<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996
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)
(206) 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 stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OCTOBER 31, 1996
----- ----------------
<S> <C>
COMMON STOCK 9,132,316
</TABLE>
<PAGE> 2
WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Income Statements for
the three months and nine months
ended September 30, 1996 and 1995 3
Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 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 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 30,827 $ 26,155 $ 95,509 $ 72,985
Cost of revenues 7,249 5,952 22,156 16,182
--------- --------- -------- ---------
Gross margin 23,578 20,203 73,353 56,803
Operating expenses:
Product development 5,940 5,148 17,395 13,521
Sales and marketing 16,073 13,519 45,068 37,805
General and administrative 3,421 2,627 10,078 7,143
Non-recurring charges -- -- -- 6,805
--------- --------- -------- ---------
Total operating expenses 25,434 21,294 72,541 65,274
--------- --------- -------- ---------
Operating income (loss) (1,856) (1,091) 812 (8,471)
Gain on sale of equity investment -- -- -- 14,040
Other income, net 815 760 1,650 2,170
--------- --------- -------- ---------
Income (loss) before income taxes (1,041) (331) 2,462 7,739
Provision for income taxes (396) (127) 935 2,940
--------- --------- -------- ---------
Net income (loss) $ (645) $ (204) $ 1,527 $ 4,799
========= ========= ======== =========
Net income (loss) per share $ (0.07) $ (0.02) $ 0.16 $ 0.47
========= ========= ======== =========
Weighted average common and common
equivalent shares outstanding 9,085 9,230 9,472 10,116
========= ========= ======== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 64,248 $ 51,969
Accounts receivable 21,536 27,597
Inventories 860 900
Deferred income taxes 3,330 2,843
Other current assets 2,421 3,048
-------- --------
Total current assets 92,395 86,357
Fixed assets, net 13,290 13,893
Deferred income taxes 1,634 2,017
Other assets 8,300 7,072
-------- --------
$115,619 $109,339
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 6,838 $ 6,038
Accrued expenses 11,030 9,882
Income taxes payable 3,604 1,913
Deferred revenues 7,075 7,804
-------- --------
Total current liabilities 28,547 25,637
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 53,861 52,295
Retained earnings 33,037 31,510
Cumulative translation adjustment (83) (103)
Unrealized gain on investments available for sale 257 --
-------- --------
Total shareholders' equity 87,072 83,702
-------- --------
$115,619 $109,339
-------- --------
</TABLE>
See accompanying notes.
4
<PAGE> 5
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,527 $ 4,799
Adjustments to reconcile net income to net cash
provided by operations:
Deferred income taxes (219) (2,107)
Depreciation and amortization 7,345 4,788
Non-recurring charges -- 6,805
Other, net 277 246
Gain on sale of equity investment -- (14,040)
Decrease (increase) in operating assets:
Accounts receivable 5,839 8,014
Inventories 40 (44)
Other current assets 561 (608)
Increase (decrease) in operating liabilities:
Accounts payable 796 107
Accrued expenses 1,147 (2,002)
Income taxes payable 1,691 (3,051)
Deferred revenues (729) 2,516
-------- --------
Net cash provided by operating activities 18,275 5,423
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets (4,014) (4,596)
Proceeds from sale of short-term investments, net -- 22,000
Proceeds from sale of equity investment -- 20,000
Acquisition of Concentric Data Systems, Inc., net of cash acquired -- (5,076)
Other assets (3,568) (3,935)
-------- --------
Net cash provided (used) by investing activities (7,582) 28,393
-------- --------
FINANCING ACTIVITIES
Repurchase of common stock -- (3,581)
Proceeds from issuances under stock plans 1,566 1,128
-------- --------
Net cash provided (used) by financing activities 1,566 (2,453)
-------- --------
Net increase in cash and cash equivalents 12,259 31,363
Effect of exchange rate changes on cash 20 (102)
Beginning cash and cash equivalents 51,969 26,927
-------- --------
Ending cash and cash equivalents $ 64,248 $ 58,188
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE> 6
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
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 and nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. 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, 1995 which are included in the Company's Annual Report to
Shareholders.
