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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 June 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
303 SECOND STREET, SAN FRANCISCO, CA 94107
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(Address of principal executive offices including zip code)
(415) 495-8811
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(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 13,255,244 Shares of $.001 Par Value Common Stock outstanding as of
August 5, 1997.
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WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996.............................................. 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1997 and 1996.................... 4
Consolidated Statements of Cash Flows for the six
months ended June 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............................. 7
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 13
SIGNATURES................................................................ 14
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE DECEMBER
ASSETS 30, 1997 31, 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,868 $ 13,475
Short-term investments 16,991 17,615
Accounts receivable, net 14,685 12,245
Prepaid expenses 1,768 1,010
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Total current assets 43,312 44,345
Long-term investments 7,637 7,080
Property and equipment, net 4,074 4,332
Capitalized software, net 13,381 11,858
Deferred tax assets, net 13,473 14,060
Other assets 510 644
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TOTAL ASSETS $ 82,387 $ 82,319
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,477 $ 13,152
Deferred revenue 14,057 14,855
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Total current liabilities 26,534 28,007
Deferred revenue 2,634 2,441
Accrued rent 727 960
Other long-term obligations 3,814 4,139
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Total liabilities 33,709 35,547
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Stockholders' equity:
Common stock, $.001 par value: 50,000,000 shares
authorized; issued 13,656,375 shares - June 30,
1997; 13,494,487 shares - December 31, 1996 14 13
Additional paid-in capital 70,723 70,008
Currency translation adjustments 145 253
Unrealized gain (loss) on investments 2 (39)
Accumulated deficit (17,675) (18,710)
Treasury stock at cost (371,772 shares - June 30,
1997; 397,194 shares - December 31, 1996) (4,531) (4,753)
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Total stockholders' equity 48,678 46,772
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,387 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
--- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
License $ 3,451 $ 2,273 $ 7,191 $ 3,836
Maintenance 6,795 6,687 13,716 13,440
Consulting 6,015 6,416 12,427 12,432
------- ------- ------- -------
Total revenues 16,261 15,376 33,334 29,708
OPERATING EXPENSES:
Costs of revenues:
Costs of licenses, maintenance and consulting 6,500 5,901 13,176 11,541
Amortization of capitalized software 1,253 956 2,341 1,717
Sales and marketing 3,931 3,127 7,787 5,970
Product development 2,451 2,953 4,984 5,872
General and administrative 2,062 2,396 4,448 4,860
Write-off of purchased in-process
research and development - 2,784 - 2,784
------- ------- ------- -------
Total operating expenses 16,197 18,117 32,736 32,744
Operating income (loss) 64 (2,741) 598 (3,036)
Interest income, net 490 499 994 982
------- ------- ------- -------
Income (loss) before income taxes 554 (2,242) 1,592 (2,054)
Income tax expense 195 50 557 103
------- ------- ------- -------
NET INCOME (LOSS) $ 359 ($2,292) $ 1,035 ($2,157)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE $ 0.03 ($0.17) $ 0.07 ($0.16)
======= ======= ======= =======
Shares used in computing net income (loss) per share 14,155 13,250 14,150 13,246
====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements
4
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,035 ($ 2,157)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,730 3,381
Tax benefit of nonqualified stock options 199 286
Write-off of purchased in-process research and development - 2,784
Changes in operating assets and liabilities:
Accounts receivable, net (2,440) (955)
Prepaid expenses (758) (446)
Accrued liabilities (1,221) (182)
Deferred tax assets 587 -
Deferred revenue (605) (21)
Other 81 (92)
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Net cash provided by operations 608 2,598
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised 1,067 1,232
Treasury stock acquired (328) (1,650)
Other (12) (213)
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Net cash provided (used) by financing activities 727 (631)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments (17,729) (18,297)
Maturities of short-term investments 8,750 4,900
Acquisition of Hunt Systems Group, Inc. - (2,109)
Sales of short-term investments 9,006 6,044
Purchases of property (1,212) (720)
Additions to capitalized software (3,863) (2,220)
Other 106 48
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Net cash used by investing activities (4,942) (12,354)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (3,607) (10,387)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,475 25,412
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,868 $ 15,025
========== =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
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 June 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.
6
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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 related to industry trends and demand for mainframe products, 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
"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 10 through
12, 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") designs, develops and markets 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 include 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.
