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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19872
WALKER INTERACTIVE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2862954
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
303 SECOND STREET, SAN FRANCISCO, CA 94107
(Address of principal executive offices including
zip code)
(415) 495-8811
(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
There were 13,313,235 Shares of $.001 Par Value Common Stock
outstanding as of November 11, 1997.
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WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.................................................3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1997 and 1996.....................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996.......................................5
Notes to Consolidated Financial Statements..........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................15
SIGNATURES..................................................................16
2
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WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
ASSETS 30, 1997 31, 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $11,755 $13,475
Short-term investments......................................... 13,139 17,615
Accounts receivable, net....................................... 16,154 12,245
Prepaid expenses............................................... 1,804 1,010
------ ------
Total current assets........................................ 42,852 44,345
Long-term investments............................................... 6,147 7,080
Property amd equipment, net......................................... 3,801 4,332
Capitalized software, net........................................... 14,121 11,858
Deferred tax assets, net............................................ 13,445 14,060
Other assets........................................................ 492 644
------ ------
TOTAL ASSETS........................................................ $80,858 $82,319
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................... $12,719 $13,152
Deferred revenue............................................... 13,309 14,855
------ ------
Total current liabilities................................... 26,028 28,007
Deferred revenue.................................................... 2,017 2,441
Accrued rent........................................................ 612 960
Other long-term obligations......................................... 3,548 4,139
------ ------
Total liabilities........................................... 32,205 35,547
------ ------
Stockholders' equity:
Common stock, $.001 par value: 50,000,000 shares
authorized; issued 13,721,104 shares - September 30,
1997; 13,494,487 shares - December 31, 1996................. 14 13
Additional paid-in capital..................................... 71,185 70,008
Currency translation adjustments............................... 165 253
Unrealized gain (loss) on investments.......................... 18 (39)
Accumulated deficit............................................ (17,583) (18,710)
Treasury stock at cost (412,869 shares - September 30,
1997; 397,194 shares - December 31, 1996)................... (5,146) (4,753)
------ ------
Total stockholders' equity.................................. 48,653 46,772
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $80,858 $82,319
======= =======
</TABLE>
See notes to consolidated financial statements
3
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WALKER INTERACTIVE SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
License................................................. $2,129 $1,823 $9,320 $5,659
Maintenance............................................. 6,919 6,817 20,635 20,257
Consulting.............................................. 7,219 7,329 19,646 19,761
--------- --------- --------- ---------
Total revenues.......................................... 16,267 15,969 49,601 45,677
OPERATING EXPENSES:
Costs of revenues:
Costs of licenses, maintenance and consulting................ 7,347 6,422 20,523 17,963
Amortization of capitalized software......................... 1,192 900 3,533 2,617
Sales and marketing.......................................... 3,790 3,530 11,577 9,500
Product development.......................................... 2,411 2,630 7,395 8,502
General and administrative................................... 1,838 2,026 6,286 6,886
Write-off of purchased in-process
research and development..................................... - - - 2,784
--------- --------- --------- ---------
Total operating expenses..................................... 16,578 15,508 49,314 48,252
Operating income (loss)...................................... (311) 461 287 (2,575)
Interest income, net......................................... 451 502 1,445 1,484
--------- --------- --------- ---------
Income (loss) before income taxes............................ 140 963 1,732 (1,091)
Income tax expense........................................... 48 49 605 152
--------- --------- --------- ---------
NET INCOME (LOSS)............................................ $92 $914 $1,127 ($1,243)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE.................................. $0.01 $0.07 $0.08 ($0.09)
========= ========= ========= =========
Shares used in computing net income (loss) per share......... 14,373 14,046 14,224 13,238
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
4
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WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $1,127 ($1,243)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization..................................... 5,496 5,023
Tax benefit of nonqualified stock options......................... 259 368
Write-off of purchased in-process research and development........ - 2,784
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (3,909) (3,044)
Prepaid expenses.................................................. (794) (643)
Accrued liabilities............................................... (1,385) 87
Deferred tax assets............................................... 615 (7)
Deferred revenue.................................................. (1,970) (510)
Other............................................................. 170 12
------- -------
Net cash provided (used) by operations........................ (391) 2,827
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised............................. 1,630 2,092
Treasury stock acquired.............................................. (1,104) (3,341)
Other................................................................ 13 (231)
------- -------
Net cash provided (used) by financing activities.............. 539 (1,480)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments........................ (26,491) (24,976)
Maturities of short-term investments................................. 11,500 4,900
Acquisition of Hunt Systems Group, Inc............................... - (2,034)
Sales of short-term investments...................................... 20,373 13,917
Purchases of property................................................ (1,614) (1,227)
Additions to capitalized software.................................... (5,796) (3,676)
Other................................................................ 160 12
------- -------
Net cash used by investing activities......................... (1,868) (13,084)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................. (1,720) (11,737)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD........................... 13,475 25,412
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................. $11,755 $13,675
======= =======
</TABLE>
See notes to consolidated financial statements
5
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WALKER INTERACTIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements and include all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position,
operating results and cash flows for those periods. Results for the
interim periods are not necessarily indicative of the results for the
entire year. These consolidated financial statements and any notes
thereto, should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1996 included in
the Walker Interactive Systems, Inc. Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards ("SFAS") No. 128, "Earnings per
Share." The Company is required to adopt SFAS No. 128 during its
quarter ending December 31, 1997. At the time of adoption all
prior-period earnings per share data will be restated to conform with
the provisions of SFAS No. 128. Earlier adoption of SFAS No. 128 is not
permitted.