2. 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 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. The complaint alleged misrepresentations and omissions with
respect to the Company's business, including its actual and expected
financial results and the success of and demand for the Company's products,
in violation of federal securities laws and state laws, during the period
from January 26, 1995 through April 5, 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
Company's 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 seeks
unspecified damages. In June 1996, the Court denied in part and granted in
part the Company's motion to dismiss the second amended complaint. Trial
has been scheduled for November 1997. The Company believes the allegations
in the second amended complaint are without merit and intends to continue
defending against the action vigorously.
6
<PAGE> 7
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, 1995
and include, but are not limited to, fluctuations in quarterly performance,
competitive products and pricing, dependence on a single product line,
dependence on host computing, dependence on Microsoft(R) Windows(R), risks
associated with new products and technological change, reliance on resellers and
distributors, uncertainties regarding international operations, dependence on
key personnel, 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 increased 18% in the third quarter of 1996 to $30.8 million from
$26.2 million in the third quarter of 1995. Sales of the Windows versions of
RUMBA(R) OFFICE, the Windows versions of RUMBA Mainframe, ONESTEP(TM) customer
support contracts, and RUMBA for the AS/400(R) accounted for most of the net
revenues in the third quarter of 1996. Most of the increase in net revenues in
the third quarter compared to the third quarter of 1995 resulted from increased
sales of the Windows versions of RUMBA OFFICE and ONESTEP customer support
contracts, partially offset by decreased sales of the Windows versions of RUMBA
Mainframe. In March 1996, the Company released commercial versions of a number
of RUMBA software products, incorporating the ActiveX(TM) component architecture
designed for the Windows 95 and Windows NT(R) 32-bit operating systems.
Approximately 32% of net revenues in the third quarter of 1996 related to
products containing the ActiveX technology. The Company began shipping
commercial versions of SALSA(TM) for the Desktop in February 1996; SALSA net
revenues in the third quarter of 1996 were not significant. Sales outside North
America represented 22% of net revenues in the third quarter of 1996 compared to
28% of net revenues in the third quarter of 1995. 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 66% of net revenues
in the third quarter of 1996 compared to 72% of net revenues in the third
quarter of 1995.
Net revenues decreased 11%, or $4.0 million, in the third quarter of 1996 from
the second quarter of 1996. The decrease was due to lower revenues from older
16-bit versions of the Company's connectivity software products partially offset
by increased revenues from the newer 32-bit products. The decline in 16-bit
revenues occurred primarily outside of North America. Net revenue outside North
America decreased by approximately $4.0 million in the third quarter
7
<PAGE> 8
of 1996 compared to the second quarter of 1996. Management believes that the
decline in sequential quarter net revenues is primarily the result of the drop
in 16-bit European revenues caused by the product transition toward 32-bit
systems amplified by a seasonally weak summer quarter and generally less robust
economies in certain overseas markets.
Net revenues increased 31% in the first nine months of 1996 to $95.5 million
from $73.0 million in the first nine months of 1995. Sales of the Windows
versions of RUMBA OFFICE, the Windows versions of RUMBA Mainframe, RUMBA for the
AS/400, OEM products and ONESTEP customer support contracts accounted for most
of the net revenues in the first nine months of 1996. Most of the increase in
net revenues in the first nine months compared to the first nine months of 1995
resulted from increased sales of the Windows versions of RUMBA OFFICE, ONESTEP
customer support contracts, RUMBA for the AS/400, and RUMBA for Database Access.
Approximately 23% of net revenues in the first nine months of 1996 related to
products containing the ActiveX technology. Net revenues in the first nine
months of 1996 relating to SALSA(TM) for the Desktop were not significant. Sales
outside North America represented 27% of net revenues in the first nine months
of 1996 compared to 28% of net revenues in the first nine months of 1995.
Foreign currency exchange rate changes did not have a significant effect on net
revenues in the first nine months. Revenue from indirect and OEM distribution
channels equaled 68% of net revenues in the first nine months of 1996 compared
to 73% of net revenues in the first nine months of 1995.
