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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________________________ TO________________________.
Commission File Number 0-26814
DATAWORKS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0209937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5910 PACIFIC CENTER BOUVELVARD 92121
SUITE 300 (Zip Code)
SAN DIEGO, CALIFORNIA
(Address of principal executive offices)
(619) 546-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
As of March 31, 1996, there were 5,874,027 shares of the Registrant's
Common Stock outstanding.
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DATAWORKS CORPORATION
FORM 10-Q INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,1996 (unaudited) and
December 31, 1995 3
Consolidated Statements of Operations (unaudited) for the Three
Months Ended March 31,1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31,1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATAWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash & cash equivalents $ 8,901,393 $ 10,726,636
Accounts receivable, net 11,755,481 9,951,922
Deferred income taxes 1,515,780 1,515,780
Other current assets 2,128,670 983,368
------------ ------------
Total current assets 24,301,324 23,177,706
Equipment, furniture and fixtures, net 1,880,796 1,589,760
Receivable from officer 228,000 206,000
Acquired and developed software costs, net 2,790,444 1,852,115
Intangible assets, net 4,377,667 4,574,277
Other assets 122,750 125,045
------------ ------------
Total assets $ 33,700,981 $ 31,524,903
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,976,080 $ 2,742,380
Accrued compensation 1,285,925 1,350,091
Other accrued liabilities 1,428,373 912,019
Deferred revenue 4,017,520 3,281,665
------------ ------------
Total current liabilities 9,707,898 8,286,155
Deferred rent 134,262 133,266
Deferred income taxes 1,907,502 1,929,189
Shareholders' equity:
Common stock, no stated par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 5,874,027 and
5,661,436 at March 31, 1996 and December 31, 1995,
respectively 26,304,635 26,005,540
Accumulated deficit (4,353,316) (4,829,247)
------------ ------------
Total shareholders' equity 21,951,319 21,176,293
------------ ------------
Total liabilities & shareholders' equity $ 33,700,981 $ 31,524,903
============ ============
See accompanying notes
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DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Software licenses $ 4,566,719 $ 2,693,996
Hardware 1,211,616 1,002,937
Maintenance and other services 2,858,934 1,871,718
----------- -----------
Total revenues 8,637,269 5,568,651
Cost of revenues:
Software licenses 389,184 274,293
Hardware 914,126 840,454
Maintenance and other services 2,232,427 1,323,322
----------- -----------
Total cost of revenues 3,535,737 2,438,069
----------- -----------
Gross profit 5,101,532 3,130,582
Operating expenses:
Selling and marketing 2,390,570 1,684,004
Research and development 904,384 583,399
General and administrative 1,128,062 795,558
----------- -----------
Total operating expenses 4,423,016 3,062,961
----------- -----------
Income from operations 678,516 67,621
Interest income (expense), net 101,993 (446,442)
----------- -----------
Income (loss) before income taxes 780,509 (378,821)
Credit (provision) for income taxes (304,578) 141,779
----------- -----------
Net income (loss) $ 475,931 $ (237,042)
=========== ===========
Per share information:
Net income (loss) per share $ 0.08 $ (0.08)
=========== ===========
Shares used in per share computations 6,300,000 2,851,000
=========== ===========
See accompanying notes
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DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
--------------------------------
1996 1995
------------ ------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 475,931 $ (237,042)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 187,263 88,800
Amortization of intangible assets 196,611 160,921
Amortization of debt discount and debt issue costs -- 76,495
Deferred rent expense 996 10,094
Deferred income taxes (21,687) (57,687)
Changes in operating assets & liabilities:
Accounts payable 233,700 864,630
Accrued compensation (64,166) 40,590
Other accrued liabilities 547,892 (95,018)
Deferred revenue 735,855 432,812
Accounts receivable (1,803,559) (883,474)
Other current assets (1,145,302) (100,627)
------------ ------------
Net cash provided by (used in) operating activities (656,466) 300,494
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (478,299) (176,939)
Additions to acquired and developed software costs (938,328) (189,625)
Advances to officers (22,000) (46,500)
Other assets 2,295 --
------------ ------------
Net cash used in investing activities (1,436,332) (413,064)
FINANCING ACTIVITIES
Net decrease in obligations under lines of credit -- (403,159)
Repayments of notes payable (31,540) (102,603)
Issuance of common stock, net 299,095 --
------------ ------------
Net cash provided by (used in) financing activities 267,555 (505,762)
------------ ------------
Net decrease in cash and cash equivalents (1,825,243) (618,332)
Cash and cash equivalents at beginning of period 10,726,636 618,332
------------ ------------
Cash and cash equivalents at end of period $ 8,901,393 $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest 15,128 307,877
============ ============
Cash paid during the period for income taxes $ -- $ --
============ ============
See accompanying notes
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DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31,1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31,1995.
