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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-21176
WALL DATA INCORPORATED
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1189299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11332 N.E. 122ND WAY, KIRKLAND, WASHINGTON 98034
(Address of principal executive offices) (Zip Code)
(425) 814-9255
(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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stocks, as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 31 , 1997
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COMMON STOCK 9,308,047
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WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Income Statements for
the three months and nine months
ended September 30, 1997 and 1996 3
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flow for the
nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Net revenues:
License Fees $ 22,788 $ 27,023 $ 85,384 $ 85,416
Services 5,776 3,804 15,803 10,093
--------- --------- --------- ---------
Total net revenues 28,564 30,827 101,187 95,509
Cost of revenues:
License Fees 4,669 5,275 15,314 16,491
Services 1,846 1,837 5,654 5,295
--------- --------- --------- ---------
Total cost of revenues 6,515 7,112 20,968 21,786
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Gross margin 22,049 23,715 80,219 73,723
Operating expenses:
Product development 4,545 5,942 14,373 17,460
Sales and marketing 14,926 16,168 47,726 45,278
General and administrative 3,694 3,461 11,768 10,173
Non-recurring charges -- -- 10,747 --
--------- --------- --------- ---------
Total operating expenses 23,165 25,571 84,614 72,911
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Operating income (loss) (1,116) (1,856) (4,395) 812
Other income, net 1,146 815 2,397 1,650
--------- --------- --------- ---------
Income (loss) before income taxes 30 (1,041) (1,998) 2,462
Provision for income taxes 11 (396) (821) 935
--------- --------- --------- ---------
Net income (loss) $ 19 $ (645) $ (1,177) $ 1,527
--------- --------- --------- ---------
Net income (loss) per share $ 0.00 $ (0.07) $ (0.12) $ 0.16
--------- --------- --------- ---------
Shares used in calculating
net income (loss) per share 9,930 9,085 9,643 9,472
--------- --------- --------- ---------
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 74,447 $ 62,483
Accounts receivable 25,337 38,694
Inventories 696 733
Deferred income taxes 4,574 3,977
Other current assets 2,344 2,262
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Total current assets 107,398 108,149
Fixed assets, net 10,554 12,735
Deferred income taxes 155 155
Other assets 6,044 6,115
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$124,151 $127,154
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,500 $ 6,774
Accrued expenses 12,013 13,665
Income taxes payable 3,679 4,722
Deferred revenues 12,471 11,190
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Total current liabilities 33,663 36,351
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Shareholders' equity:
Preferred stock -- --
Common stock 55,769 54,357
Retained earnings 34,426 35,791
Cumulative translation adjustment 293 655
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Total shareholders' equity 90,488 90,803
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$124,151 $127,154
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WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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OPERATING ACTIVITIES
Net income (loss) $ (1,177) $ 1,527
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Deferred income taxes (597) (219)
Depreciation and amortization 7,363 7,345
Other, net 111 277
Decrease (increase) in operating assets:
Accounts receivable 13,357 5,839
Inventories 37 40
Other current assets (82) 561
Increase (decrease) in operating liabilities:
Accounts payable (1,274) 796
Accrued expenses (1,652) 1,147
Income taxes payable (1,043) 1,691
Deferred revenues 1,281 (729)
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Net cash provided by operating activities 16,324 18,275
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INVESTING ACTIVITIES
Purchases of fixed assets (2,558) (4,014)
Other assets (2,852) (3,568)
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Net cash used by investing activities (5,410) (7,582)
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FINANCING ACTIVITIES
Proceeds from issuances under stock plans 1,412 1,566
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Net cash provided by financing activities 1,412 1,566
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Net increase in cash and cash equivalents 12,326 12,259
Effect of exchange rate changes on cash (362) 20
Beginning cash and cash equivalents 62,483 51,969
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Ending cash and cash equivalents $ 74,447 $ 64,248
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WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated balance sheets
and related consolidated statements of income and cash flows include all
adjustments, consisting only of normal and recurring items, necessary for
their fair presentation. The results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. These financial statements
and related notes should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1996 which
are included in the Company's Annual Report on Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
which becomes effective for the Company's 1997 consolidated financial
statements beginning in the fourth quarter of 1997. SFAS No.128 will
eliminate the disclosure of primary earnings per share which includes the
dilutive effect of stock options, warrants and other convertible securities
("Common Stock Equivalents") and instead requires reporting of "basic"
earnings per share, which will exclude Common Stock Equivalents.
