<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 MARCH 31, 1998
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.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS APRIL 30, 1998
------------ --------------
<S> <C>
COMMON STOCK 9,905,245
</TABLE>
================================================================================
<PAGE> 2
WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Income Statements for the three
months ended March 31, 1998 and 1997 3
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flow for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosure about
Market Risk 10
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
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Net revenues
License fees $ 25,440 $ 32,355
Services 6,508 4,668
-------- --------
Total net revenues 31,948 37,023
Cost of revenues
License fees 4,312 4,927
Services 2,363 1,827
-------- --------
Total cost of revenues 6,675 6,754
-------- --------
Gross margin 25,273 30,269
Operating expenses:
Product development 4,611 5,141
Sales and marketing 16,718 16,268
General and administrative 4,117 3,858
-------- --------
Total operating expenses 25,446 25,267
-------- --------
Operating income (loss) (173) 5,002
Other income, net 1,079 571
-------- --------
Income before income taxes 906 5,573
Provision for income taxes 272 2,115
-------- --------
Net income $ 634 $ 3,458
======== ========
Net income:
Basic earnings per share $ 0.06 $ 0.38
======== ========
Diluted earnings per share $ 0.06 $ 0.35
======== ========
Shares used to calculate earnings per share:
Basic 9,772 9,138
======== ========
Diluted 9,955 9,744
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,004 $ 70,814
Accounts receivable 36,209 35,113
Inventories 867 738
Deferred income taxes 5,687 5,701
Other current assets 4,160 2,172
-------- --------
Total current assets 107,927 114,538
Fixed assets, net 10,619 10,597
Deferred income taxes 529 458
Long-term investments 2,636 2,636
Intangible assets 16,196 2,281
Other assets 9,509 6,066
-------- --------
$147,416 $136,576
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,521 $ 8,106
Accrued expenses 17,036 14,532
Income taxes payable 3,859 3,735
Deferred revenues 15,240 15,316
-------- --------
Total current liabilities 46,656 41,689
-------- --------
Deferred income taxes 3,288 --
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 58,576 56,771
Retained earnings 38,475 37,762
Cumulative translation adjustment 421 354
-------- --------
Total shareholders' equity 97,472 94,887
-------- --------
$147,416 $136,576
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 634 $ 3,458
Adjustments to reconcile net income to net cash
provided by operations:
Deferred income taxes (57) (58)
Depreciation and amortization 2,857 2,668
Other, net (50) --
Decrease (increase) in operating assets:
Accounts receivable 1,394 6,460
Inventories (39) (97)
Other current assets 32 (127)
Increase (decrease) in operating liabilities:
Accounts payable (920) (966)
Accrued expenses (2,763) (512)
Income taxes payable 124 3,511
Deferred revenues (429) 1,100
-------- --------
Net cash provided by operating activities 783 15,437
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets (1,265) (739)
Acquisition of First Service, net of cash acquired (9,811) --
Other assets (1,389) (1,255)
-------- --------
Net cash used in investing activities (12,465) (1,994)
-------- --------
FINANCING ACTIVITIES
Tax benefits from stock options exercised 200 --
Proceeds from issuances under stock plans 1,605 41
-------- --------
Net cash provided by financing activities 1,805 41
-------- --------
Net increase (decrease) in cash and cash equivalents (9,877) 13,484
Effect of exchange rate changes on cash 67 (348)
Beginning cash and cash equivalents 70,814 62,483
-------- --------
Ending cash and cash equivalents $ 61,004 $ 75,619
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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 March 31,
1998 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 December 31, 1997 which are
included in the Company's Annual Report on Form 10-K.
As previously reported, the Company's Board of Directors approved a change
in the Company's fiscal year-end from December 31 to April 30. This change
is being made to improve the company's ability to manage operations in
light of seasonal customer buying patterns. The Company will report on the
period ended April 1998 on Form 10-Q and will recast the prior year
quarterly financial information to conform to the new fiscal periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Standards (SFAS) No. 130,
"Reporting Comprehensive Income", in the first quarter of 1998. This
standard requires disclosure of total nonowner changes in stockholders'
equity, which is defined as net income plus direct adjustments to
stockholders' equity such as unrealized gains and losses on equity
investments adjustments and cumulative translation adjustments. The
components of the Company's total comprehensive income were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income $ 634 $ 3,458
------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments, net 67 (348)
Unrealized gains on securities, net 79 (134)
------- -------
Other comprehensive income (loss) 146 (482)
------- -------
Comprehensive income $ 780 $ 2,976
======= =======
</TABLE>
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which changed the method for determining and reporting
business segment information. The FASB's approach to determine business
segments will cause the company to report certain financial information at
segment levels. This Standard is required to be adopted for interim
reporting commencing in fiscal 1999.