Note B - Accounting Policies
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 121"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). The adoption of the new
standard had no effect on the financial statements.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 123 "Accounting and Disclosure of Stock-Based Compensation" (SFAS
123). As allowed under SFAS 123, the Company has elected to continue to account
for stock option grants in accordance with Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations. The adoption of the new standard had no effect on the financial
statements.
Note C - Net Income (Loss) Per Share
For periods subsequent to the completion of the Company's initial public
offering (the "IPO") in October 1995, income per share information is computed
using the weighted average number of common shares outstanding plus common share
equivalents arising from outstanding stock options and warrants using the
treasury stock method. Prior to the IPO, net income (loss) per share is computed
pursuant to the requirements of the Securities and Exchange Commission ("SEC"),
which require that common stock and convertible preferred shares issued by the
Company during the twelve months immediately preceding the IPO, plus the number
of common equivalent shares which were granted during the same period pursuant
to the grant of stock options and warrants, be included in the calculation of
the shares used in computing net income (loss) per share as if these shares were
outstanding for all periods presented using the treasury stock method.
Note D - Acquisition
In January 1996, the Company agreed to purchase software assets of Arrowkey
Systems for $450,000. These assets facilitate the integration of shop floor data
collection systems into the Company's current software products. In addition,
the Company may be required to pay up to $75,000 annually through 1998 if
certain sales levels of Arrowkey software products are achieved, as defined.
These assets have been included on the Balance Sheet as "Acquired and developed
software costs, net" and will be amortized over their estimated useful life of
five years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
DataWorks Corporation (the "Company") was incorporated in 1986 to develop,
market, implement and support open systems, client-server based ERP software for
mid-sized discrete manufacturing companies. The Company expects that the factors
affecting its growth will include expansion in the range and capabilities of its
ERP software products, continued focus on licensing products to new customers
and licensing additional sites and modules to existing customers, extended
availability of sales and services through the expansion of regional centers and
investment in infrastructure to support anticipated growth in sales and service
requirements.
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues occur
predominantly in the third month of each fiscal quarter and tend to be
concentrated in the latter half of such third month. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in product
delivery or in closings of sales near the end of the quarter could cause
quarterly revenues and, to a greater degree, net income to fall substantially
short of anticipated levels. The forward-looking comments contained in the
following discussion involve risks and uncertainties. The Company's actual
results may differ materially from those discussed here. Factors that could
cause or contribute to such differences can be found in the following discussion
and elsewhere throughout this Quarterly Report on Form 10-Q, as well as in the
Company's Form 10-K as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented by
certain statement of operations data for the periods indicated:
Three Months Ended
March 31,
--------------------------
1996 1995
(Unaudited) (Unaudited)
Revenues:
Software licenses 53% 48%
Hardware 14 18
Maintenance and other services 33 34
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Total revenues 100 100
---- ----
Cost of revenues:
Software licenses 4 5
Hardware 11 15
Maintenance and other services 26 24
---- ----
Total cost of revenues 41 44
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Gross Profit 59 56
---- ----
Operating expenses:
Selling and marketing 28 30
Research and development 10 11
General and administrative 13 14
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Total operating expenses 51 55
---- ----
Income from operations 8 1
Interest income (expense) 1 (8)
---- ----
Income (loss) before taxes 9 (7)
Credit (provision) for income taxes (3) 3
---- ----
Net income (loss) 6% (4)%
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Revenues. Total revenues include software license revenues and related service
fees, including software maintenance, consulting and custom programming. In
addition, the Company resells third party hardware and operating sytems software
to provide turnkey systems solutions. The Company's revenues for the three
months ended March 31, 1996 increased 55% to $8.6 million from $5.6 million for
the same period in 1995. These increases were primarily due to growth in
software license revenues and service fees which increased 70% and 53%,
respectively, over the same period in 1995. This growth is the result of the
expansion of the Company's customer base through the impact of the
regionalization and expansion of the sales force and marketing efforts of the
Company. Growth in software license revenues also reflects an increase in add-on
sales to the Company's existing customer base. Hardware revenue increased 21%
for the three months ended March 31, 1996 as compared to the same period in
1995. The decline in hardware revenues as a percentage of total revenues
reflects an increasing tendency for the new customers who purchase smaller
systems to purchase hardware directly from third party vendors.
Cost of Revenues. The costs related to software license revenues consist
primarily of the cost of software products sold with the Company's systems that
are provided by third party suppliers. These costs increased 42% for the three
months ended March 31, 1996 as compared to the same period in 1995. The cost of
hardware revenues consists primarily of the cost of the computers (primarily
servers) and related peripheral and network products purchased from third party
vendors and sold as part of the Company's turnkey systems. The cost of providing
hardware products increased 9% for the three months ended March 31, 1996 as
compared to the same period for 1995. The dollar increases in cost of software
licenses and cost of hardware are due to the increased volume of software and
hardware sales. The cost of service revenues is primarily based on salary and a
portion of the Company's overhead costs. The cost of service revenues increased
by 69% for the three months ended March 31,1996 as compared to the same period
for 1995. This cost increase primarily reflects the increased costs attributable
to hiring additional service personnel to support the current and expected
growth in new customer accounts.