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, and provisions for obsolete inventory, doubtful accounts and reseller
rebates. The Company's gross margin as a percentage of net revenues decreased to
76.5% in the third quarter of 1996 from 77.2% in the third quarter of 1995. For
the first nine months, the gross margin decreased to 76.8% in 1996 from 77.8% in
1995. The decreases in both the third quarter and the first nine months are due
primarily to higher average staffing levels for the departments included in cost
of revenues and increases in royalties and amortization of prepaid licenses
resulting from the increased use of third-party technology in the Company's
products.
Product development expenses increased 15% to $5.9 million, or 19% of net
revenues, in the third quarter of 1996, from $5.1 million, or 20% of net
revenues, in the third quarter of 1995. For the first nine months, product
development expenses increased 29% to $17.4 million, or 18% of net revenues in
1996, from $13.5 million, or 19% of net revenues in 1995. The increase of $0.8
million in the third quarter and $3.9 million in the first nine months resulted
primarily from increases in overall compensation, and higher consulting services
and depreciation. The increase of $3.9 million in the first nine months resulted
primarily from increases in overall compensation, higher support costs for third
party software, and higher occupancy costs.
Sales and marketing expenses increased 19% to $16.1 million, or 52% of net
revenues, in the third quarter of 1996 from $13.5 million, or 52% of net
revenues, in the third quarter of 1995. For the first nine months, sales and
marketing expenses increased 19% to $45.1 million, or 47% of net revenues in
1996, from $37.8 million, or 52% of net revenues in 1995. The increases of $2.6
million in the third quarter and $7.3 million in the first nine months resulted
primarily from higher sales commissions, increased promotion, public relations
and other product launch
8
<PAGE> 9
expenses relating to the introduction of the RUMBA 95/NT, SALSA and Arpeggio(TM)
product families, and higher occupancy costs.
General and administrative expenses increased 30% to $3.4 million, or 11% of net
revenues, in the third quarter of 1996, from $2.6 million, or 10% of net
revenues, in the third quarter of 1995. For the first nine months, general and
administrative expenses increased 41% to $10.1 million, or 11% of net revenues
in 1996, from $7.1 million, or 10% of net revenues in 1995. The increase of $.8
million in the third quarter resulted primarily from higher average staffing
levels and increased depreciation charges. The increase of $3.0 million in the
first nine months resulted primarily from higher average staffing levels,
increased legal fees principally due to the Company's defense of the
shareholders' class action lawsuit (see Note 2 of Notes to Consolidated
Financial Statements), and increased depreciation charges.
During the second quarter of 1995, the Company recorded non-recurring charges
totaling $6.8 million, primarily relating to the write-off of in-process
research and development arising from the acquisition of Concentric Data
Systems, Inc. in April 1995 and the write-off of the remaining goodwill from a
prior acquisition.
On April 4, 1995, the Company received $20.0 million in cash from the sale of
its 20% equity investment in SPRY, Inc. The gain on the sale, totaling $14.0
million, was recorded in the second quarter of 1995.
Other income, net of other expenses, equaled $0.8 million in the third quarters
of both 1996 and 1995. For the first nine months, other income, net of other
expenses, decreased 24% to $1.7 million in 1996 from $2.2 million in 1995. The
$0.5 million decrease in the first nine months primarily resulted from changes
in the amount of foreign currency transaction gains or losses; foreign currency
transactions resulted in net exchange losses of approximately $150,000 in the
first nine months of 1996 compared to net exchange gains of approximately
$100,000 in the first nine months of 1995. 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 38% in the third quarter and in the first nine
months of both 1996 and 1995.
The net loss equaled $0.6 million, or 2.1% of net revenues, in the third quarter
of 1996 compared to a net loss of $0.2 million, or 0.8% of net revenues, in the
third quarter of 1995. For the first nine months, net income increased 386% to
$1.5 million, or 1.6% of net revenues, in 1996 from $0.3 million, or 0.4% of net
revenues in 1995, excluding non-recurring items. Net income in the first nine
months of 1995, including the non-recurring items, was $4.8 million or 6.6% of
net revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments totaled $64.3
million, or 56% of total assets, at September 30, 1996, compared to $52.0
million, or 47% of total assets, at December 31, 1995.