6
<PAGE> 7
3. ACQUISITION
In March 1998, the Company acquired all of the outstanding shares of First
Service Computer Dienstleistungs-GmbH (First Service) of Hattingen,
Germany and related companies for $11 million cash. First Service
distributes and supports a range of connectivity software solutions to
major corporations throughout Germany and has been selling and supporting
Wall Data's products and technologies for more than seven years. The
acquisition, accounted for using the purchase method, included a cash
payment of $11 million of which $2 million remains in escrow for one year
to cover claims, if any. As a part of this transaction, the Company
recorded approximately $14.3 million of goodwill and other intangible
assets and approximately $3.3 million in long-term deferred tax liability.
The goodwill and other intangible assets will be amortized over a 10-year
period. Pro forma information has not been presented due to immateriality.
4. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------ ------
<S> <C> <C>
Net income (numerator) $ 634 $3,458
------ ------
Average share (denominator for basic) 9,772 9,138
Effect of dilutive stock options 183 606
------ ------
Total (denominator for diluted) 9,955 9,744
------ ------
Earnings per share--basic $ 0.06 $ 0.38
------ ------
Earnings per share--assuming dilution $ 0.06 $ 0.35
====== ======
</TABLE>
7
<PAGE> 8
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, 1997
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 single product line, 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
Net revenues decreased 14% in the first quarter of 1998 to $31.9 million from
$37.0 million in the first quarter of 1997. Licenses of RUMBA(R) Mainframe,
RUMBA OFFICE, and revenues from ONESTEP(R) customer support contracts accounted
for most of the net revenues in the first quarter of 1998. A license to one
customer accounted for approximately 22% of the net revenues in the first
quarter of 1997. Most of the decrease in net revenues in the first quarter
compared to the first quarter of 1997 resulted from decreased sales of RUMBA for
the Mainframe and RUMBA OFFICE. The decrease was partially offset by increases
in revenues from ONESTEP customer support contracts. Revenue outside North
America represented 35% of net revenues in the first quarter of 1998 compared to
23% of net revenues in the first quarter of 1997. The decrease in North America
revenues as a percentage of total revenues is primarily due to a license to one
customer in the first quarter of 1997. Revenue outside North America increased
as a percentage of net revenues in the first quarter of 1998 as compared to the
first quarter of 1997 at a higher growth rate in Europe than in North America.
Foreign currency exchange rate changes did not have a significant effect on net
revenues in the first quarter. Revenue from indirect and OEM distribution
channels equaled 58% of net revenues in the first quarter of 1998 compared to
59% of net revenues in the first quarter of 1997.
Cost of revenues related to revenues derived from license fees decreased 12% to
$4.3 million, or 17% of revenues, in the first quarter of 1998 from $4.9
million, or 15% of revenues, in the first quarter of 1997. The $0.6 million
decrease was due primarily to a decrease in software publishing costs resulting
from a decrease in net revenue. Cost of revenues related to services increased
29% to $2.4 million, or 36% of revenues, in the first quarter of 1998 from $1.8
million, or 39% of revenues, in the first quarter of 1997. The $0.5 million
increase is a result of increases in staffing levels associated with increased
service.
8
<PAGE> 9
Product development expenses decreased 10% to $4.6 million, or 14% of net
revenues, in the first quarter of 1998, from $5.1 million, or 14% of net
revenues, in the first quarter of 1997. The $0.5 million decrease resulted
primarily from lower staffing levels.
Sales and marketing expenses increased 3% to $16.7 million, or 52% of net
revenues, in the first quarter of 1998 from $16.3 million, or 44% of net
revenues, in the first quarter of 1997. The $0.4 million increase was due
primarily to higher sales and sales management costs associated with increased
sales staffing.
