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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 JULY 31, 1999
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 AUGUST 31, 1999
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COMMON STOCK 10,186,815
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WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Statement of Operations for the three months
ended July 31, 1999 and 1998 3
Consolidated Balance Sheets as of
July 31, 1999 and April 30, 1999 4
Consolidated Statements of Cash Flows for the three
months ended July 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosure about
Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALL DATA INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JULY 31,
-------------------------
1999 1998
-------- --------
Net revenues
License fees $ 12,428 $ 32,722
Services 7,644 7,688
-------- --------
Total net revenues 20,072 40,410
Cost of revenues
License fees 3,310 4,553
Services 2,817 2,955
-------- --------
Total cost of revenues 6,127 7,508
-------- --------
Gross margin 13,945 32,902
Operating expenses:
Product development 6,025 6,601
Sales and marketing 16,021 19,525
General and administrative 3,028 3,947
Amortization of intangibles from acquisitions 567 519
-------- --------
Total operating expenses 25,641 30,592
-------- --------
Operating income (loss) (11,696) 2,310
Other income, net 590 417
-------- --------
Income (loss) before income taxes (11,106) 2,727
Provision for income taxes 234 544
-------- --------
Net income (loss) $(11,340) $ 2,183
======== ========
Net income:
Basic earnings (loss) per share $ (1.12) $ 0.22
======== ========
Diluted earnings (loss) per share $ (1.12) $ 0.22
======== ========
Shares used to calculate earnings per share:
Basic 10,152 9,906
======== ========
Diluted 10,152 9,965
======== ========
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, APRIL 30,
1999 1999
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 13,720 $ 17,728
Marketable securities 46,605 47,736
Accounts receivable 14,910 19,866
Deferred income taxes 5,697 5,697
Other current assets 3,062 3,317
--------- ---------
Total current assets 83,994 94,344
Fixed assets, net 9,001 9,559
Deferred income taxes 400 400
Long-term investments 2,017 2,017
Intangible assets related to acquisitions 14,363 14,861
Other assets 4,908 5,614
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$ 114,683 $ 126,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,111 $ 7,531
Accrued expenses 12,353 11,107
Income taxes payable 3,334 3,249
Deferred revenues 14,695 15,877
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Total current liabilities 37,493 37,764
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Deferred income taxes 2,639 2,630
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Shareholders' equity:
Preferred stock -- --
Common stock 62,177 62,145
Retained earnings 13,042 24,382
Accumulated other comprehensive income (668) (126)
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Total shareholders' equity 74,551 86,401
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$ 114,683 $ 126,795
========= =========
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JULY 31,
-------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income (loss) $(11,340) $ 2,183
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of long-term assets 1,265 1,747
Amortization of intangibles from acquisitions 567 519
Amortization of prepaid licenses and localization costs 1,000 1,211
Other, net 6 464
Loss on sale of fixed assets -- 323
Decrease in operating assets:
Accounts receivable 4,956 55
Other current assets 254 85
Increase (decrease) in operating liabilities:
Accounts payable (420) (226)
Accrued expenses 1,246 (1,769)
Income taxes payable 89 321
Deferred revenues (1,182) 1,709
-------- --------
Net cash provided by (used in) operating activities (3,559) 6,622
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INVESTING ACTIVITIES
Purchases of fixed assets (776) (1,333)
Proceeds from sale and maturity of marketable securities 545 --
Other assets (294) (215)
-------- --------
Net cash used in investing activities (525) (1,548)
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FINANCING ACTIVITIES
Proceeds from issuances under stock plans 32 5
-------- --------
Net cash provided by financing activities 32 5
-------- --------
Net increase (decrease) in cash and cash equivalents (4,052) 5,079
Effect of exchange rate changes on cash 44 (168)
Beginning cash and cash equivalents 17,728 57,490
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Ending cash and cash equivalents $ 13,720 $ 62,401
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See accompanying notes.