SFAS No. 128 replaces current earnings per share ("EPS") reporting
requirements by requiring a dual presentation of basic and diluted EPS
on the face of the income statements. Basic EPS excludes dilution and
is computed by dividing income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. If SFAS No. 128 had
been in effect for the current and prior periods, EPS presentation
would not be significantly different from EPS currently reported in the
Company's statements of operations.
In September 1997, the Financial Accounting Standards Board issued
Statements of Financial Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in net assets during
the period from nonowner sources; and No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services,
geographical areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results
of operations or cash flows and any effect will be limited to the form
and content of its disclosures. Both statements, SFAS No. 130 and SFAS
No. 131, are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
with the current presentation format.
2. ACQUISITION OF REVERE, INC.
On October 29, 1997, the Company announced that it agreed to acquire
Revere, Inc., a high-end computerized maintenance management systems
provider. The Company expects to account for the acquisition as a
purchase transaction. At closing, the Company expects to exchange $8.5
million in Company stock for all outstanding shares in Revere, Inc. The
transaction will include an earnout that may increase the purchase
price by up to an additional $2.0 million if certain performance
targets are met between the closing date and December 31, 1998. The
earnout is payable in cash or stock, at the
6
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Company's option. The Company expects to take a charge for in-process
research and development and other expenses currently estimated to be
in the range of $4.0 million to $5.0 million. The closing date is
anticipated to occur during the fourth quarter of 1997.
7
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WALKER INTERACTIVE SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The report on this Form 10-Q contains forward-looking statements, including
statements, among others, related to license revenue trends, industry trends and
demand for mainframe products, reduction in an acquired line of credit, working
capital requirements, expansion in international markets, new consulting
opportunities and the use of distributors for license resale. Discussions
containing such forward-looking statements may be found in the material set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," generally and specifically therein under the captions
"Results of Operations," "Liquidity and Capital Resources" and "Future
Performance and Additional Risk Factors" as well as elsewhere in this Quarterly
Report on Form 10-Q, the Company's 1996 Annual Report on Form 10-K and the
Company's Annual Report for the year ended December 31, 1996. Actual events or
results may differ materially from those discussed herein. The risk factors on
pages 11 through 14, among others, should be considered in evaluating the
Company's prospects and future financial performance.
Walker Interactive Systems, Inc. and its subsidiaries (collectively, the
"Company") design, develop and market software products for the mainframe and
client/server platforms. The Tamaris C/S product line represents the Company's
core suite of business and financial solutions utilizing the power of the
mainframe server. The Aptos suite of financial applications provides a
multi-tier client/server architecture that runs on UNIX and Windows NT servers.
In addition to the Tamaris C/S and Aptos product lines, the Company develops and
markets financial solutions which focus on the high-end corporate market with
the ability to serve mid-sized stand-alone organizations and divisions of large
corporations. The Company's Tamaris C/S financial suite includes productivity
tools that allow the Company's applications to be extensively customized to fit
the customer's particular requirements. The Company complements its software
products by providing consulting and training services to assist in
customization and implementation.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's Tamaris C/S
product line is licensed primarily to Fortune 1000 companies and similarly-sized
business and governmental organizations worldwide. The Company's Aptos products
are marketed primarily in the United Kingdom to mid-sized organizations. The
Company's products and services are marketed primarily through its sales forces
located in the United States, United Kingdom and Asia Pacific. The Company
licenses software products directly to customers and occasionally to
distributors for resale.
