<PAGE> 1
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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 JULY 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 AUGUST 31, 1998
----- ---------------
<S> <C>
COMMON STOCK 9,955,249
</TABLE>
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WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Income Statements for the three
months ended July 31, 1998 and 1997 3
Consolidated Balance Sheets as of
July 31, 1998 and April 30, 1998 4
Consolidated Statements of Cash Flow for the
three months ended July 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>
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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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JULY 31,
1998 1997
-------- --------
<S> <C> <C>
Net revenues
License fees $ 32,722 $ 28,242
Services 7,688 5,426
-------- --------
Total net revenues 40,410 33,668
Cost of revenues
License fees 5,530 5,490
Services 2,955 1,971
-------- --------
Total cost of revenues 8,485 7,461
-------- --------
Gross margin 31,925 26,207
Operating expenses:
Product development 5,152 4,794
Sales and marketing 19,857 16,272
General and administrative 4,087 3,663
Amortization of intangibles from acquisitions 519 91
Non-recurring expenses -- 10,747
-------- --------
Total operating expenses 29,615 35,567
-------- --------
Operating income (loss) 2,310 (9,360)
Other income, net 417 960
-------- --------
Income (loss) before income taxes 2,727 (8,400)
Provision for income taxes 544 (3,210)
-------- --------
Net income (loss) $ 2,183 $ (5,190)
======== ========
Net income:
Basic earnings (loss) per share $ 0.22 $ (0.56)
======== ========
Diluted earnings (loss) per share $ 0.22 $ (0.56)
======== ========
Shares used to calculate earnings per share:
Basic 9,906 9,313
======== ========
Diluted 9,965 9,313
======== ========
</TABLE>
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1998
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 62,401 $ 57,490
Accounts receivable 33,479 33,534
Inventories 741 952
Deferred income taxes 5,696 5,701
Other current assets 2,973 2,847
-------- --------
Total current assets 105,290 100,524
Fixed assets, net 10,175 10,665
Deferred income taxes 436 458
Long-term investments 2,901 2,965
Intangible assets related to acquisitions 16,785 16,551
Other assets 7,546 9,042
-------- --------
$143,133 $140,205
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,156 $ 8,382
Accrued expenses 16,094 17,063
Income taxes payable 3,904 3,583
Deferred revenues 16,728 15,019
-------- --------
Total current liabilities 44,882 44,047
-------- --------
Deferred income taxes 3,420 3,390
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 58,887 58,882
Retained earnings 35,489 33,306
Accumulated other comprehensive income 455 580
-------- --------
Total shareholders' equity 94,831 92,768
-------- --------
$143,133 $140,205
======== ========
</TABLE>
See accompanying notes.
4
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WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,183 $ (5,190)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Deferred income taxes 57 (330)
Depreciation and amortization of fixed assets and intangible assets 2,266 1,684
Amortization of prepaid licenses and localization costs 1,211 732
Non-recurring charges -- 1,639
Other, net 407 (17)
Loss on sale of fixed assets 323 --
Decrease (increase) in operating assets:
Accounts receivable 55 (2,209)
Inventories 211 63
Other current assets (126) 168
Increase (decrease) in operating liabilities:
Accounts payable (226) 570
Accrued expenses (1,769) (2,075)
Income taxes payable 321 (3,036)
Deferred revenues 1,709 (7)
-------- --------
Net cash provided by (used in) operating activities 6,622 (8,008)
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets (1,333) (1,087)
Other assets (215) (569)
-------- --------
Net cash used in investing activities (1,548) (1,656)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuances under stock plans 5 1,545
-------- --------
Net cash provided by financing activities 5 1,545
-------- --------
Net increase (decrease) in cash and cash equivalents 5,079 (8,119)
Effect of exchange rate changes on cash (168) 75
Beginning cash and cash equivalents 57,490 82,384
-------- --------
Ending cash and cash equivalents $ 62,401 $ 74,340
======== ========
</TABLE>
See accompanying notes.
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WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 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 July 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 four month period ended April 30, 1998 which are
included in the Company's Transition 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
was made to improve the company's ability to manage operations in light of
seasonal customer buying patterns. The Company has recast the prior year
quarterly financial information to conform to the new fiscal periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the 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 year ending April 30, 2000.
