<PAGE>
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 March 31, 1998
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 14,005,000 Shares of $.001 Par Value Common Stock
outstanding as of May 8, 1998.
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997...............................................................................3
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997................................................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997................................................................5
Notes to Consolidated Financial Statements...............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...............................................................................7
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................14
SIGNATURES ........................................................................................15
</TABLE>
2
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH DECEMBER
ASSETS 31, 1998 31, 1997
------------- -------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $5,818 $7,646
Short-term investments 9,822 13,693
Accounts receivable, net 25,200 23,107
Prepaid expenses 2,200 2,001
------------- -------------
Total current assets 43,040 46,447
Long-term investments 6,454 6,351
Property and equipment, net 4,423 4,599
Capitalized software, net 16,680 15,777
Deferred tax assets, net 13,043 13,632
Other assets 4,316 4,528
------------- -------------
TOTAL ASSETS $87,956 $91,334
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $16,623 $19,292
Deferred revenue 13,815 15,557
------------- -------------
Total current liabilities 30,438 34,849
Deferred revenue 1,873 1,190
Accrued rent 901 887
Other long-term obligations 2,537 2,719
------------- -------------
Total liabilities 35,749 39,645
------------- -------------
Commitments and Contingencies - -
Stockholders' equity:
Common stock, $.001 par value: 50,000,000 shares
authorized; issued 14,000,690 shares - March 31,
1998; 13,973,457 shares - December 31, 1997 14 14
Additional paid-in capital 73,911 73,622
Currency translation adjustments 228 238
Unrealized gain on investments 15 2
Accumulated deficit (21,138) (22,187)
Treasury stock at cost (50,000 - March 31, 1998;
zero shares - December 31, 1997) (823) 0
------------- -------------
Total stockholders' equity 52,207 51,689
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $87,956 $91,334
============= =============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1997
------------- -------------
REVENUES:
<S> <C> <C>
License $6,407 $3,740
Maintenance 7,725 6,921
Consulting 9,530 6,412
------------- -------------
Total revenues 23,662 17,073
OPERATING EXPENSES:
Costs of revenues:
Costs of licenses, maintenance and consulting 9,736 6,676
Amortization of capitalized software 1,033 1,088
Sales and marketing 5,639 3,856
Product development 3,201 2,533
General and administrative 2,723 2,386
------------- -------------
Total operating expenses 22,332 16,539
Operating income 1,330 534
Interest income, net 308 504
------------- -------------
Income before income taxes 1,638 1,038
Income tax expense 589 362
------------- -------------
NET INCOME $1,049 $676
============= =============
BASIC NET INCOME PER SHARE $0.08 $0.05
============= =============
Shares used in computing
basic net income per share 13,974 13,179
============= =============
DILUTED NET INCOME PER SHARE $0.07 $0.05
============= =============
Shares used in computing
diluted net income per share 15,100 14,145
============= =============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,049 $676
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,628 1,784
Tax benefit of nonqualified stock options 76 15
Changes in operating assets and liabilities:
Accounts receivable, net (2,093) (2,207)
Prepaid expenses (199) (121)
Accounts payable and accrued liabilities (1,398) (1,264)
Deferred tax assets 589 46
Deferred revenue (1,059) (1,393)
Other 216 49
------------- -------------
Net cash used by operating activities (1,191) (2,415)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised 218 288
Treasury stock acquired (823) (328)
Repayment of borrowings (1,422) -
Other (18) 16
------------- -------------
Net cash used by financing activities (2,045) (24)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments (2,513) (10,515)
Maturities of short-term investments 5,650 4,000
Sales of short-term investments 642 4,391
Purchases of property (438) (621)
Additions to capitalized software (1,935) (1,839)
Other 2 52
------------- -------------
Net cash provided (used) by investing activities 1,408 (4,532)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,828) (6,971)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,646 13,475
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,818 $6,504
============= =============
</TABLE>
See notes to consolidated financial statements
5
<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, 1997 included in
the Walker Interactive Systems, Inc. Annual Report on Form 10-K.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
with the current presentation format.