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WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1999
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 months
ended July 31, 1999 are not necessarily indicative of the results that
may be expected for any future periods. These financial statements and
related notes should be read in conjunction with the Company's audited
consolidated financial statements for the year ended April 30, 1999
which are included in the Company's Annual Report on Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in
years beginning after June 15, 1999. SFAS No. 133 requires all
derivatives to be recognized as either assets or liabilities in the
balance sheet and be measured at fair value. Although management of the
Company has not completed its assessment of the impact of SFAS No. 133
on its consolidated results of operations and financial position,
management believes that the impact of SFAS No. 133 will not be
material.
3. RECONCILIATION OF EARNINGS PER SHARE
The following table presents a reconciliation of basic earnings per
share to earnings per share--assuming dilution (income and shares in
thousands):
THREE MONTHS ENDED
JULY 31,
-------------------------
1999 1998
-------- --------
Net income (loss) (numerator) $(11,340) $ 2,183
-------- --------
Average share (denominator for basic) 10,152 9,906
Effect of dilutive stock options -- 59
-------- --------
Total (denominator for diluted) 10,152 9,965
-------- --------
Earnings (loss) per share--basic $ (1.12) $ 0.22
======== ========
Earnings (loss) per share--assuming dilution $ (1.12) $ 0.22
======== ========
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4. COMPREHENSIVE INCOME
The components of the Company's total comprehensive income were:
THREE MONTHS ENDED
JULY 31,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Net income (loss) $(11,340) $ 2,183
-------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments, net 44 (168)
Unrealized gains (losses) on securities, net (586) 43
-------- --------
Other comprehensive income (loss) (542) (125)
-------- --------
Comprehensive income (loss) $(11,882) $ 2,058
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5. SEGMENT REPORTING
Wall Data is organized based on the products and services that it
offers. In August 1999, the Company announced that it will consolidate
the Web-to-host and related server-based administrative and security
technologies of its Cyberprise product line into the RUMBA product line
and will not continue to pursue the corporate information portal market
at this time. As a result of consolidating the Web-to-host and related
technology with the RUMBA product line, the RUMBA segment consists of
products and services that connect the PC-to-host and Web-to-host
systems. RUMBA products include RUMBA OFFICE, RUMBA Mainframe, RUMBA
AS/400 and others. The Company's Cyberprise business relates to an
enterprise information portal solution. Cyberprise products include
Cyberprise Server, Cyberprise Host, Cyberprise Tools DBApp Developer and
others. As a result of the Company's decision to consolidate the
Web-to-host and related technology with its RUMBA products, prior
periods will be restated to eliminate all RUMBA/Cyberprise edition
revenues from Cyberprise and reflect it as RUMBA business. In the
quarter ended July 31, 1998, the Company did not recognize any revenue
from its RUMBA/Cyberprise edition product.
The Company's chief operating decision maker utilizes revenue and
operating income (loss) information in assessing performance and making
overall operating decisions and resource allocations. The accounting
policies of the operating segments are the same as those described in
the summary of significant accounting policies. Information about the
Company's segments is as follows:
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THREE MONTHS ENDED JULY 31,
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1999 1998
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(IN THOUSANDS)
NET REVENUES
RUMBA $ 18,971 $ 36,873
Cyberprise 1,101 3,537
-------- --------
Total net revenues $ 20,072 $ 40,410
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OPERATING INCOME (LOSS)
RUMBA $ (504) $ 5,812
Cyberprise (11,192) (3,502)
-------- --------
Operating income (loss) (11,696) 2,310
Other income, net 590 417
-------- --------
Income (loss) before income taxes $(11,106) $ 2,727
======== ========
As previously noted, the Company will no longer continue to pursue the
corporate information portal market. Accordingly, the Company will no
longer be required to report segment information.
6. SUBSEQUENT EVENTS
In connection with the process of consolidating the Web-to-host
technology with the RUMBA product line, the Company announced in August
1999 that it will restructure its worldwide operations around the RUMBA
business. The Company currently estimates that it will record a one time
charge of between $14 million and $16 million during its second fiscal
quarter ending October 31, 1999 for workforce reductions, facility
closures and certain asset write-offs. The non-cash portion of this
charge is estimated to be $6 million.