Additionally, SFAS No. 128 changes the methodology for fully diluted
earnings per share. The adoption of this new accounting standard will not
have a material effect on the reported earnings per share of the Company.
3. NON-RECURRING CHARGES
During the second quarter of 1997, the Company recorded several
non-recurring charges totaling $10.7 million. Approximately $9.1 million
represents a charge for the settlement of the shareholders' class action
lawsuit. (see Note 5). The Company also recorded restructuring charges of
approximately $1.0 million for the write-off of inventory, technology
investments and for severance payments relating to the SALSA business line.
The remaining $0.6 million represents a retirement payment to James Simpson,
who retired as the Company's Chairman of the Board and Chief Executive
Officer on July 31, 1997. In July 1997, the Board of Directors also voted to
accelerate the vesting of certain stock options granted to Mr. Simpson. The
related compensation expense, which was not material, was recorded as an
expense in the third quarter.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
5. LITIGATION
In April 1995, four individuals who allegedly had purchased Wall Data common
stock filed proposed shareholders' class action lawsuits against Wall Data
and certain of the Company's
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officers and/or directors in the U.S. District Court, Western District
of Washington. A consolidated complaint amending the four actions was
filed by one of the individuals in June 1995. On September 13, 1995, the
Court granted the Company's motion to dismiss the complaint, with leave
to amend the complaint. The Court also dismissed all claims against one
of the directors with prejudice. On January 12, 1996, the plaintiffs
filed a second amended complaint, containing the same alleged violations
of law and class period as the previous complaint. The complaint sought
unspecified damages. In June 1996, the Court denied in part and granted
in part the Company's motion to dismiss the second amended complaint.
In July 1997, the Company agreed to settle the lawsuit, subject to
negotiation of a final settlement agreement and court approval, for $11.25
million, of which $3.0 million is to be paid by the Company's insurance
carrier. Included in non-recurring expenses in the second quarter of 1997 is
a charge of $9.1 million for the Company's share of the settlement plus
related fees and expenses. The Company paid its share of the settlement in
July 1997. Wall Data continues to deny the allegations of the plaintiffs'
claims, but agreed to the settlement to avoid any further expense and the
distraction of continued legal proceedings. On November 12, 1997, the Court
approved the settlement.
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WALL DATA INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this report and elsewhere by management from time to time, the
words "believes," "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Certain important factors could
cause the Company's actual results to differ materially from those expressed in
the Company's forward-looking statements. These factors are detailed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
and include, but are not limited to, the unpredictable nature of quarterly
revenue, competitive products and pricing in a rapidly changing marketplace,
dependence on a single product line, dependence on host computing, timely
development, production and acceptance of new products and services, dependence
on Microsoft Windows, the risk that the overall market for traditional
connectivity products may be flat or declining, risks associated with new
products and technological change, increasing reliance on resellers and
distributors, uncertainties regarding international operations, dependence on
key personnel, ability to attract and retain qualified staff, ability to manage
growth and risks associated with intellectual property and proprietary rights.
Readers are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly release the results of any revision to the
forward-looking statements that may be made to reflect subsequent events or
circumstances or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Net revenues decreased 7% in the third quarter of 1997 to $28.6 million from
$30.8 million in the third quarter of 1996. License fee revenue decreased 15.7%
from $27.0 million in the third quarter of 1996 to $22.8 million in the third
quarter of 1997. The Company believes that license revenues for the quarter
continued to be affected by lengthening sales cycles as some customers are
deferring purchase decisions while they evaluate incorporating internet-based
connectivity into their overall enterprise connectivity architectures. Licenses
of RUMBA(R) OFFICE, RUMBA for the Mainframe and RUMBA for the AS/400 accounted
for most of the net license revenues in the third quarter of 1997. Most of the
decrease in net license revenues in the third quarter compared to the third
quarter of 1996 resulted from decreases in licenses of RUMBA products. Service
revenue increased 52% in the third quarter of 1997 to $5.8 million from $3.8
million in the third quarter of 1996. Revenue outside North America represented
28% of total net revenues in the third quarter of 1997 compared to 23% of total
net revenues in the third quarter of 1996. Foreign currency exchange rate
changes did not have a significant effect on net revenues in the third quarter.
Revenue from indirect and OEM distribution channels equaled 71% of net revenues
in the third quarter of 1997 compared to 66% of net revenues in the third
quarter of 1996.