2. ACQUISITION OF REVERE, INC
On December 2, 1997, the Company acquired all the outstanding share
capital of Revere, Inc. ("Revere") in exchange for $7.7 million of the
Company's common stock (634,022 shares) and $0.6 million for various
transaction related costs and fees. An additional earnout of up to $2.0
million is payable based upon the achievement of certain 1998
performance targets. Associated with the transaction's closing total
purchase price of $8.3 million, the Company allocated $4.1 million to
goodwill, $4.6 million was allocated to in-process research and
development and the remaining amounts allocated primarily to working
capital. The amount of the purchase price allocated to in-process
research and development was charged to the Company's operations,
because technological feasibility had not been established and no
alternative future uses existed at the acquisition date. The
acquisition was accounted for as a purchase transaction. The goodwill
will be ratably charged to operations over six years. The results of
operations of Revere are included in the 1998 consolidated statement of
operations.
3. EARNINGS PER SHARE
The Company calculates basic earnings per share ("EPS") and diluted EPS
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share". Basic EPS is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for that period. Diluted EPS takes into account the effect
of dilutive instruments, such as stock options, and uses the average
share price for the period in determining the number of incremental
shares that are to be added to the weighted average number of shares
outstanding.
The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Shares used to compute basic EPS 13,974 13,179
Add: effect of dilutive securities 1,126 966
------ ------
Shares used to compute diluted EPS 15,100 14,145
====== ======
</TABLE>
6
<PAGE>
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, cash
commitments, working capital requirements and possible expansion in
international markets. Discussions containing such forward-looking statements
may be found in the material set forth in this section, generally and
specifically herein under the captions "Other Significant Charges," "Liquidity
and Capital Resources" and "Additional Risk Factors." Actual events or results
may differ materially from those discussed herein. The Company disclaims any
obligation to update these forward-looking statements as a result of subsequent
events. The risk factors on pages 10 through 13, among others, should be
considered in evaluating the Company's prospects and future financial
performance.
Walker Interactive Systems, Inc. (hereinafter "Walker" or the "Company") was
incorporated in California in 1973 and reincorporated in Delaware in March 1992.
Walker designs, develops, markets and supports, on a worldwide basis, a family
of enterprise client/server financial application software products that enable
large and medium-sized organizations, higher education institutions, and
federal, state, and government agencies to accelerate time-to-benefit, lower
cost of ownership and reduce information systems risks stemming from changes in
information technology and/or business processes or structure.
Walker designs its software products specifically for the client/server and
network computing models and believes that its architecture is among the most
scalable and adaptable available for enterprise-level financial applications
software. The Company's strategy is to offer comprehensive enterprise financial
solutions to a variety of industries utilizing its best-of-breed software
products. Walker's internet/intranet-enabled applications support and enhance
enterprise-wide financial processes, including planning, budgeting, forecasting,
consolidation and performance management. The Company's software products
utilize the Microsoft Windows operating systems on the desktop, and
industry-leading relational database management systems including IBM's DB2,
Oracle and Microsoft SQL/Server.
The Tamaris product line represents the Company's core suite of business and
financial solutions utilizing the power of the enterprise server, while the
Aptos suite of financial applications provides a client/server architecture that
runs on UNIX and Windows NT servers. The Company also develops and markets
Horizon best-of-breed analytic applications which provide financial reporting,
budgeting and financial consolidation solutions for large and mid-sized
organizations. The Horizon analytic applications can be used with the Tamaris
and Aptos products or in conjunction with leading Enterprise Resource Planning
("ERP") applications. In addition, Walker's IMMPOWER product line provides
best-of-breed Enterprise Asset Management solutions for capital intensive
industries.