Net cash provided by operating activities totaled $18.3 million in the first
nine months of 1996 compared to $5.4 million in the first nine months of 1995.
Expenditures for property and
9
<PAGE> 10
equipment totaled $4.0 million in the first nine months of 1996 compared to $4.6
million in the comparable period in 1995. Expenditures for other long-term
assets totaled $3.6 million in the first nine months of 1996 compared to $3.9
million in the first nine months of 1995; these expenditures were primarily for
prepaid software technology, and, in 1996, capitalized product localization
costs. 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 increased to $87.1 million at September 30, 1996, from
$83.7 million at December 31, 1995. The change primarily resulted from net
income for the first nine months and proceeds from issuances under stock plans.
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.
10
<PAGE> 11
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 June 1995. The complaint alleged misrepresentations and omissions
with respect to the Company's business, including its actual and
expected financial results and success of and demand for the Company's
products, in violation of federal securities laws and state laws,
during the period from January 26, 1995 through April 5, 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 Company's 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 seeks unspecified
damages. In June 1996, the Court denied in part and granted in part the
Company's motion to dismiss the second amended complaint. Trial has
been scheduled for November 1997. The Company believes the allegations
in the second amended complaint are without merit and intends to
continue defending against the action vigorously.
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, 1996.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
11
<PAGE> 12
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, 1996 By: RICHARD VAN HOESEN
-----------------------------------
Richard Van Hoesen, Vice President,
Finance and Chief Financial Officer
(Duly Authorized Officer and Chief
Financial and Accounting Officer)
12
<PAGE> 13
WALL DATA INCORPORATED
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
(11) Computation of Earnings Per Share 14
(27) Financial Data Schedule 15
</TABLE>
13
<PAGE> 1
WALL DATA INCORPORATED Exhibit (11)
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 9,085,454 9,230,293 9,033,698 9,263,067
Net effect of dilutive stock options based on the treasury
stock method using average market price -- -- 437,970 853,087
---------- ---------- ----------- -----------
Total weighted average shares outstanding 9,085,454 9,230,293 9,471,668 10,116,154
========== ========== =========== ===========
Net income (loss) $ (645,000) $ (204,000) $ 1,527,000 $ 4,799,000
========== ========== =========== ===========
Net income (loss) per share $ (0.07) $ (0.02) $ 0.16 $ 0.47
========== ========== =========== ===========
FULLY DILUTED
Average shares outstanding 9,085,454 9,230,293 9,033,698 9,263,067
Net effect of dilutive stock options based on the treasury
stock method using the period-end market price, if
higher than average market price -- -- 437,970 853,087
========== ========== =========== ===========
Total weighted average shares outstanding 9,085,454 9,230,293 9,471,668 10,116,154
========== ========== =========== ===========
Net income (loss) $ (645,000) $ (204,000) $ 1,527,000 $ 4,799,000
========== ========== =========== ===========
Net income (loss) per share $ (0.07) $ (0.02) $ 0.16 $ 0.47
========== ========== =========== ===========
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722607
<NAME> N/A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 64248
<SECURITIES> 0
<RECEIVABLES> 21536
<ALLOWANCES> 0
<INVENTORY> 860
<CURRENT-ASSETS> 92395
<PP&E> 27608
<DEPRECIATION> 14318
<TOTAL-ASSETS> 115619
<CURRENT-LIABILITIES> 28547
<BONDS> 0
0
0
<COMMON> 53861
<OTHER-SE> 33212
<TOTAL-LIABILITY-AND-EQUITY> 115619
<SALES> 95509
<TOTAL-REVENUES> 95509
<CGS> 22156
<TOTAL-COSTS> 22156
<OTHER-EXPENSES> 72541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 2462
<INCOME-TAX> 935
<INCOME-CONTINUING> 1527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1527
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