In June 1998, the Financial Accounting Standards Board (FASB) recently
issued Statement of Financial Accounting Standards (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.
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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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1998 1997
------- -------
<S> <C> <C>
Net income (loss) (numerator) $ 2,183 $(5,190)
------- -------
Average share (denominator for basic) 9,906 9,313
Effect of dilutive stock options 59 --
------- -------
Total (denominator for diluted) 9,965 9,313
------- -------
Earnings (loss) per share--basic $ 0.22 $ (0.56)
======= =======
Earnings (loss) per share--assuming dilution $ 0.22 $ (0.56)
======= =======
</TABLE>
4. COMPREHENSIVE INCOME
The components of the Company's total comprehensive income were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss) $ 2,183 $(5,190)
------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments, net (168) 75
Unrealized gains on securities, net 43 27
------- -------
Other comprehensive income (loss) (125) 102
------- -------
Comprehensive income (loss) $ 2,058 $(5,088)
======= =======
</TABLE>
5. 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 Transition Report on Form 10-K for the four month period ended April
30, 1998 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.
The Company has developed plans to address issues related to the impact on its
products and systems of the year 2000. Products have been modified, financial
and operational systems have been assessed and plans have been developed to
address modification requirements. If the company or its vendors or distributors
are unable to resolve such 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, it could result in a material
financial risk. Accordingly, the Company plans to continue to devote the
necessary resources to resolve significant year 2000 issues in a timely manner.
RESULTS OF OPERATIONS
Revenues
Total net revenue. Net revenues increased 20% in the first quarter of fiscal
1999 to $40.4 million from $33.7 million in the same period in the prior year.
Revenue outside North America represented 32% of net revenues in the first
quarter of fiscal 1999 and in the same quarter of the prior year. 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 52% of net revenues in the first quarter of 1999 compared to 77% of net
revenues in the same period in the prior year.
License fees. License fees increased 16% to $32.7 million in the first quarter
of fiscal 1999 from $28.2 million in the same period in the prior year. The
increase in product revenues is due to an expanded product line, increased unit
shipments of existing products and higher average transaction sizes. Revenues
from the Company's Cyberprise products represented $3.4 million of the increase.
License fees from all other products increased 4%. Significant increases in
license fees from RUMBA(R) Mainframe were partially offset by decreases in
license fees from RUMBA OFFICE and RUMBA AS/400.
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Service revenue. Service revenues for first quarter of fiscal 1999 increased 42%
to $7.6 million from $5.4 million in the same period in the prior year. During
the first quarter of fiscal 1999, the Company recorded $100,000 in Cyberprise
services revenues.
Cost of Revenue
Cost of license fees. Cost of revenues derived from license fees was flat in
absolute dollars at $5.5 million in the first quarter of 1999 as compared to
$5.5 million in the same period in the prior year. Cost of license fees as a
percentage of license fees declined to 17% for the first quarter of 1999 from
19% in the same period in the prior year 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 increased 50% to $3.0 million in the first quarter of fiscal
1999 from $2.0 million in the same quarter in the prior year primarily due to
increases in staffing levels related to technical support associated with
increased service. Costs as a percentage of service revenues increased to 38%
for the first quarter of fiscal 1999 as compared to 36% in same period in the
prior year.
Operating Expenses
Product development expenses increased 7% to $5.2 million, or 13% of net
revenues, in the first quarter of fiscal 1999, from $4.8 million, or 14% of net
revenues, in the same period in the prior year.
Sales and marketing expenses increased 22% to $19.9 million, or 49% of net
revenues, in the first quarter of fiscal 1999 from $16.3 million, or 48% of net
revenues, in the same period in the prior year. The $3.6 million increase was
due primarily to higher sales and sales management costs associated with
increased sales staffing and higher marketing expenses related to the release of
several Cyberprise products.