The Company's software products 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 specialized consulting services to assist customers with customization
and implementation.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's Tamaris, Horizon
and IMMPOWER product lines are licensed to large and mid-size business and
governmental organizations worldwide. The Company's Aptos products are marketed
primarily in the United Kingdom and are licensed 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.
ACQUISITION OF REVERE, INC.
On December 2, 1997, the Company acquired all the outstanding share capital of
Revere, Inc. ("Revere") in exchange for $7.7 million of the Company's common
stock (634,022 shares) and $0.6 million for various transaction related costs
and fees. An additional earnout of up to $2.0 million is payable based upon the
achievement of certain 1998 performance targets. Associated with the
transaction's closing total purchase price of $8.3 million, the Company
allocated $4.1 million to goodwill, $4.6 million was allocated to in-process
research and
7
<PAGE>
development and the remaining amounts allocated primarily to working capital.
The amount of the purchase price allocated to in-process research and
development was charged to the Company's operations, because technological
feasibility had not been established and no alternative future uses existed at
the acquisition date. The acquisition was accounted for as a purchase
transaction. The goodwill will be ratably charged to operations over six years.
The results of operations of Revere are included in the consolidated statement
of operations for the quarterly period ended March 31, 1998. Therefore, period
to period comparisons may not meaningfully depict trends or changes in operating
results.
RESULTS OF OPERATIONS
The following results of operations for three months ended March 31, 1998
include the operations of Revere, unless otherwise specified.
REVENUES. The Company recorded total revenues of $23.7 million and $17.1 million
during the three months ended March 31, 1998 and 1997, respectively. The 39
percent increase in total revenues is primarily due to a $2.7 million or 71
percent increase in license revenues and a $3.1 million or 49 percent increase
in consulting revenues during 1998.
License revenues were $6.4 million in 1998 and $3.7 million in 1997. The
increase in license revenues is partly attributable to license revenues
generated from Revere operations. The remaining increase in license revenues is
primarily attributable to increases in license revenues generated by the
Company's Horizon and Aptos product lines. The Company believes that the
increase in license revenues during the first quarter of 1998 is attributable to
increased sales and marketing efforts, enhanced product offerings and increased
demand for the Company's financial application solutions from large and
mid-sized organizations.
Maintenance revenues increased 12 percent to $7.7 million in 1998 from $6.9
million in 1997, the majority of which was derived from Revere operations. The
remaining increase in maintenance revenues is primarily attributable to growth
in license sales.
Consulting revenues were $9.5 million and $6.4 million for 1998 and 1997,
respectively. Consulting revenues are generated from new and existing customers
for services related to training, implementation, customization, migration,
enhancement, Year 2000 compliance engagements and other special projects. The
Company historically generates a majority of its consulting revenues from
implementation related projects. The $3.1 million or 49 percent increase in
consulting revenues is partly attributable to consulting revenues generated from
Revere operations. The remaining increase in first quarter 1998 consulting
revenues is primarily due to revenues generated from Year 2000 consulting
engagements, which were not a source of revenue during the first quarter of
1997. Additional increases in consulting revenue were due to revenues generated
from implementation related projects associated with the Company's Tamaris,
Aptos and Horizon product lines.
COSTS OF LICENSES, MAINTENANCE AND CONSULTING. Costs of licenses, maintenance
and consulting represented 41 percent and 39 percent of total revenues in 1998
and 1997, respectively. The increase is primarily attributable to increased
license revenues and a greater proportion of those license revenues generated
from the Company's products which utilize technology licensed from third
parties. Excluding the operations of Revere, the costs of license, maintenance
and consulting represented 43 percent and 39 percent of total revenues in 1998
and 1997, respectively. The increase in 1998 is primarily attributable to lower
than expected consulting revenues, lower profit margins in North America
associated with a fixed fee consulting engagement and an increase in the use of
outside contractors.