General and administrative expenses increased 7% to $4.1 million, or 13% of net
revenues, in the first quarter of 1998, from $3.9 million, or 10% of net
revenues, in the first quarter of 1997. The $0.2 million increase resulted
primarily from increases in expenses for management information systems.
Other income, net of other expenses, increased 89% to $1.1 million in the first
quarter of 1998 from $0.6 million in the first quarter of 1997. The $0.5 million
increase primarily resulted from changes in the amount of foreign currency
transaction gains and losses. Foreign currency transactions resulted in net
exchange gains of approximately $246,000 in the first quarter of 1998 compared
to net exchange losses of approximately $179,000 in the first quarter of 1997.
To date, the Company has not engaged in currency hedging transactions for
accounts receivable and payable denominated in currencies other than U.S.
dollars.
The effective income tax rate was 30% in the first quarter of 1998 and 38% in
the first quarter of 1997. The decrease in the Company's effective tax rate in
1998 as compared to 1997 resulted primarily from significant operating profits
earned in jurisdictions with lower tax rates.
Net income equaled $634,000, or 2% of net revenues, in the first quarter of 1998
compared to $3.5 million, or 9% of net revenues, in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $61.0 million, or 41% of total
assets, at March 31, 1998, compared to $70.8 million, or 52% of total assets, at
December 31, 1997. The reduction on cash and cash equivalents resulted primarily
from the acquisition of First Service for $9.8 million, net of cash acquired.
Net cash provided by operating activities totaled $783,000 in the first quarter
of 1998 compared to $15.4 million in the first quarter of 1997. The decrease of
$14.7 million was primarily due to lower net income and related lower income
taxes payable in the first quarter of 1998 compared to the first quarter of
1997, and a larger decrease in accounts receivable in the first quarter of 1997
compared to the first quarter of 1998. Net cash used in investing activities
increased to $12.5 million in the first quarter of 1998 compared to $2.0 million
in the first quarter of 1997. Most of the increase resulted from the acquisition
of First Service. Expenditures for property and equipment totaled $1.3 million
in the first quarter of 1998 compared to $0.7 million in the first quarter of
1997. Expenditures for prepaid software technology and other long-term assets
totaled $1.4 million in the first quarter of 1998 compared to $1.3 million in
the first quarter of 1997. 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 $97.5 million at March 31, 1998, from $94.9
million at December 31, 1997. The change primarily resulted from proceeds from
the sale of stock and net income in the first quarter.
9
<PAGE> 10
In connection with the acquisition of SDTI in November 1997, the Company expects
that the remaining consideration of $1.0 million will be payable in November
1998.
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. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
10
<PAGE> 11
WALL DATA INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to 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 pending legal matters will have a material adverse effect on the
Company.
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 March 31, 1998.
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: May 14, 1998 By: RICHARD P. FOX
----------------------------------
Richard P. Fox,
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> 14
<PAGE> 1
EXHIBIT (11)
WALL DATA INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---------- ----------
<S> <C> <C>
Average shares outstanding 9,771,542 9,137,894
Effect of dilutive stock options 183,093 605,739
---------- ----------
Total weighted average shares outstanding 9,954,635 9,743,633
========== ==========
Net income $ 634,000 $3,458,000
========== ==========
Earnings per share - basic $ 0.06 $ 0.38
========== ==========
Earnings per share - assuming dilution $ 0.06 $ 0.35
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 61,004
<SECURITIES> 0
<RECEIVABLES> 36,209
<ALLOWANCES> 0
<INVENTORY> 867
<CURRENT-ASSETS> 107,927
<PP&E> 33,127
<DEPRECIATION> 22,508
<TOTAL-ASSETS> 147,416
<CURRENT-LIABILITIES> 46,656
<BONDS> 0
0
0
<COMMON> 58,576
<OTHER-SE> 38,896
<TOTAL-LIABILITY-AND-EQUITY> 147,416
<SALES> 31,948
<TOTAL-REVENUES> 31,948
<CGS> 6,675
<TOTAL-COSTS> 6,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 906
<INCOME-TAX> 272
<INCOME-CONTINUING> 634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 634
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