Software license revenues are recognized when software revenue recognition
criteria have been met. The portion of revenues from new license agreements
which relate to the Company's obligations to provide customer support are
deferred and recognized ratably over the contract support period, which is
generally three to twelve months. Software maintenance contracts are usually
renewable on an annual basis, although the Company may negotiate long-term
contracts. Revenues from maintenance contract renewals are deferred and
recognized ratably over the terms of the agreements. Revenues from consulting
and other services are recognized as the related services are provided or as
milestones are completed.
ACQUISITIONS
On October 29, 1997, the Company announced that it agreed to acquire Revere,
Inc., a high-end computerized maintenance management systems provider. The
Company expects to account for the acquisition as a purchase transaction. At
closing, the Company expects to exchange $8.5 million in Company stock for all
outstanding shares in Revere, Inc. The transaction will include an earnout that
may increase the purchase price by up to an additional $2.0 million if certain
performance targets are met between the closing date and December 31, 1998. The
earnout is payable in cash or stock, at the Company's option. The Company
expects to take a charge for in-process research and development and other
expenses currently estimated to be in the range of $4.0 million to $5.0 million.
The closing date is anticipated to occur during the fourth quarter of 1997.
On May 17, 1996, the Company acquired the business and net assets of Hunt
Systems Group, Inc. ("Hunt") for a total acquisition price of $3.8 million
comprised of a $2.1 million cash payment, $1.6 million payable based on
achievement of certain performance targets during the four year period following
closing and $0.1 million in
8
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transaction costs. Additional amounts will be paid if further performance
targets are reached during the same four year period. As of September 30, 1997,
the Company has paid $0.3 million on the achievement of performance targets. The
acquisition was accounted for as a purchase transaction. Of the purchase price,
$0.2 million was allocated to identifiable net tangible assets, $0.8 million was
allocated to capitalized software and $2.8 million was allocated to in-process
research and development. The amount of the purchase price allocated to
in-process research and development was charged to the Company's operations in
the second quarter of 1996, because technological feasibility had not been
established and no alternative future uses existed at the acquisition date. The
results of operations of Hunt, which are included in the Company's Consolidated
Statement of Operations beginning with the quarter ended September 30, 1996,
were not material to the results of operations of the Company.
RESULTS OF OPERATIONS
REVENUES. The Company's revenues for the quarter ended September 30, 1997 of
$16.3 million increased $0.3 million or two percent over the same period in
1996. Revenue for the nine month period ended September 30, 1997 increased $3.9
million or nine percent to $49.6 million compared to the same period of 1996.
The increase in 1997 total revenues is primarily attributable to an increase in
license revenues which were $2.1 million for the three months ended September
30, 1997 compared to $1.8 million for the same period in 1996, an increase of 17
percent. License revenues of $9.3 million for the nine months ended September
30, 1997 increased 65 percent from $5.7 million for the same period in 1996.
During the third quarter of 1997, license revenues generated by the Company's
client/server products represented 75 percent of total license revenues compared
to 39 percent of total license revenues in 1996. Client/server product revenues
contributed 39 percent of total revenues for the nine months ended September 30,
1997 and 25 percent of total revenues for the same period in 1996. The change in
1997 license revenue product mix is attributable to an increase in sales of the
Company's client/server products - Business Framework Series, Information Access
and Aptos product lines. Further contributing to the change in product mix was a
decrease in Tamaris C/S product sales during the third quarter of 1997 (see
below).
During the third quarter of 1997, the Company recognized 64 percent of its total
license revenue in the United Kingdom compared with 26 percent in 1996 while
North American license revenues were 22 percent and 68 percent of total license
revenue for the same periods, respectively. The remaining percentage of license
revenue for the above periods was recognized in the Asia Pacific region. The
Company has recognized increased license revenue in the United Kingdom which is
due to increasing Aptos and Business Framework Series license sales. The Company
believes that the increase in client/server product sales in the United Kingdom
is a result of Aptos product line feature and functionality enhancements and
increased regional sales and marketing efforts for the Company's Business
Framework Series. North American license revenues for the three months ended
September 30, 1997 have decreased from the same period in 1996. The decrease is
primarily attributable to a decrease in Tamaris C/S product line license sales.