ACQUISITION
- -----------
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 transaction costs. Additional amounts will be paid
if further performance targets are reached during the same four year period. 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 June 30, 1996, were not
material to the results of operations of the Company.
7
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RESULTS OF OPERATIONS
- ---------------------
REVENUES. The Company's 1997 second quarter revenues of $16.3 million increased
$0.9 million or six percent over second quarter revenues of the prior year.
Revenue for the six month period ended June 30, 1997 increased $3.6 million or
12 percent to $33.3 million compared to the same period of 1996. The increase in
revenues for 1997 is primarily attributable to an increase in license revenues
which were $3.5 million for the three months ended June 30, 1997 compared to
$2.3 million for the same period in 1996, an increase of 52 percent. License
revenues of $7.2 million for the six months ended June 30, 1997 increased 87
percent from $3.8 million for the same period in 1996. License revenue mix for
the second quarter of 1996 and 1997, by platform, has remained stable with
mainframe products consisting of 74 percent of license revenue and client/server
license revenue comprising the difference.
Increased license revenue for the three and six month periods ended June 30,
1997 was generated from all of the Company's product lines and geographic
regions. The Company believes that the increase in worldwide Tamaris C/S
revenues is attributable to continued and increasing use of mainframe systems as
the solution to high volume transaction requirements and due to corporate
requirements for robust analytical, budgeting and consolidating applications.
The Company believes that the increase in Aptos revenues in the United Kingdom
is a result of product feature and functionality enhancements. The Company
further believes that increased marketing promotions and growth in the Company's
sales and marketing infrastructure has increased customer awareness of the
Company's products and services. There can be no assurances that these
historical trends will continue in the future.
Consulting revenues decreased $0.4 million or six percent to $6.0 million for
the second quarter ended June 30, 1997 from the comparable period in 1996. The
decrease in revenues is attributable to the completion of several large
implementation and post-implementation projects during 1996 and the first
quarter of 1997 which had not been replaced by projects of the same magnitude.
Consulting revenues for the second quarter of 1997 were also adversely affected
by a fixed-fee consulting engagement. The decrease was partially offset by an
increase in consulting revenues in the United Kingdom for the three months ended
June 30, 1997. Consulting revenues for the first half of 1997 remained
relatively flat over the comparable 1996 period. See "Future Performance and
Additional Risk Factors - Fluctuations in Operating Results" and "- Employees."
COSTS OF LICENSES, MAINTENANCE AND CONSULTING. The costs of licenses,
maintenance and consulting as a percentage of total revenues increased two
percentage points and one percentage point for the three months and six months
ended June 30, 1997, respectively, compared to 1996. Cost of licenses in 1997
increased due to a greater portion of 1997 license revenue generated from
products 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 six months ended June 30, 1997 compared to
1996.
The costs of consulting revenues as a percentage of total revenue for the three
months and the six months ended June 30, 1997 increased 14 percent and 9
percent, respectively, over the comparable 1996 periods. The increases are
attributable to lower profit margins in North America associated with a fixed
fee consulting engagement. The Company has recognized 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 six months ended June 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 six
months ended June 30, 1997 increased $0.8 million or 26 percent and $1.8 million
or 30 percent, respectively, over the comparable 1996 periods. As a percentage
of revenues, 1997 sales and marketing expenses increased four percentage points
over the three month period ended June 30, 1996 and three percentage points over
the six month period ended June 30, 1997. The increase in absolute dollars is
due to higher commissions 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 growth in the
sales and marketing organization during 1997 further contributed to increased
sales and marketing expenses as a percentage of revenues.
8
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GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1997
decreased $0.3 million or 14 percent and $0.4 million or eight percent from the
three month and six month periods ended June 30, 1997, respectively. The
decrease is primarily due to bad debt reserves and senior management related
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Product development costs including additions
to capitalized software (gross) $ 4,475 $ 4,146 $ 8,847 $ 8,093
Less:
Additions to capitalized software (2,024) (1,193) (3,863) (2,221)
------- ------- ------- -------
Product development expenses $ 2,451 $ 2,953 $ 4,984 $ 5,872
======= ======= ======= =======
</TABLE>
The increase in gross product development costs is primarily due to the
Company's efforts to broadened its existing product sets 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 six months ended June 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. The Company
estimates that the 1997 effective income tax rate will be 35 percent. In the
first half of 1996, the Company recorded a tax provision of $0.1 million on a
net loss of $2.1 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 June 30, 1997, the Company had cash and cash equivalents and short- and
long-term investments totaling $34.5 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 $2.4 million increase in net
accounts receivable and a $1.2 million decrease in accrued liabilities. These
changes resulted from the timing of sales, cash collections and cash payments.
