrant and its
directors and officers(2)
10.2 Registrant's 1989 Stock Option Plan, as amended (the "Stock Option
Plan")(4)
10.3 Form of Incentive Stock Option grant under the Stock Option Plan(1)
10.4 Form of Supplemental Stock Option grant under the Stock Option Plan(1)
10.5 Registrant's Employee Stock Purchase Plan(5)
10.6 Form of Registrant's Proprietary Information and Inventions
Agreement(2)
10.7 Series B Preferred Stock Purchase Agreement among the Registrant
and the other parties named therein, dated as of February 28, 1991, as
amended(2)
10.8 Industrial Lease Agreement between the Registrant and The Irvine
Company, dated April 23, 1993(2)
10.9 Loan and Security Agreement between the Registrant and Silicon Valley
Bank, dated May 29, 1992, as amended(1)
10.10 License and Consulting Agreement between the Registrant and Microsoft
Corporation, dated October 3, 1991, as amended (6)
10.11 Development and License Agreement between the Registrant and Microsoft
Corporation, dated December 3, 1992 (6)
10.12 Registrant's 1994 Non-Employee Directors Stock Option Plan, as
amended (7)
10.13 Lease Agreement between the Registrant and Aetna Life Insurance
Company, dated July 24, 1996
10.14 Employment Agreement between the Registrant and Roy H. Slavin, dated
November 28, 1995
10.15 Separation Agreement between the Registrant and Gary J. Wilson, dated
September 9, 1996
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
24.1 Power of Attorney. See page 47
49
----------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-72380) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-63906) or amendments thereto and incorporated herein by
reference.
(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
February 15, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-94030) and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.
(6) This exhibit was originally filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-63906) with certain confidential
portions redacted. It is filed as an exhibit to this Report to disclose
those portions for which confidential treatment was previously granted.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by reference.
50
Dates Referenced Herein and Documents Incorporated by Reference
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