Net revenues increased 6% in the first nine months of 1997 to $101.2 million
from $95.5 million in the first nine months of 1996. License fee revenue totaled
$85.4 million in the first nine months of both 1997 and 1996. Licenses of RUMBA
OFFICE, RUMBA for the Mainframe, and RUMBA for the AS/400, accounted for most of
the net license revenues in the first nine months of 1997. Service revenue
increased 57% in the first nine months of 1997 to $15.8 million from $10.1
million in the first nine months of 1996. Revenue outside North America
represented 27% of total net revenues in the first nine months of both 1997 and
1996. Foreign currency exchange rate changes did not have a significant effect
on net revenues in the first nine months. Revenue
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from indirect and OEM distribution channels equaled 69% of net revenues in the
first nine months of 1997 compared to 68% of net revenues in the first nine
months of 1996.
Cost of revenues consists of software publishing costs, which include labor,
product media, packaging and documentation costs, and publishing engineering,
technical support and product quality assurance costs, royalties and licensing
costs, amortization of product localization costs and provisions for obsolete
inventory, doubtful accounts and reseller rebates. The Company's total gross
margin as a percentage of net revenues increased to 77.2% in the third quarter
of 1997 from 76.9% in the third quarter of 1996. The gross margin for license
fee revenue was 79.5% in the third quarter compared to 80.5% in the third
quarter of 1996. The gross margin for service revenue equaled 68.0% in the third
quarter of 1997 compared to 51.7% in the third quarter of 1996. For the first
nine months, the total gross margin increased to 79.3% in 1997 from 77.2% in
1996. License fee gross margin increased from 80.7% in the first nine months of
1996 to 82.1% in the first nine months of 1997. The gross margin for service
revenue increased to 64.2% in the first nine months of 1997 from 47.5% in the
first nine months of 1996. The increases in gross margin for service revenue are
primarily attributable to increases in net revenues without corresponding
increases in related costs.
Product development expenses decreased 24% to $4.5 million, or 15.9% of net
revenues, in the third quarter of 1997, from $5.9 million, or 19.3% of net
revenues, in the third quarter of 1996. For the first nine months, product
development expenses decreased 18% to $14.4 million, or 14.2% of net revenues in
1997, from $17.5 million, or 18.3% of net revenues in 1996. The decreases of
$1.4 million in the third quarter and $3.1 million in the first nine months
resulted primarily from lower staffing levels, arising from the completion of
the initial versions of certain RUMBA and SALSA products in 1996.
Sales and marketing expenses decreased 8% to $14.9 million, or 52.3% of net
revenues, in the third quarter of 1997 from $16.2 million, or 52.4% of net
revenues, in the third quarter of 1996. For the first nine months, sales and
marketing expenses increased 5% to $47.7 million, or 47.2% of net revenues in
1997, from $45.3 million, or 47.4% of net revenues in 1996. The decrease of $1.2
million in the third quarter was due to lower incentive compensation on lower
net revenues. The increase of $2.4 million in the first nine months was due
primarily to higher staffing levels, increased incentive compensation arising
from increased net revenues, and higher promotion, travel and occupancy costs.
General and administrative expenses increased 7% to $3.7 million, or 12.9% of
net revenues, in the third quarter of 1997, from $3.5 million, or 11.2% of net
revenues, in the third quarter of 1996. For the first nine months, general and
administrative expenses increased 16% to $11.8 million, or 11.6% of net revenues
in 1997, from $10.2 million, or 10.7% of net revenues in 1996. The increase of
$0.2 million in the third quarter was primarily due to abnormal
telecommunication costs and higher occupancy costs. The increase of $1.6 million
in the first nine months resulted primarily from non-recurring telecommunication
costs, higher occupancy costs and higher temporary service expenses.
During the second quarter of 1997, the Company recorded non-recurring charges
totaling $10.7 million, of which approximately $9.1 million represents the
settlement of the shareholders' class action lawsuit and related expenses (see
Note 5 of Notes to Consolidated Financial Statements). Wall Data continues to
deny the allegations of the plaintiffs' claims, but agreed to the settlement to
avoid any further expense and the distraction of continued legal proceedings.
Approximately $1.0 million represents the write-off of inventory, technology
investments and severance payments resulting from the restructuring of the SALSA
business line. The remaining $0.6
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million represents a retirement payment to Mr. James Simpson, who retired as
Chairman and Chief Executive Officer of Wall Data on July 31, 1997.