The following sentence is a forward-looking statement. The Company does not
believe that this decline in North American license revenue will continue into
the quarter ending December 31, 1997. Asia Pacific license revenue increased
over 1996 for both the three and nine months ended September 30, 1997 in all
product lines. License revenues by region have remained relatively stable for
the nine months ended September 30, 1997 and 1996. There can be no assurances
that these fluctuations or any historical trends will continue in the future.
Consulting revenue for the three months and nine months ended September 30, 1997
has remained relatively flat over the comparable 1996 periods. The Company
historically generates a majority of its consulting revenue from implementation
related projects. During the three months and nine months ended September 30,
1997, consulting revenue from implementation related projects decreased from the
comparable 1996 periods due to several large implementation and
post-implementation projects during 1996 and the first quarter of 1997 which
were not replaced with projects of the same magnitude. Consulting revenues for
1997 were also adversely affected by a fixed-fee consulting engagement. The
Company recognized revenue from consulting engagements to change non-Walker
information systems to be Year 2000 compliant. These Year 2000 consulting
engagements were not a source of revenue in prior years. The Company's Year 2000
consulting revenue offset the decrease in revenue recognized from implementation
related projects. The Company generated a majority of its Year 2000 consulting
revenues in the North America region. Increases in 1997 total United Kingdom and
Asia Pacific consulting revenue offset decreases in 1997 North American
consulting revenue. See "Future Performance and Additional Risk Factors
Fluctuations in Operating Results" and "- Employees."
9
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COSTS OF LICENSES, MAINTENANCE AND CONSULTING. The costs of licenses,
maintenance and consulting as a percentage of total revenues increased five
percentage points and two percentage points for the three months and nine months
ended September 30, 1997, respectively, compared to 1996. The increase is
primarily attributable to increases in third party royalties and an increase in
consulting expenses.
Cost of licenses in 1997 increased due to a greater portion of 1997 license
revenue generated from the Company's client/server product lines, many of which
utilize technology licensed from outside third parties. Third party royalties
increased in absolute dollars and as a percentage of total revenue for the three
months and nine months ended September 30, 1997 compared to 1996.
The costs of consulting revenues as a percentage of total revenue for the three
months and the nine months ended September 30, 1997 increased nine percent and
one percent, respectively, over the comparable 1996 periods. The increases are
attributable to lower than expected total revenues, lower profit margins in
North America associated with a fixed fee consulting engagement and an increase
in the use of outside contractors. Further contributing to the increase was the
growth and turnover in the consulting organizations. The growth in the
consulting organization was due to increased resources for implementation
consulting engagements and for the pursuit and execution of non-implementation
projects. The decline in North American profit margins was partially offset by
increased profit margins on consulting revenue in the United Kingdom and the
Asia Pacific regions compared to 1996 which is attributable to a greater number
of consulting engagements resulting from an increase in 1997 license revenues
and increased utilization in the professional services organizations.
The costs of maintenance as a percentage of total revenues remained relatively
constant compared to 1996 for both the three months and nine months ended
September 30, 1997.
AMORTIZATION OF CAPITALIZED SOFTWARE. The amortization of capitalized software
increased due to recent software product releases.
SALES AND MARKETING. Sales and marketing expenses for the three months and nine
months ended September 30, 1997 increased $0.3 million or seven percent and $2.1
million or 22 percent, respectively, over the comparable 1996 periods. As a
percentage of revenues, 1997 sales and marketing expenses increased one
percentage point over the three month period ended September 30, 1996 and two
percentage points over the nine month period ended September 30, 1996. The
increase in absolute dollars is due to increased commission expense and other
expenses associated with the increase in license revenues. Increases in
worldwide marketing promotions including, but not limited to, corporate imaging
and positioning and related headcount growth in the sales and marketing
organization during 1997 further contributed to increased sales and marketing
expenses as a percentage of revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1997
decreased $0.2 million or nine percent and $0.6 million or nine percent from the
three month and nine month periods ended September 30, 1997, respectively. The
decrease is primarily due to charges for bad debt and senior management changes
incurred during the second quarter of 1996 which were not incurred during the
comparable period in 1997.
