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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998
COMMISSION FILE NUMBER 0-21176
WALL DATA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
WASHINGTON 91-1189299
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION) 98034-6931
11332 N.E. 122ND WAY, KIRKLAND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(425) 814-9255
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class
Common Stock
Preferred Stock Purchase Rights
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and nonvoting stock held by
nonaffiliates of the registrant at July 1, 1998 was approximately $134,677,216.
The number of shares of the registrant's Common Stock outstanding at July
1, 1998 was 9,906,325.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
When used in this discussion, the words "believes," "anticipates" and
"intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"-- Important Factors Regarding Forward-Looking Statements." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are urged, however, to review the
factors set forth in reports the Company files from time to time with the
Securities and Exchange Commission.
ITEM 1. BUSINESS
OVERVIEW
Wall Data Incorporated ("Wall Data" or the "Company") develops, markets and
supports enterprise and Internet software products and associated application
tools and provides comprehensive support and services for its products. The
Company's products deliver access to corporate computing systems, including
various host, database, client/server and public information, to users in a
browser or Windows-based environment. Using Wall Data solutions, organizations
can extend their enterprise information systems to allow internal users, remote
users, third-party partners and customers to access information and applications
over corporate intranets, extranets, the Internet and Local Area Networks/Wide
Area Networks ("LAN/WAN").
To reach its global customer base, Wall Data delivers products and services
through multiple distribution channels. The Company uses a combination of direct
sales, telesales, resellers, distributors, original equipment manufacturer
("OEM") arrangements and the Internet.
Wall Data was incorporated in 1982 and has a 15-year history of extending
corporate computing systems to users on new platforms and providing outstanding
business solutions to customers worldwide. With the introduction of Microsoft
Corporation ("Microsoft") Windows in 1989, the Company focused its strategy and
resources on the emerging market for Windows-based personal computer
("PC")-to-host connectivity software and launched the RUMBA(R) brand of software
products. To allow customers to extend enterprise information and applications
to the Internet, the Company has recently launched its Cyberprise(TM) product
line and is increasingly focused on emerging markets for Internet-based
enterprise application solutions.
CHANGE IN FISCAL YEAR END
On April 22, 1998, the Company's Board of Directors approved a change in
the Company's fiscal year from a calendar year to a year beginning May 1 and
ending April 30. The four-month transition period from January 1, 1998 through
April 30, 1998 (the "1998 Four Month Period") precedes the start of the new
fiscal year and is represented in this Form 10-K Transition Report. The prior
periods ended December 31, 1997, 1996 and 1995 will be referred to herein as
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. The period ending April
30, 1999 will be referred to as Fiscal 1999. The change in the Company's fiscal
year end was made to improve the Company's ability to manage operations in light
of seasonal customer buying patterns.
RECENT DEVELOPMENTS
NEW CORPORATE DIRECTION
In January 1998, Wall Data publicly announced its Cyberprise strategy.
Cyberprise products and services enable customers to use existing enterprise
information systems in conjunction with the Internet. By migrating existing
systems, customers gain competitive advantages by delivering Internet-based
solutions more rapidly and at a lower cost than if they created new
applications. New products and services involve a significant amount of risk.
See "-- Important Factors Regarding Forward-Looking Statements -- New Markets;
Longer Sales Cycle."
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PRODUCTS
The Company's software products provide computer users in business
organizations with easy access to and use of computer applications and data
residing on multiple host mainframes, minicomputers and servers in
enterprise-wide information system networks and public information networks.
Using Wall Data solutions, organizations can extend their enterprise information
to allow their internal users, remote users, third-party partners and customers
to access information and applications over corporate LAN/WAN systems,
intranets, extranets and the Internet.
CYBERPRISE(TM) PRODUCTS
In connection with the launch of the Cyberprise strategy, Wall Data
announced the rollout of a complete line of Cyberprise products in 1998. The
Company has completed and released products in the following categories:
Cyberprise Server products, Cyberprise Host products, Cyberprise Tool products,
Cyberprise Data products and Cyberprise Services. The Company plans to continue
to release additional Cyberprise products during 1998.
Cyberprise Server Products. Cyberprise Server products are the foundation
of the Cyberprise solution. The Cyberprise Server software product line is a Web
application server platform. These products allow users to access existing
enterprise computing applications and information, as well as public
information, through an easy-to-use, channel interface. This channel interface
can be easily customized and accessed through a browser. Cyberprise Server
software products include features such as Web-based administration and
management, centralized system controls and domain security.
Cyberprise Host Products. Cyberprise Host products provide direct,
persistent, browser-based access to mission-critical information and
applications on host systems. The products enable intranet users to interact
with real-time information in a secure, highly scaleable environment and offer
the same mission-critical reliability found in Wall Data's RUMBA client
products.