Other income, net of other expenses, increased 41% to $1.1 million in the third
quarter of 1997 from $0.8 million in the third quarter of 1996. For the first
nine months, other income, net of other expenses, increased 45% to $2.4 million
from $1.7 million in 1996. The increases of $0.3 million in the third quarter
and $0.7 million in the first nine months primarily resulted from higher
investment income earned, due principally to higher average cash balances in the
third quarter and first nine months of 1997 versus the comparable periods in
1996. Net foreign exchange gains or losses were not material in the three and
nine month periods ended September 30, 1997 and 1996. To date, the Company has
not engaged in currency hedging transactions against sales denominated in
currencies other than U.S. dollars.
The effective income tax rate was 36.7% in the third quarter of 1997 and 38.0%
in the third quarter of 1996. The effective tax rate for the first nine months
was 41.1% in 1997 compared to 38.0% in 1996.
Net income in the third quarter of 1997 equaled $19,000 ($0.00 per share)
compared to a net loss of $645,000 ($0.07 per share) in the third quarter of
1996. Net income in the first nine months of 1997, excluding the effect of
non-recurring items, totaled $5.5 million ($0.57 per share), or 5.4% of net
revenues, compared to net income of $1.5 million ($0.16 per share), or 1.6% of
net revenues in the first nine months of 1996. The net loss in the first nine
months of 1997, including the effect of non-recurring items, was $1.2 million
($0.12 per share). (See Note 3 of Notes to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments totaled $74.4
million, or 60% of total assets, at September 30, 1997, compared to $62.5
million, or 49% of total assets, at December 31, 1996.
Net cash provided by operating activities totaled $16.3 million in the first
nine months of 1997 compared to $18.3 million in the first nine months of 1996.
During the third quarter of 1997 the company paid (a) $8.25 million to settle
the shareholders' class action lawsuit, (b) $0.6 million for a retirement
payment to the Company's former chairman and CEO, and (c) $1.9 million to the
Internal Revenue Service in connection with an examination of the Company's
federal income tax returns for 1993 and 1994. Expenditures for property and
equipment totaled $2.6 million in the first nine months of 1997 compared to $4.0
million in 1996. Expenditures for prepaid software technology and other
long-term assets totaled $2.9 million in the first nine months of 1997 compared
to $3.6 million in the first nine months of 1996. The Company will, from time to
time consider the acquisition of additional third party technology through
license agreements, acquisitions or investments in other businesses.
Stockholders' equity decreased to $90.5 million at September 30, 1997, from
$90.8 million at December 31, 1996. The change primarily resulted from the net
loss in the first nine months of 1997.
Management believes that existing cash and cash equivalents together with funds
from operations will be sufficient to finance the Company's operations over the
near term.
ITEM 3 IS NOT APPLICABLE AND HAS BEEN OMITTED.
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WALL DATA INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1995, four individuals who allegedly had purchased Wall Data common
stock filed proposed shareholders' class action lawsuits against Wall Data and
certain of the Company's officers and/or directors in the U.S. District Court,
Western District of Washington. A consolidated complaint amending the four
actions was filed by one of the individuals in September 1995. On September 13,
1995, the Court granted the Company's motion to dismiss the complaint, with
leave to amend the complaint. The Court also dismissed all claims against one of
the directors with prejudice. On January 12, 1996, the plaintiffs filed a second
amended complaint, containing the same alleged violations of law and class
period as the previous complaint. The complaint sought unspecified damages. In
September 1996, the Court denied in part and granted in part the Company's
motion to dismiss the second amended complaint.
In July 1997, the Company agreed to settle the lawsuit, subject to negotiation
of a final settlement agreement and court approval, for $11.25 million, of which
$3.0 million is to be paid by the Company's insurance carrier. Included in
non-recurring expenses is a charge of $9.1 million for the settlement plus
related fees and expenses. Wall Data continues to deny the allegations of the
plaintiffs' claims, but agreed to the settlement to avoid any further expense
and the distraction of continued legal proceedings. On November 12, 1997, the
Court approved the settlement. (see Note 5 of Notes to Consolidated Financial
Statements).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1997.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wall Data Incorporated
Date: November 13, 1997 By: RICHARD VAN HOESEN
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Richard Van Hoesen, Vice President,
Finance and Chief Financial Officer
(Duly Authorized Officer and Chief
Financial and Accounting Officer)
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WALL DATA INCORPORATED
INDEX TO EXHIBITS
Exhibit Description Page
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(11) Computation of Earnings Per Share 14
(27) Financial Data Schedule 15
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