PRODUCT DEVELOPMENT. Product development expenses, excluding amortization of
capitalized software, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product development costs including additions to
capitalized software (gross)................. $4,344 $4,086 $13,191 $12,178
Less:
Additions to capitalized software............ (1,933) (1,456) (5,796) (3,676)
------ ------ ------ ------
Product development expenses...................... $2,411 $2,630 $7,395 $8,502
====== ====== ====== ======
</TABLE>
10
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The increase in gross product development costs is primarily due to the
Company's efforts to broaden its existing product offerings by further
developing acquired technologies, incorporating third party technologies in new
products and enhancing existing products. In absolute dollars and as a
percentage of gross product development costs, additions to capitalized software
increased for the three months and nine months ended September 30, 1997 compared
to 1996. The change is due to increased efforts by internal and external
resources to develop enhanced releases of existing products.
INCOME TAX EXPENSE. Income tax expense is recorded each quarter based on the
Company's estimated effective income tax rate for the year. As of September 30,
1997, the Company estimated that the 1997 effective income tax rate would be 35
percent. It is anticipated that the effective income tax rate will differ due to
the accounting for the Revere, Inc. acquisition. See "- Acquisitions."
Currently, the impact on the effective income tax rate has not been determined.
In the first nine months of 1996, the Company recorded a tax provision of $0.2
million on a net loss of $1.2 million. The 1996 provision was comprised of
withholding taxes in certain foreign jurisdictions and increases to the
valuation allowance for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents and short-
and long-term investments totaling $31.0 million compared to $38.2 million at
December 31, 1996. The decrease is primarily attributable to changes in
operating assets and liabilities, consisting of a $3.9 million increase in net
accounts receivable, $2.0 decrease in deferred revenue and a $1.4 million
decrease in accrued liabilities. These changes resulted from negative effect of
the timing of sales, cash collections and cash payments.
In 1995, the Board of Directors authorized the repurchase of 800,000 shares of
the Company's outstanding common stock, not to exceed a total cost of $6.0
million. The Board of Directors subsequently authorized the Company to spend up
to an additional $4.0 million for repurchases, for a total cost of up to $10.0
million The shares are being repurchased for use in connection with the
Company's employee stock purchase plan and one of its employee stock option
plans. The volume of shares repurchased will vary from quarter to quarter. As of
September 30, 1997, the Company had acquired 572,000 shares of its common stock
at a cost of $6.7 million. As of September 30, 1997, the Company had reissued
approximately 164,000 of the repurchased shares.
The Company has a line of credit with a financial institution in the amount of
$3.0 million, secured by marketable securities. The line of credit expires on
August 1, 1998. The Company has never borrowed against this line of credit. The
credit agreement provides that the Company shall maintain certain financial
ratios and contains restrictions related to various matters, including the
Company's ability to effect mergers or acquisitions without the bank's approval
and the Company's ability to pay dividends while borrowings are outstanding
under the line of credit.
Revere, Inc. has borrowed approximately $1.5 million from an existing line of
credit. The following sentence is a forward looking statement. The Company
anticipates that it will pay off the remaining balance on this line of credit
subsequent to the closing date of the acquisition. See "- Acquisition."
As of September 30, 1997, the Company's principal source of liquidity included
cash, cash equivalents and short-and long-term investments aggregating $31.0
million. The following sentence is a forward looking statement. The Company
believes that such amounts, together with funds expected to be generated from
operations, will satisfy the Company's currently anticipated working capital and
capital expenditure requirements for at least the next twelve months.
FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and may in the
future experience significant quarterly and annual changes in revenues and
results of operations. The Company's revenues and results of operations
fluctuate as a result of a variety of factors which include the length of the
sales cycle for the Company's products, the amount of revenue generated from
products which require third party royalty payments, changes in product mix,
demand for the Company's products, competitive conditions in the industry and
general economic conditions. Furthermore, the revenue growth rate experienced
during the last half of 1996 and the first quarter of 1997 did not continue into
the second and third quarters of 1997 and may not continue in the future.
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Shortfalls in revenues or earnings from levels expected by the financial market
could have an immediate and significant adverse effect on the trading price of
the Company's common stock. Additionally, the trading price of the Company's
common stock could be adversely affected if repurchases of the Company's common
stock are suspended or discontinued.