General and administrative expenses increased 12% to $4.1 million, or 10% of net
revenues, in the first quarter of fiscal 1999, from $3.7 million, or 11% of net
revenues, in the same period in the prior year. The $0.4 million increase
resulted primarily from administrative expenses from First Service Computer
Dienstleistungs-GmbH (First Service), acquired in March 1998, and several
non-recurring expenses.
Amortization of intangibles from acquisitions increased to $0.5 million in the
first quarter of fiscal 1999 from $0.1 million in the same period in the prior
year due to the amortization of intangibles related to the acquisitions of First
Service and Software Development Tools, Inc. (SDTI).
During the three months ended July 31, 1997, the Company recorded non-recurring
charges totaling $10.7 million, of which approximately $9.1 million represents
the settlement of a shareholders' class action lawsuit and related expenses.
Approximately $1.0 million represents the write-off of inventories, technology
investments and severance payments resulting from the restructuring of the SALSA
business line. The remaining $0.6 million represents a retirement payment to the
Company's former chairman and Chief Executive Officer of Wall Data who retired
July 31, 1997.
Other Income (Expense)
Other income, net of other expenses, decreased 57% to $0.4 million in the first
quarter of fiscal 1999 from $1.0 million in the same period in the prior year.
Of the $0.6 million decrease, $0.3 million resulted from lower interest income
as a result of lower average cash and cash equivalent
9
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balances during the first quarter of fiscal 1999 as compared to the prior year.
Additional expenses in the first quarter of fiscal 1999 related to a loss on the
sale of fixed assets which did not occur in the same period in the prior year.
Income Taxes
The effective income tax rate was 20% in the first quarter of fiscal 1999 and
38% in the same period in the prior year. The decrease in the Company's
effective tax rate in fiscal 1999 as compared to prior year resulted from
significant operating profits earned in jurisdictions with lower tax rates and
the availability of losses from the four month transition period ended April 30,
1998.
Net income equaled $2,183,000, or 5% of net revenues, in the first quarter of
fiscal 1999 compared to a net loss of $5.2 million in the same period in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $62.4 million, or 44% of total
assets, at July 31, 1998, compared to $57.5 million, or 41% of total assets, at
April 30, 1998.
Net cash provided by operating activities totaled $6.6 million in the first
quarter of fiscal 1999 compared to a use of cash of $8.0 million in the same
period in the prior year. The change of $14.6 million was primarily due to
higher net income in the first quarter of fiscal 1999 compared to the same
period in the prior year. Increases from operating activities were also a result
of changes in accounts receivable, income taxes payable and deferred revenue
balances. Expenditures for property and equipment totaled $1.3 million in the
first quarter of fiscal 1999 compared to $1.1 million in the prior year.
Stockholders' equity increased to $94.8 million at July 31, 1998, from $92.8
million at April 30, 1998. The change primarily resulted from net income in the
first quarter.
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.
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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
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K and one report on
Form 8-K/A during the quarter ended July 31, 1998. On May 6,
1998, the Company filed an 8-K to announce that the Board of
Directors approved a change in the Company's fiscal year-end
to April 30. On May 22, 1998, the Company filed an 8-K to
disclose revised Key Financial Metrics of selected historical
income statement, balance sheet and cash flow data to conform
to the Company's new fiscal periods. On June 9, 1998, the
Company filed an 8-K/A to indicate its intention to report on
its transition period of January 1 - April 30, 1998 on Form
10-K instead of Form 10-Q, as was previously reported.
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 11, 1998 By: 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
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C>
(27) Financial Data Schedule 14
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 62,401
<SECURITIES> 0
<RECEIVABLES> 33,479
<ALLOWANCES> 0
<INVENTORY> 741
<CURRENT-ASSETS> 105,290
<PP&E> 34,954
<DEPRECIATION> 24,779
<TOTAL-ASSETS> 143,133
<CURRENT-LIABILITIES> 44,882
<BONDS> 0
0
0
<COMMON> 58,887
<OTHER-SE> 35,944
<TOTAL-LIABILITY-AND-EQUITY> 143,133
<SALES> 40,410
<TOTAL-REVENUES> 40,410
<CGS> 8,485
<TOTAL-COSTS> 29,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,727
<INCOME-TAX> 544
<INCOME-CONTINUING> 2,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,183
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