In August 1999, the Company sold its 10% equity investment in
DataChannel, a Seattle-based software technology company. In connection
with this sale, the Company will receive $4.6 million in cash and
recognize a $2.9 million non-operating gain in the Company's second
fiscal quarter ending October 31, 1999.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
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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 year ended April 30, 1999 and
include, but are not limited to, uncertain acceptance of the Company's new
products, risks associated with new markets and longer sales cycles,
fluctuations in quarterly performance, competitive products and pricing in a
rapidly changing market place, dependence on a two product segments, buying
patterns of customers as a result of expenditures to make systems year 2000
compliant, dependence on host computing, dependence on Microsoft Windows, risks
associated with technological change, increasing reliance on resellers and
distributors, increasing reliance on the Internet, 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
Revenues
Total net revenues. Net revenues decreased 50% in the first quarter of fiscal
2000 to $20.1 million from $40.4 million in the same period in the prior year.
Revenue outside North America represented 30% of net revenues in the first
quarter of fiscal 2000 and 32% in the same quarter of the prior year,
respectively. Foreign currency exchange rate changes did not have a significant
effect on net revenues in the first quarter.
License fees. License fees decreased 62% to $12.4 million in the first quarter
of fiscal 2000 from $32.7 million in the same period in the prior year. License
fees declined across all products with the largest declines in RUMBA Office and
RUMBA for the Mainframe. The decline is partially attributable to a slowdown in
the size and volume of sales transactions as customers postpone software
purchases to focus resources on ensuring their corporate information systems are
Year 2000 compliant. In addition, the Company believes that the operational
restructuring in the immediately preceding fourth quarter has had continued
effects on the current quarter performance. License revenue from indirect and
OEM distribution channels equaled 61% of license fees in the first quarter of
fiscal 2000 compared to 65% of license fees in the same period in the prior
year. License fees in the first quarter of fiscal 2000 from corporate
information portal and business intelligence products were nominal.
Services. Service revenues for first quarter of fiscal 2000 were $7.6 million
and were flat as compared the same period in the prior year with service revenue
of $7.7 million.
Cost of Revenue
Cost of license fees. Cost of revenues derived from license fees decreased 27%
to $3.3 million in the first quarter of fiscal 2000 as compared to $4.6 million
in the same period in the prior year.
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The decrease in cost of license fees is due primarily to decreases in material
costs of approximately $0.7 million related to a reduced amount of licenses
sold. The decrease in costs of license fees was also due to a reduction of
amortization of localization of $0.4 million which was a result of write-offs of
certain localization costs in October 1998. Cost of license fee revenues as a
percentage of license fee revenues increased to 27% in the first quarter of
fiscal 2000 as compared to 14% in the same period in the prior year,
respectively, due to the fixed nature of certain costs.
Cost of service revenues. Cost of service revenues consists primarily of
technical support, post-sales engineering and consulting services. Cost of
service revenues was $2.8 million or 37% of service revenues in the first
quarter of fiscal 2000 which is comparable to the cost of service revenue in the
same period in the previous year of $3.0 million or 38% of service revenues.
Operating Expenses
Product development expenses decreased 9% to $6.0 million, or 30% of total net
revenues, in the first quarter of fiscal 2000, from $6.6 million, or 16% of
total net revenues, in the same period in the prior year. The decline in product
development expenses is primarily due to lower compensation and related costs as
a result of lower average headcount in the first quarter of fiscal 2000 as
compared to the same period in the prior year.