Future operating results will continue to heavily depend on the level of license
sales. Due to the lengthy sales cycle associated with the Company's mainframe
software products and time to establish product recognition for its
client/server products, revenues are difficult to forecast and may fluctuate
dramatically between reporting periods. Future prices the Company will be able
to obtain for its software products may decrease from historical levels
depending on competitive factors. Maintenance revenues are derived from new and
existing customers. Lower than expected maintenance revenues may result if
cancellations or non-renewals of maintenance agreements are not replaced by new
maintenance agreements equal to or greater than those lost. Maintenance revenues
may be negatively impacted if prices for maintenance agreements decrease from
historical levels due to competitive factors. Consulting revenues are derived
from new and existing customers for services related to training,
implementations, customizations, migrations, enhancements and other special
projects. In order to maintain or increase existing levels of consulting
revenues, the Company heavily depends on consulting engagements from new license
customers. However, revenues from consulting engagements may be generated for an
extended period of time beyond the customers' software implementations. The
Company will also continue to pursue Year 2000 consulting engagements to
supplement projects related to license customers. There can be no assurances
that any license, maintenance or consulting revenue trends experienced in the
past will continue into the future.
The Company has sold its Aptos product line primarily in the United Kingdom. The
Company plans to further increase its presence in additional markets including,
but not limited to, introducing the Aptos product line in the United States and
further in the Asia Pacific region. Risks associated with such pursuits include,
but are not limited to, the following: changing market demands, economic and
political conditions in foreign markets, foreign exchange fluctuations, longer
collections cycles and changes in international tax laws. During 1996 and the
first nine months of 1997, the Company experienced an increase in revenues
generated in the United Kingdom and the Asia Pacific region. There can be no
assurances that the Company will continue to experience increased revenues in
the United Kingdom or in Asia Pacific. Furthermore, there can be no assurances
that the Company's sales and marketing efforts in other international markets
will result in future revenue.
The Company has occasionally entered into fixed price consulting agreements and
the Company expects to enter into additional fixed priced agreements. The
Company has recognized lower profit margins on certain fixed price service
agreements when compared to non-fixed priced agreements. Consulting revenues and
related margins for the second and third quarters of 1997 were adversely
affected by a fixed-fee consulting engagement. This engagement could adversely
affect future revenues if the Company is unable to reduce the resources assigned
to this engagement or to rapidly deploy additional resources to other consulting
engagements. See "- Employees." Although the Company intends to negotiate future
fixed priced consulting agreements that provide greater profit margins, it
cannot ensure that such arrangements will provide profit margins comparable to
non-fixed price agreements.
The Company has historically generated a majority of its consulting revenue from
pre- and post-implementation services. During the second and third quarters of
1997, the Company provided services which include, but are not limited to, Year
2000 conversion engagements and other hardware and software solutions. The
Company intends to continue its pursuit of consulting engagements for which the
Company believes it has the qualifications to successfully complete. Such
engagements may not be pre- or post-implementation related. There can be no
assurances that these engagements will result in profit margins equal to or
greater than those engagements that are specific to a customer's product
implementation. Furthermore, there can be no assurances that consulting revenue
generated from non-implementation related projects will continue to increase in
the future.
The Company normally recognizes a greater ratio of consulting service revenue
per mainframe product sale as compared to consulting service revenue per
client/server product sale. Increased sales of the Company's client/server
product lines as a percentage of total license revenue may reduce the ratio of
total consulting service revenue to total license revenue.
The Company generates revenue from internally developed software products, some
of which utilize technology licensed from third parties. The Company expects to
continue utilizing third party technology and may enter into
12
<PAGE>
agreements with additional business partners. If sales of software utilizing
third party technology increase disproportionately, gross margins may be below
historical levels due to third party royalty obligations. There can be no
assurances that the third parties will renew existing agreements with the
Company or will not require financial conditions which are unfavorable to the
Company.
The Company expects product development expenses to grow in future periods.
However, there can be no assurances that revenues will be sufficient to support
the future product development which is required for the Company to be
competitive. Although the Company may be able to release new products in
addition to enhancements to existing products, there can be no assurances that
the Company's new or upgraded products will be accepted, will not be delayed or
canceled, or will not contain errors or "bugs" that could affect the performance
of the product or cause damage to users' data.
The Company expects sales and marketing expenses to increase in the future as
the Company promotes new products, increases promotions of existing product
lines and solutions and continues to build its sales force internationally.
However, the Company believes that the impact of these activities, if any, on
future revenues may not be immediate and there can be no assurances that
increased sales and marketing expenditures will result in increased revenues.