SALES AND MARKETING. In absolute dollars, sales and marketing expenses increased
46 percent to $5.6 million in 1998 from $3.9 million in 1997. As a percentage of
total revenues, sales and marketing expenses were 24 percent and 23 percent in
1998 and 1997, respectively. The increase in sales and marketing expenses in
1998 is attributable to higher commissions and travel expenses associated with
the increase in license revenues and increased costs associated with marketing
promotions.
PRODUCT DEVELOPMENT. Product development related expenses, excluding
amortization of capitalized software, are detailed as follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Product development costs including additions to
capitalized software (gross) $5,136 $4,372
Less:
Additions to capitalized software (1,935) (1,839)
------ ------
Product development expenses $3,201 $2,533
====== ======
</TABLE>
The increase in 1998 gross product development expense 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. As a percentage of gross product
development expenses, additions to capitalized software were 38 percent and 42
percent in 1998 and 1997, respectively. The decrease in 1998 is attributable to
product development resources utilized on post-release work on products released
in the fourth quarter of 1997. Past additions to capitalized software, in
absolute dollars and as a percentage of gross product development costs, are not
a reliable indicator of additions to capitalized software in absolute dollars
and as a percentage of gross product development costs that will be recognized
in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.7
million and $2.4 million in 1998 and 1997, respectively. The increase is
primarily due to expenses from Revere operations.
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 1998 effective income tax rate will be 36 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from investing activities provided cash of $1.4 million in 1998 and
used cash of $4.5 million in 1997. The increase in cash provided during 1998 is
primarily a result of short-term investment maturities which were greater than
investment purchases made during the quarter.
In connection with the December 1997 acquisition of Revere, the Company assumed
a line of credit with an outstanding balance of $1.5 million. During the first
quarter of 1998, the Company used $1.4million for the Company's repayment of the
acquired Revere line of credit balance. The Company further used $0.8 million
during the first quarter of 1998 for the repurchase of its common stock.
As of March 31, 1998, the Company had acquired 687,000 shares of its common
stock at a cost of $8.4 million. As of March 31, 1998, the Company had reissued
637,000 of the repurchased shares in connection with the Company's employee
stock purchase plan, one of its employee stock option plans and the acquisition
of Revere.
The Company has a line of credit in the amount of $3.0 million, secured by
marketable securities. The line of credit expires on August 31, 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 March 31, 1998, the Company's principal sources of liquidity included
cash, cash equivalents and short- and long-term investments aggregating $22.1
million. The following sentence is a forward looking statement. The Company
believes that its principal sources of liquidity, 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.
9
<PAGE>
ADDITIONAL RISK FACTORS
The Company operates in a rapidly changing environment that involves numerous
risks and uncertainties which could have a material adverse effect on the
Company. The following discussion details some, but not all, of these risks and
uncertainties.
FLUCTUATION IN OPERATING RESULTS. The Company's operating results fluctuate as a
result of a variety of factors including: (i) the execution of new license
agreements; (ii) the shipment of software products; (iii) customer acceptance
criteria for services performed; (iv) completion of milestone or other
significant development requirements pursuant to the Company's license
agreements; (v) the financial terms of consulting agreements and the inclusion
of fixed as opposed to variable pricing; (vi) third-party royalty payments for
licensed software; (vii) the demand for the Company's products; (viii) changes
in the Company's product mix; (ix) the development and launch of new products,
and the life cycles of the Company's existing products; (x) research and
development expenditures required to update and expand the Company's product
portfolio and related third-party consulting costs; (xi) sales and marketing
expenses generally related to the entry into new markets with new or existing
products and maintenance of market share in existing markets; (xii) acquisitions
and the integration and development of acquired entities or products; (xiii)
competitive conditions in the industry and (xiv) general economic conditions. As
a result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
The Company's quarterly operating results are particularly dependent on the
number of license agreement bookings executed in each quarter. The amount of
quarterly bookings has varied substantially from quarter to quarter due to a
variety of reasons including: (i) a high proportion of license agreements are
negotiated during the latter part of each quarter which may not be completed
before the quarter end; (ii) the sales cycles for some of the Company's products
are relatively long due to the Company's focus on "enterprise solutions" as
opposed to individual products, which adds complexity to the customer's
selection, negotiation and approval process; (iii) the amount related to each
booking may vary significantly due to the need for different solutions for
different customers; (iv) procurement procedures may vary from customer to
customer, which may affect the timing of the bookings; (v) the period for a
customer to complete product evaluations and to complete any subsequent purchase
approval may be delayed due to resource limitations; and (vi) economic,
political and industrial conditions can adversely affect business opportunities
without notice. In addition, bookings that are executed during a particular
quarter may not be recognized as revenue during such quarter because such
bookings may not have met the Company's revenue recognition criteria. No
assurance can be given that the Company will be able to effect new bookings in
accordance with historical results or management's expectations, and the
inability of the Company to do so could have a material adverse effect on the
Company's operating results.