Sales and marketing expenses decreased 18% to $16.0 million, or 80% of total net
revenues, in the first quarter of fiscal 2000 from $19.5 million, or 48% of
total net revenues, in the same period in the prior year. Lower average staff
levels in sales and marketing in the first quarter of fiscal 2000 as compared to
the same quarter in the prior year resulted in a decline in sales and marketing
expenses in whole dollars. Other reductions in sales and marketing expenses
occurred as a result of decreased promotional activities. Commission expense
also decreased in direct relation to reduced revenue during the first quarter of
fiscal 2000 as compared to the prior year quarter. The majority of the higher
sales and marketing expenses and higher staff levels in the prior year quarter
were due to the Company's investments in the Cyberprise brand.
General and administrative expenses decreased 23% to $3.0 million, or 15% of
total net revenues, in the first quarter of fiscal 2000, from $3.9 million, or
10% of total net revenues, in the same period in the prior year. The decrease in
general and administrative expenses was a result of reduced consulting and other
service expenses and lower average headcount in the first quarter of fiscal 2000
as compared to the prior year quarter.
Other Income, Net
Other income, net of other expenses, increased in the first quarter of fiscal
2000 to $0.6 million compared with $0.4 million the same period in the prior
year. Other income in the first quarter of fiscal 1999 included a loss on the
sale of fixed assets.
Income Taxes
The income tax provision for the first quarter of fiscal 2000 relates to taxes
payable on income in the Company's foreign subsidiaries. No tax benefit has been
recognized for U.S. losses. Such benefits are available to offset future taxable
income in the U.S. As of July 31, 1999, the Company reviewed its current risks
and uncertainties regarding the ultimate realizability of its deferred tax
assets and concluded that it is more likely than not that future operations and
tax planning would allow for the recognition of its deferred tax assets. The
Company will review the realizability of these deferred tax assets each quarter
to determine if operating results and business conditions have changed such that
the carrying value of the assets requires adjustment.
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Net Income (Loss)
The net loss equaled $11.3 million in the first quarter of fiscal 2000 compared
to net income of $2.2 million in the same period in the prior year. The loss per
share was ($1.12) per share for the first quarter of fiscal 2000 as compared to
earnings of $0.22 per share for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities totaled $60.3
million, or 53% of total assets, at July 31, 1999, compared to $65.5 million, or
52% of total assets, at April 30, 1999.
Net cash used in operating activities totaled $3.6 million in the first quarter
of fiscal 2000 compared to cash provided of $6.6 million in the same period in
the prior year. The change was partially due to the net loss in the first
quarter of fiscal 2000. The net loss in the first quarter was primarily offset
by reductions of accounts receivable of $5.0 million and increases in accrued
expenses of $1.2 million. Expenditures for property and equipment totaled $0.8
million in the first quarter of fiscal 2000 compared to $1.3 million in the
prior year quarter.
Stockholders' equity decreased to $74.6 million at July 31, 1999, from $86.4
million at April 30, 1999. The change primarily resulted from net loss during
the first quarter of fiscal 2000.
Management believes that existing cash and cash equivalents and marketable
securities together with funds from operations will be sufficient to finance the
Company's operations over the near term.
SUBSEQUENT EVENTS
The Company announced that in its second fiscal quarter ending October 31, 1999
it will record a restructuring charge and will receive proceeds of $4.6 million
from the sale of an equity investment in DataChannel. The restructuring charge
is currently estimated to be between $14 and $16 million and includes severance
costs, facility closure costs and approximately $6 million of non-cash asset
write-offs. During the first two weeks of the second fiscal quarter, the Company
reduced its overall workforce by roughly one third and is in the process of
closing and consolidating offices and facilities. The Company will no longer
continue to pursue the corporate information portal market.
In August 1999, John Wall resigned as CEO and as a director of the company to
pursue other interests. The Company's board of directors named Kevin Vitale,
president of the RUMBA business and formerly chief operating officer of Wall
Data, as the new president and CEO of the Company.
YEAR 2000
The Year 2000 problem arises from the common practice in software development in
the past of using two digits rather than four to designate the calendar year
(e.g., DD/MM/YY). This practice can lead to incorrect results whenever computer
systems, software or microchips perform arithmetic operations, comparisons or
data field sorting involving years later than 1999. The Company has been
assessing the impact of the Year 2000 issues for some time and has developed and
implemented plans to address these issues related to its products, its internal
business systems and its distributors and partners.