In 1995, the Board of Directors authorized the repurchase of 800,000 shares, not
to exceed a total cost of $6.0 million. During the second quarter of 1997, the
Board of Directors authorized the Company to spend up to an additional $4.0
million for repurchases, for a total cost of $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 June 30, 1997, the Company
had acquired 517,000 shares of its common stock at a cost of $5.9 million. As
of June 30, 1997, the Company had reissued approximately 150,371 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.
As of June 30, 1997, the Company's principal source of liquidity included cash,
cash equivalents and short- and long-term investments aggregating $34.5 million.
The following sentence is a forward looking statement. The
9
<PAGE>
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 rates experienced
during 1996 did not continue into the first half of 1997 and may not continue in
the future. 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.
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 software
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 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.
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 introduced its Aptos product line to the Asia Pacific Region.
The Company plans to further increase its presence in international markets
including, but not limited to, introducing its Aptos product line to the United
States and other countries outside of the Europe. 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 six 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 entered into fixed price consulting agreements with some
customers, and the Company expects to enter into additional fixed priced
agreements. The Company historically has recognized lower profit margins on
certain fixed price service agreements when compared to non-fixed priced
agreements. Consulting revenues for the second quarter 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. Such fixed price arrangements may become a
greater proportion of the Company's revenues in the future.
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 agreements with
additional business partners. If sales of software utilizing third party
technology increase disproportionately, operating income as a percent of revenue
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.
10
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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 releases and promotes new products, increases promotions of existing
product lines and continues to build its sales force. However, the Company
believes that the impact of these activities, if any, on future license 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. The Company has historically generated a majority
of its consulting revenue from pre- and post-implementation services. To a
lesser extent, the Company has 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.
On occasion the Company has utilized distributors to resale 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
11
<PAGE>
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.
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.
12
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of Walker Interactive Systems,
Inc. was held on May 14, 1997.
(b) Tania Amochaev and John M. Lillie were elected to the Board of
Directors to hold office until the 2000 Annual Meeting of
Stockholders. The Directors whose term of office as Director
continued after the meeting where: Richard C. Alberding, William
A. Hasler, David C. Hodgson, Leonard Y. Liu, and David C.
Wetmore.
(c) The matters voted upon at the meeting and the voting of the
stockholders with respect thereto are as follows:
(i) The election of Tania Amochaev as a Director to hold
office until the 2000 Annual Meeting of Stockholders:
For: 12,430,858 Withheld: 4,757
(ii) The election of John M. Lillie as a Director to hold
office until the 2000 Annual Meeting of Stockholders:
For: 12,431,458 Withheld: 4,157
(iii) Ratification of the selection of Deloitte & Touche LLP as
independent public accountants of the Company for its
fiscal year ending December 31, 1997.
For: 12,419,194 Against: 3,304
Abstain: 13,117 Broker Non-Votes: 0
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
June 30, 1997.
13
<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: August 8, 1997 By: /s/ BARBARA M. HUBBARD
-------------- ----------------------
Barbara M. Hubbard
Vice President and
Corporate Controller
(Chief Accounting Officer)
14
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule (electronic filing only)
15
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<PAGE>
<ARTICLE> 5
<LEGEND>
WALKER INTERACTIVE SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,868
<SECURITIES> 24,628
<RECEIVABLES> 16,086
<ALLOWANCES> 1,401
<INVENTORY> 0
<CURRENT-ASSETS> 43,312
<PP&E> 22,547
<DEPRECIATION> 18,473
<TOTAL-ASSETS> 82,387
<CURRENT-LIABILITIES> 26,534
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 48,664
<TOTAL-LIABILITY-AND-EQUITY> 82,387
<SALES> 16,261
<TOTAL-REVENUES> 16,261
<CGS> 7,753
<TOTAL-COSTS> 16,197
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 554
<INCOME-TAX> 195
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
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