While the Company typically sells its software under a standard license
agreement, license agreements associated with large enterprise solutions often
require the negotiation of terms and conditions that differ substantially from
the Company's standard license agreement terms. The negotiation of these
agreements may extend the sales cycle. In certain circumstances, the Company may
not obtain terms and conditions that permit the recognition of revenue upon
shipment of the licensed product or under the percentage of completion method of
contract accounting rules. Accordingly, revenue may not be recognized despite
the shipment of a product because specified milestones have not been met or
because applicable services have not been completed.
The Company in the past has and in the future expects to enter into fixed price
consulting agreements, particularly in response to increased competition in the
industry. The Company has recognized lower profit margins on certain fixed-price
service agreements when compared to variable agreements. No assurance can be
given that the Company will be able to conclude fixed-price agreements on terms
that will allow the Company to retain its historical operating margins.
The Company has historically generated a majority of its consulting revenue from
pre- and post-implementation services. Recently, 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 is
qualified. 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 in the future.
10
<PAGE>
Employee and facility related expenditures comprise a significant portion of the
Company's operating costs and expenses, and are therefore relatively fixed over
the short term. In addition, the Company's expense levels are based, in
significant part, on the Company's forecasted revenue. If revenue levels fall
below expectations, net income is likely to be adversely affected. There can be
no assurance that the Company will be able to maintain or to continue its
current level of profitability on a quarterly or annual basis in the future. Any
of the foregoing factors could cause the Company's future operating results to
fall below the expectations of public securities market analysts, which could
have an adverse effect on the trading price of the Company's common stock. See
"Volatility of Stock Price."
RELIANCE ON THIRD PARTY TECHNOLOGY. 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, 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. Furthermore, there can be no
assurances that existing third party agreements will not be terminated.
INDUSTRY. Certain software companies, including the Company, have experienced
significant economic downturns as a result of technological shifts and
competitive pressures. These downturns are characterized by decreased product
demand, price erosion, work slowdowns and layoffs. The Company's operations may,
in the future, experience substantial fluctuations from period to period as a
consequence of such industry patterns and general economic and political
conditions which could affect the timing of orders from customers. There can be
no assurance that such factors will not have a materially adverse effect on the
Company's business, operating results or financial condition.
INTERNATIONAL. The Company plans to increase its presence in international
markets including, but not limited to, marketing the Tamaris and Aptos product
lines in additional countries. 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, difficulty in managing a geographically dispersed
organization, and changes in international tax laws. The downturn in the Asia
Pacific business climate will have an adverse effect on some market
opportunities. Operating results are likely to be adversely affected if the
Company's expansion into international markets is not successful.
COMPETITION. The business and financial applications software market for large
and complex organizations is intensely competitive. The Company's principal
competitors with Tamaris solutions are Dun & Bradstreet Software Services, Inc.