Cyberprise Tool Products. Cyberprise Tool products enable internal
developers, consultants, value added resellers ("VARs") and business users to
extend the basic capabilities of Cyberprise products by creating customized
solutions. Cyberprise Tool products allow developers to customize the user
information presentation, migrate client/server applications to the Web and
build Web applications that connect to host transaction applications.
Cyberprise Data Products. Cyberprise Data products publish database queries
and reports, database applications, spreadsheets, word processing documents and
other data sources custom applications to anyone with a Web browser. Cyberprise
Data products also publish custom applications developed with Cyberprise Tool
products.
Cyberprise Channel Products. Cyberprise Channel products deliver
business-specific corporate and public content in an organized,
channel-segregated fashion to employees, partners and customers through a
browser.
Cyberprise Services. Cyberprise Services include service, support,
consulting and specialized programs to facilitate moving corporate information
and applications, including mission-critical systems to the Cyberprise
environment.
HOST CONNECTIVITY SOFTWARE PRODUCTS
The RUMBA family of PC-based host connectivity software products operates
in the Microsoft Windows, Windows 95 and Windows NT environments. RUMBA products
support the exchange of information between PC applications and host
applications operating on IBM and IBM-compatible mainframe computers, IBM AS/400
midrange computers, Digital Equipment Corporation ("Digital") VAX computers,
UNIX computers, Hewlett-Packard Company ("HP") 3000 and 9000 computers and a
variety of client-server and desktop databases. RUMBA products implement
PC-to-enterprise connections using a wide array of network and communication
configurations over a wide range of communication hardware, multiple
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LAN operating systems and a broad range of communications servers and gateways.
RUMBA software is designed for enterprise-wide implementation while leveraging
customers' prior investments in host computers, applications, PCs, intranets,
the Internet and a wide range of private networks.
The Company has derived a substantial majority of its net revenues to date
from sales of its RUMBA client software products, which accounted for 76%, 81%,
86% and 88% of net revenues in the 1998 Four Month Period, Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively. The RUMBA product line and related
enhancements are expected to continue to account for a majority of the Company's
net revenues in Fiscal 1999. Some of the features of the Company's Cyberprise
products deliver, through a Web browser, similar access to enterprise
information and applications to the access delivered by RUMBA client software
products. As a result, the acceptance of the Company's Cyberprise products will
have a negative impact on RUMBA sales. A decline in demand for RUMBA products as
a result of competition, technological changes or otherwise could have a
material adverse effect on the Company's results of operations. See
"-- Important Factors Regarding Forward-Looking Statements -- Dependence on a
Single Product Line."
The Company's RUMBA software products fall into two categories: RUMBA
client software products and RUMBA tool products. In 1989, Wall Data introduced
RUMBA for the Mainframe, Windows Version, which allowed PC users to access and
use host information and applications on IBM and IBM-compatible mainframes.
Since then, the Company has introduced new client software products and features
that allow PC users to access and use host applications and data in various
enterprise-wide networks and public information networks. RUMBA tool products
allow advanced users, developers and administrators to create custom
applications to suit user needs.
RUMBA Client Software Products. RUMBA client software products allow
business users running the Microsoft Windows, Windows 95 and Windows NT
operating systems easy access to character-based and client/server applications
and data residing on IBM and IBM-compatible mainframe computers, IBM AS/400
midrange computers, Digital VAX computers, UNIX computers, HP 3000 and 9000
computers and a variety of client-server and desktop databases. These products
implement PC-to-host connections using a wide array of network and communication
system configurations and are designed to be implemented enterprise-wide. The
modular architecture of RUMBA products has allowed the Company to deliver
individual products to specific markets in accordance with the demands of that
market.
Generally, these products are licensed on a per-user basis and may be
available pursuant to enterprise-wide or site licenses.
RUMBA OFFICE products offer a suite of solutions for users needing to
access enterprise server or host systems by providing access to a vast range of
character-based and client/server applications on business-critical systems such
as IBM mainframe, IBM AS/400, Digital VAX, UNIX and HP systems. The modular
architecture of RUMBA OFFICE integrates file and print management, database
access, mail and messaging, and Internet features into a single universal
client. In addition, features such as QuickAssist, which eliminates repetitive
keystrokes, and Hotspots and QuickStep, which allow host applications to be
operated by a mouse instead of the keyboard, help to provide customers with
productivity-enhanced business tools.
RUMBA Tool Products. The Company's RUMBA software tools operate on client
PCs and network servers to enable software developers and advanced users to
customize or develop PC applications making use of host information. By
supplying enterprise information access technology and implementing industry-
standard architectures for custom solution development, including Microsoft's
ActiveX component architecture, RUMBA tool products give developers the ability
to produce easily custom software solutions that meet specific user and
enterprise needs.