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The Company has tested its products for Year 2000 compliance and has made
modifications to certain of its products to make them Year 2000 compliant. Year
2000 compliant means that neither performance nor functionality of the products
or services is materially affected by dates prior to, during and after the year
2000. The Company believes that all of its currently supported RUMBA and
Cyberprise products are Year 2000 compliant as is or with available patches.
Because most of the work associated with testing and modification of the
Company's products has occurred in the ordinary course of product development,
the cost of Year 2000 compliance for the Company's products has not been
material.
The Company is assessing its internal systems, including financial and
operational systems, for Year 2000 compliance. The Company is currently in the
process of reviewing all affected Information Technology ("IT") processes,
applications, hardware, operating systems and databases, as well as critical
non-IT areas (such as facilities and building equipment) where Year 2000 issues
may exist. The assessment of the Company's critical internal IT systems was
completed on or before December 31, 1998. The Company continues to assess all
remaining internal systems and external relationships. The Company's goal is to
complete all assessment and mitigation tasks for all internal systems and
external relationships by November 1, 1999. The Company has incurred
approximately $197,000 in costs to date related to the assessment and mitigation
of internal system Year 2000 issues and estimates that total related costs will
approximate $500,000. These costs are primarily fees paid to third-party
consultants and vendors and exclude internal costs, which the Company does not
track separately and which the Company does not believe will be material. The
Company believes that the costs required to remedy internal Year 2000 issues
will not have a material effect on the Company's operations or financial
results.
The Company is also evaluating external relationships with distributors,
resellers, vendors and partners for Year 2000 issues. The Company is currently
in the process of surveying its external vendors and partners. None of the
Company's resellers or distributors is individually responsible for a material
amount of the Company's total revenues.
Although the Company is not aware of material operational issues or costs
associated with preparing for the Year 2000, the Company may experience serious
adverse impacts or material costs if the Company or its vendors or distributors
fail to resolve Year 2000 issues in a timely manner or if the Company's products
are used in conjunction with the software of other suppliers that have not
adequately addressed Year 2000 issues. The Company has not yet completed all
contingency plans to address problems that may result if the Company, it
vendors, or its distributors fail to achieve Year 2000 readiness. The Company's
goal is to complete all contingency plans by November 1, 1999. The Company plans
to continue to devote the necessary resources to resolve significant Year 2000
issues and develop contingency plans.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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WALL DATA INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1998, the Company filed an action for declaratory judgment in
Federal District Court for the Western District of Washington against
OpenConnect Systems, Inc. ("OCS") of Dallas, Texas seeking a judicial
determination that the Company does not infringe on patent No. 5,754,830 (the
"'830 Patent") held by OCS. Also in September 1998, OCS filed suit in Federal
District Court for the Eastern District of Texas against the Company claiming
that the Company infringes the '830 Patent. The OCS complaint seeks unspecified
damages. The Company has answered the OCS complaint by denying infringement and
asserting that the '830 patent is invalid and unenforceable. The Federal
District Court for the Western District of Washington has stayed the action for
declaratory judgement pending a ruling from the Federal District Court for the
Eastern District of Texas on a motion by the Company to transfer the action. The
Federal District Court for the Eastern District of Texas has denied the motion
to transfer the action. Because the complaint seeks unspecified damages, it is
impossible to predict the outcome in the litigation; however, an adverse outcome
could have a material adverse impact on the Company's liquidity, operating
results or financial condition. The Company intends to defend against the action
vigorously.
The Company may be subject to other legal proceedings or claims, either asserted
or unasserted, that arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, management does not believe
that any such legal matters will have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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 July 31, 1999.
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: September 13, 1999 By: /s/ RICHARD P. FOX
-------------------------------------
Richard P. Fox,
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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(27) Financial Data Schedule
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