(mainframe applications now owned by Geac Computer Corporation Limited), SAP AG,
Oracle and PeopleSoft, Inc. With Aptos solutions, the Company faces competition
from Coda Group plc, Oracle Corporation, Lawson Software, Inc., Platinum
Software, Inc., Systems Union Group Ltd and Agresso AS. With the Horizon suite
of products, the Company faces competition from Hyperion Software, Longview and
Oracle Corporation. With the IMMPOWER suite of products, the Company faces
competition from Datastream Systems, Inc., Indus International, Inc., Marcam
Solutions, Inc., Mincom Pty Ltd., Product Software & Development, Inc. and SAP
AG.
The Company also competes to a lesser extent with other independent software
application vendors. Many of the Company's current and potential 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, primarily in the areas of human resources
and manufacturing. However, Walker remains one of the few companies committed to
providing and enhancing applications for the mainframe environment. Many of the
competitors listed above compete with Walker by offering UNIX-based
applications.
The Company encounters competition from a broader range of firms in the market
for professional services. These competitors include the consulting divisions of
the major accounting firms which possess greater resources than the Company and
small independent firms which compete primarily on the basis of price of
services provided.
The principal competitive factors in the market for business and financial
applications software and services include product functionality, flexibility,
portability, integration, reliability, performance, product availability, speed
of implementation, quality of customer support and user documentation, vendor
reputation, experience, financial
11
<PAGE>
stability, cost effectiveness and price. The Company believes that it competes
favorably with respect to these factors. There can be no assurance, however,
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
depends 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.
PRODUCT DEVELOPMENT. The Company's continued success is dependent on its
continued ability to introduce, develop and market new and enhanced versions of
its software products, although there can be no assurance that such ability can
be maintained. 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.
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. There can be no assurance that the
confidentiality of any proprietary information will provide any meaningful
competitive advantage. The Company has no patents relating to its products. The
Company believes that, because of the rapid pace of technological change in the
computer software industry, that trade secrets are less significant than factors
such as the knowledge, ability and experience of the Company's employees,
frequent product enhancements and the timeliness and quality of support
services. There can be no assurance that the current efforts to retain its
products as proprietary will be adequate.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance 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.
YEAR 2000 COMPLIANCE. The Company's internal business information systems
include some of the same commercial application software products generally
offered for license by the Company to end-user customers. The Company believes
these applications to be Year 2000 compliant; therefore the Company does not
expect any Year 2000 compliance issues to arise related to its primary internal
business information systems. However, the Company utilizes third party vendor
network equipment, telecommunication products and software products, some of
which may not be fully Year 2000 compliant. In general, the Company believes
that its key internal business information systems are Year 2000 compliant.
However, failure of any critical technology components to operate properly in
the Year 2000 may have an adverse impact on business operations or require the
Company to incur unanticipated expenses to remedy any problems.
PRODUCT LIABILITY. The Company's license agreements with its customers contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in such license agreements may not be enforced as a result
of international, federal,
12
<PAGE>
state and local laws or ordinances or unfavorable judicial decisions. The
license and support of the Company's software for use in mission critical
applications creates the risk of product liability claims against the Company.
Damage liability or injunctive relief resulting from such a claim could cause a
materially adverse impact on the Company's business, operating results and
financial condition.
EMPLOYEES. The Company believes that its continued success will depend in large
part upon its ability to attract, train and retain highly-skilled technical,
sales and marketing and managerial personnel. The Company continues to hire a
significant number of sales, marketing, services and technical personnel.
Because of the high level of demand, competition for such personnel is intense
and the Company from time to time experiences difficulty in locating candidates
with appropriate qualifications or within desired geographic locations. Revenue
growth is dependent on the Company's ability to attract, train, retain and
productively manage such personnel.
EXPANSION OF FACILITIES. Recently, commercial building vacancy rates have
significantly dropped in San Francisco, California, where the Company has its
headquarters. The Company's San Francisco office lease expires in 2007. However,
the Company may experience difficulty obtaining additional space if the
Company's space requirements in San Francisco significantly exceed the quantity
of space the Company currently has under lease. In addition, the increased
demand for office space has caused commercial rental rates to increase
substantially. Failure to either obtain space, or obtain it on reasonably
attractive commercial terms, may inhibit the Company's ability to grow or
otherwise adversely affect the Company's operations and financial results.