Gross Profit. The Company's gross profit increased 63% to $5.1 million for the
three months ended March 31,1996 as compared to $3.1 million for the comparable
three months ended March 31, 1995. During the same period, gross profit as a
percentage of sales increased to 59% from 56%. This increase was primarily due
to the increase in software license revenues which increased at a greater
percentage than the other components of revenue and which carries a higher gross
profit percentage than that of hardware and service revenues.
Selling and marketing expenses. Selling and marketing expenses consist primarily
of sales and marketing personnel costs, advertising and promotional expenses.
These expenses for the three months ended March 31,1996 increased 42% to $2.4
million from $1.7 million for the same period of 1995. Selling and marketing
expenses as a percentage of revenue decreased to 28% for the three months ended
March 31,1996 from 30 % for the same period in 1995, due to the increase in
sales revenue. The dollar increase in expenses was primarily due to increased
regional staffing and the marketing effort required to support current and new
markets for the Company's products. The Company expects that such expenses will
continue to increase as it expands its sales efforts.
General and administrative expenses. These expenses for the three months ended
March 31, 1996 increased 42% to $1.1 million from approximately $800,000 for the
same period in 1995. The increase in expenses was due primarily to costs related
to the increase in administrative staff necessary to manage higher revenue and
expense levels and to the increase in depreciation from the investments made in
capital equipment.
Research and development expenses. Research and development expenses are
comprised primarily of salary and a portion of the Company's overhead. Costs
incurred in the research and development of new software products are expensed
to operations as incurred. Certain software production costs related to the
Company's new ECS product, however, are capitalized as required by Statement of
Financial Accounting Standards No. 86, "Accounting for Software Cost."
Amortization of these costs will begin when the product is available for general
release, which is expected in 1997. Research and development expenses
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increased 55% to approximately $900,000 from approximately $600,000 and
decreased as a percentage of sales to 10% from 11% for the three months ended
March 31, 1996 as compared to the same period in 1995. The Company believes that
investments in research and development are required to remain competitive in
the software business. Accordingly, the Company has continued to increase the
amount of its expenditures on research and development, primarily through the
employment of additional development personnel. For the foreseeable future, the
Company anticipates continued increased expenditures on research and development
for both the enhancement of current products and the addition of new products.
Interest Income and Expense. The Company reported net interest income of
approximately $102,000 for the three months ended March 31, 1996, as compared to
net interest expense of approximtely $446,000 for the same period in 1995. The
interest income in the first quarter of 1996 relates primarily to the income
from the investment of the net proceeds of the Company's initial public offering
in October 1995. The interest expense recorded in the first quarter of 1995
relates primarily to long-term debt and the amortization of debt issue cost with
respect to prior financings, all of which were retired with a portion of the
proceeds from the initial public offering.
Provision for Income Taxes. The Company's effective tax rate for the first
quarter of 1996 was 39% as compared to 37% for the same quarter of 1995. The
difference between the Company's effective rate and the combined statutory rates
is due to benefits from certain tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash flow from operations
and its current cash and short-term investment balances. For the three months
ended March 31,1996, operating activities required cash of approximately
$656,000 primarily to support increases to accounts receivable and other current
assets. In addition, the Company made investments during the first quarter for
capital equipment of approximately $478,000, the funding of the Company's new
ECS product of approximately $488,000 and the purchase of certain software from
Arrowkey Systems of $450,000.
As of March 31, 1996, the Company had cash and cash equivalents totaling
approximately $8.9 million.
The Company maintains a secured bank line of credit expiring in June 1997 that
provides for borrowings of up to $6.0 million, based upon eligible receivables,
at the bank's prime rate. No borrowings were outstanding under the line of
credit at March 31,1996.
The Company's principal commitments as of March 31,1996 consisted primarily of
leases on facilities and equipment. There were no material commitments for
capital expenditures.
The Company's capital resources may be used to support working capital
requirements, product development, capital equipment requirements and possible
acquisitions of businesses, products or technologies complementary to the
Company's current business.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
(B) No reports on Form 8-K were filed during the three months ending
March 31, 1996.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATAWORKS CORPORATION
---------------------
(Registrant)
Date: May 14, 1996 /s/Stuart W. Clifton
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Stuart W. Clifton
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1996 /s/Norman R. Farquhar
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Norman R. Farquhar
Chief Financial Officer and
Director
(Principal Financial Officer)
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