NEW BUSINESS OPPORTUNITIES. On occasion the Company has utilized distributors to
resell its software products. The Company may generate proportionately more of
its license revenue through the utilization of distributors or Value Added
Resellers (VAR's) than it has in the past. If a disproportionate amount of
license revenue is generated by these means, operating income as a percentage of
revenue may be below historical levels due to financial obligations to these
third parties.
COMPETITION. The financial applications and business software market is
intensely competitive and rapidly changing. A number of competitors offer
products similar to the Company's products and target the same customers. The
Company believes that its ability to compete depends upon many factors within
and outside its control, including the timing and market acceptance of new
products and enhancements developed by the Company and its competitors, product
functionality, performance, price, reliability, customer service and support,
sales and marketing efforts and product distribution. The primary competition
for the Company's products is the financial applications software offered by
Geac Computer Corporation Limited (formerly Dun & Bradstreet Software Services,
Inc.), Oracle Software Corporation, PeopleSoft, Inc. and SAP AG. In addition,
the Company's products compete with the software offered by Coda Group plc,
Quality Software Products Holding plc, Lawson Software, Systems Union Group Ltd,
Agresso AS and SquareSum Ltd. The Company's products also compete with products
offered by other vendors, with systems integrators and with consulting companies
that offer custom software development services. In addition, the Company
competes with in-house management information services and programming resources
of its potential customers. Many of the Company's competitors have substantially
greater financial, technical marketing and sales resources than the Company.
Some of these competitors also offer business application products not offered
by the Company. There can be no assurances that the Company will be able to
compete successfully in the future.
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid
technological change. The pace of change has accelerated due to advances in
mainframe and client/server technology and the growth in internet, intranet and
extranet utilization. The Company expects to evaluate potential opportunities
and may invest in those which are compatible with the Company's strategic
direction. However, there can be no assurances that any such investments will be
profitable. Furthermore, the Company's products are designed primarily for use
with certain mainframe and client/server systems. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete. Accordingly, the Company's future success
will depend in part upon its ability to continue to enhance its current products
and to develop and introduce new products that respond to evolving customer
requirements and keep pace with technological development and emerging industry
standards, such as new operating systems, hardware platforms, interfaces and
third party applications software. There can be no assurances that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change, changes in customer requirements
or emerging industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of such products and enhancements, or that any new
products or enhancements that it may introduce will achieve market acceptance.
13
<PAGE>
PROPRIETARY RIGHTS. The Company regards its products as proprietary. Through its
license agreements with customers and its internal security systems,
confidentiality procedures and employee agreements, the Company has taken steps
to maintain the trade secrecy of its products. However, there can be no
assurances that misappropriation will not occur. In addition, the laws of some
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
The Company is not aware of any claims that its products infringe on the
proprietary rights of third parties, however, there can be no assurances that
third parties will not assert infringement claims against the Company in the
future with respect to current or future products or that any such assertions
may not require the Company to enter into royalty arrangements or result in
costly litigation.
EMPLOYEES. The Company's success depends on a number of its key employees. The
loss of the services of the Company's key employees could have a material
adverse effect on the Company. The Company believes that its future success will
also depend in large part on its ability to attract and retain highly-skilled
technical and managerial personnel. In this regard, the Company must retain
existing and hire additional personnel (directly or through contractual
agreements) in order to maintain its consulting revenues at historical levels.
Competition for such personnel in the software industry is intense and the
supply is limited. There can be no assurances that the Company will be
successful in attracting and retaining such personnel.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1997.
15
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WALKER INTERACTIVE SYSTEMS, INC.
(REGISTRANT)
Date: November 12, 1997 By: /s/ BARBARA M. HUBBARD
----------------- ----------------------
Barbara M. Hubbard
Vice President and
Corporate Controller
(Chief Accounting Officer)
16
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule (electronic filing only)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Walker Interactive Systems, Inc. Quarterly report on Form 10-Q for the period
ended September 30, 1997.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,755
<SECURITIES> 19,286
<RECEIVABLES> 17,555
<ALLOWANCES> 1,401
<INVENTORY> 0
<CURRENT-ASSETS> 42,852
<PP&E> 22,274
<DEPRECIATION> 18,473
<TOTAL-ASSETS> 80,858
<CURRENT-LIABILITIES> 26,028
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 48,639
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 16,267
<TOTAL-REVENUES> 16,267
<CGS> 8,539
<TOTAL-COSTS> 16,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 140
<INCOME-TAX> 48
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