ACQUISITION RELATED RISKS. The Company has and may continue to acquire
complimentary businesses, products or technology. The process of integrating an
acquired company's business into the Company's operations may result in
unforeseen operating difficulties and expenditures and may require significant
management attention that would otherwise be available for the ongoing
development of the Company's business. There can be no assurance that any
anticipated benefits of an acquisition will be realized. Future acquisitions by
the Company could result in potentially dilutive issuance's of equity
securities, the incurrance of debt and contingent liabilities and amortization
related to goodwill and other intangible assets, which could materially affect
the Company's operating results and financial condition. Acquisitions involve
numerous risks, including difficulties in the assimilation of operations,
technologies and products of the acquired company, risks associated with
entering markets in which the Company has no or limited direct prior experience
and the potential loss of key employees of the acquired company.
VOLATILITY OF STOCK PRICE. High technology companies, including the Company,
frequently experience volatility in their common stock prices. Factors such as
quarterly fluctuations in results of operations, announcements of technological
innovations by the Company or its competitors or the introduction of new
products by the Company or its competitors and macroeconomic conditions in the
computer hardware and software industries generally may have a significant
adverse impact on the market price of the Company's stock. If revenues or
earnings in any quarter fail to meet the expectations of the investment
community, there could be an immediate impact on the Company's stock price. In
addition, the Company has issued shares and stock options which if sold directly
or exercised and sold on the open market in large concentrations, could cause
the Company's stock price to decline in the short term. Recent tax legislation
which lowered tax rates on capital gains could potentially result in increased
sales of all U.S. equity securities including the Company's common stock. Such
sales, if material, could negatively impact the stock price. Furthermore, the
stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for many high
technology companies, in some cases unrelated to the operating performance of
those companies. These broad market fluctuations may materially adversely affect
the market price of the stock of the Company.
13
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<S> <C> <C>
10.2 1992 Employee Stock Purchase Plan, as amended to date (1)
10.10 1994 Equity Incentive Plan, as amended to date (1)
27.1 Financial Data Schedule for quarter ended March 31, 1998
(electronic filing only)
27.2 Amended and restated 1996 Financial Data Schedule
including columns for year ended December 31, 1996
and quarters ended June 30, 1996 and September 30,
1996 (electronic filing only)
27.3 Amended and restated 1997 Financial Data Schedule
including columns for year ended December 31, 1997
and quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997 (electronic filing only)
(b) Reports on Form 8-K
</TABLE>
The Company filed no reports on Form 8-K during the quarter ended
March 31, 1998.
- --------
(1) Incorporated by reference to the attachments to the Company's 1998 Proxy
Statement.
14
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
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.
WALKER INTERACTIVE SYSTEMS, INC.
(REGISTRANT)
Date: May 14, 1998 By: /s/ BARBARA M. HUBBARD
------------ ----------------------
Barbara M. Hubbard
Vice President and
Corporate Controller
(Chief Accounting Officer)
15
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
27.1 Financial Data Schedule for quarter ended March 31, 1998
(electronic filing only)
27.2 Amended and restated 1996 Financial Data Schedule including
columns for year ended December 31, 1996 and quarters ended
June 30, 1996 and September 30, 1996 (electronic filing only)
27.3 Amended and restated 1997 Financial Data Schedule
including columns for year ended December 31, 1997
and quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997 (electronic filing only)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Walker
Interactive Systems, Inc. quarterly report on Form 10-Q for the period ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,818
<SECURITIES> 16,276
<RECEIVABLES> 26,333
<ALLOWANCES> 1,133
<INVENTORY> 0
<CURRENT-ASSETS> 43,040
<PP&E> 25,969
<DEPRECIATION> 21,546
<TOTAL-ASSETS> 87,956
<CURRENT-LIABILITIES> 30,438
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 52,193
<TOTAL-LIABILITY-AND-EQUITY> 87,956
<SALES> 23,662
<TOTAL-REVENUES> 23,662
<CGS> 10,769
<TOTAL-COSTS> 22,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,638
<INCOME-TAX> 589
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,049
<EPS-PRIMARY> 0.08<F1>
<EPS-DILUTED> 0.07
<FN>
<F1> BASIC EARNINGS PER SHARE ARE REPORTED UNDER EDGAR TAG "EPS-PRIMARY".
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Walker
Interactive Systems, Inc. annual report on Form 10-K for the year ended December
31, 1996 and the quarterly reports on Form 10-Q for the periods ended June 30,
1996 and September 30, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 13,475 15,025 13,675
<SECURITIES> 24,695 24,117 22,981
<RECEIVABLES> 13,829 12,855 15,177
<ALLOWANCES> 1,584 1,488 1,604
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 44,345 46,101 44,325
<PP&E> 21,673 20,017 20,489
<DEPRECIATION> 17,341 15,846 16,471
<TOTAL-ASSETS> 82,319 81,056 81,329
<CURRENT-LIABILITIES> 28,007 27,097 26,968
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 13 13 13
<OTHER-SE> 46,759 46,335 46,535
<TOTAL-LIABILITY-AND-EQUITY> 82,319 81,056 81,329
<SALES> 62,834 29,708 45,677
<TOTAL-REVENUES> 62,834 29,708 45,677
<CGS> 28,732 13,258 20,580
<TOTAL-COSTS> 64,818 32,744 48,252
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 86 (2,054) (1,091)
<INCOME-TAX> 202 103 152
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (116) (2,157) (1,243)
<EPS-PRIMARY> (0.01)<F1> (0.16)<F1> (0.09)<F1>
<EPS-DILUTED> (0.01) (0.16) (0.09)
<FN>
<F1> BASIC EARNINGS PER SHARE ARE REPORTED UNDER EDGAR TAG "EPS-PRIMARY".
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Walker
Interactive Systems, Inc. annual report on Form 10-K for the year ended December
31, 1997 and the quarterly reports on form 10-Q for the periods ended March 31,
1997, June 30, 1997 and September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 7,646 6,504 9,868 11,755
<SECURITIES> 20,044 26,739 24,628 19,286
<RECEIVABLES> 24,483 16,207 16,086 17,555
<ALLOWANCES> 1,376 1,755 1,401 1,401
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 46,447 41,183 43,312 42,852
<PP&E> 25,590 21,311 22,547 22,274
<DEPRECIATION> 20,991 17,187 18,473 18,473
<TOTAL-ASSETS> 91,334 80,133 82,387 80,858
<CURRENT-LIABILITIES> 34,849 25,641 26,534 26,028
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 14 14 14 14
<OTHER-SE> 51,675 47,213 48,664 48,639
<TOTAL-LIABILITY-AND-EQUITY> 91,334 80,133 82,387 80,858
<SALES> 71,409 17,073 33,334 49,601
<TOTAL-REVENUES> 71,409 17,073 33,334 49,601
<CGS> 33,335 7,764 15,517 24,056
<TOTAL-COSTS> 75,428 16,539 32,736 49,314
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (2,179) 1,038 1,592 1,732
<INCOME-TAX> 1,298 362 557 605
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (3,477) 676 1,035 1,127
<EPS-PRIMARY> (0.26)<F1> 0.05<F1> 0.08<F1> 0.09<F1>
<EPS-DILUTED> (0.26) 0.05 0.07 0.08
<FN>
<F1> BASIC EARNINGS PER SHARE ARE REPORTED UNDER EDGAR TAG "EPS-PRIMARY".
</FN>
</TABLE>