RUMBA tools deliver a range of capabilities for enhancing the presentation
of enterprise information on PCs and are designed for users and developers of
varying proficiency: (i) advanced Windows application users can use RUMBA
application tools to present enterprise information in the formats of familiar
Windows applications, such as Excel or Lotus 1-2-3 spreadsheets; (ii) advanced
users or Windows developers can use RUMBA application tools to customize or
develop specific Windows applications designed to incorporate enterprise
information; and (iii) more sophisticated developers can use RUMBA application
tools in
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connection with industry-standard application programming interfaces and
computer-aided software engineering tools to develop sophisticated PC
applications and transaction programs interfacing with host applications.
Other Software Products. The Company also offers ARPEGGIO(R) and SALSA(R)
software products. ARPEGGIO products allow organizations to publish database
information across a variety of platforms. SALSA products allow advanced
computer users to create their own customized client/server applications.
SERVICE
Wall Data is committed to responsive, high-quality product support and
timely upgrades for the Company's software products. These services are marketed
under the ONESTEP(R) brand. This flexible annual program provides responsive,
priority product support at predictable costs, augments customers' support staff
and maximizes user productivity. Customers can select the support options that
best fit the size, structure and service requirements of their organization.
Separate service offerings are available for various Wall Data products.
Individual program options include: priority telephone access to Wall Data
senior support engineers; electronic services on the Web that provide on-line
case entry, privileged access to Wall Data's online support information
database, and the ability to download current product updates and fixes; and
upgrade subscription, which keeps the customer's software current with the
latest upgrades and updates.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products primarily to multinational and national
business organizations with installed enterprise computer systems. These
organizations vary in size, complexity and purchasing-decision structures. To
address this range of sales and marketing opportunities, Wall Data uses a
combination of direct sales, telesales, resellers, distributors and OEMs.
The direct sales force focuses on large enterprises and markets to the
executive, management information systems, department/division and user levels
within these organizations. The Company also sells its products through indirect
channels, primarily consisting of distributors and national and regional
resellers addressing the business market. The Company supports its resellers and
distributors with experienced sales, marketing, systems engineering and
technical support staff. In addition, the Company relies on resellers and
distributors to market and support its products in certain geographic markets.
There can be no assurance, however, that such resellers and distributors will be
able to market the Company's products effectively or be qualified to provide
timely and cost-effective customer support or service. See "-- Important Factors
Regarding Forward-Looking Statements -- Reliance on Resellers and Distributors."
Wall Data sells its product lines through national distributors such as
Ingram Micro Inc., Merisel, Inc. and Tech Data Corporation, which may in turn
sell to other resellers, VARs and dealers. The Company's resellers include
Corporate Software and Technology, Entex Information Systems, Shared Medical
Systems, Softmart, Inc. and Software Spectrum, Inc. The Company's agreements
with resellers and distributors typically are not exclusive and may be
terminated by either party without cause. Many of the Company's resellers and
distributors carry competing product lines. The Company's distributors generally
are permitted inventory exchange or rotation rights. There can be no assurance
that any resellers or distributors will continue to represent the Company's
products or that additional resellers or distributors will agree, or continue,
to represent the Company's products.
Wall Data has entered into OEM agreements with certain companies, including
IBM, pursuant to which these companies market derivatives of RUMBA products
under various names. The OEM agreements generally provide nonexclusive licenses
of specific versions of software and allow the OEMs to combine the specific
version of software with their product-specific software and to distribute and
market the derivative of the software product under their own names. The Company
generally receives a license fee or royalty based on the number of copies of
products or derivatives of the software distributed to end users or used
internally. The Company's OEM agreement with IBM expires in 2001 and is
terminable by IBM for its convenience upon 90 days' notice. The Company intends
to pursue OEM agreements with other companies. Sales pursuant to OEM agreements
accounted for approximately 4% of the Company's net revenues in the 1998 Four
Month
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Period. There can be no assurance, however, that OEMs will be able to market the
Company's products effectively or that OEM revenues will continue at such
levels.
The Company's marketing programs are designed to create user awareness and
generate sales opportunities for its direct sales force and telesales, as well
as its resellers, distributors and OEMs. These programs include press releases,
press and industry analyst relations, advertising in trade and business
publications, direct mail advertising, participation in regional conferences,
seminars, trade shows and industry conferences and provision of ongoing customer
communication programs. In addition, the Company provides demonstration disks
and trial versions of the software to promote the products and provide product
information. Additional sales support is provided to resellers through product
literature and promotional programs. The Company also assists the marketing
efforts of certain of its resellers and distributors by providing funds for
promotional and educational purposes.
Approximately 35%, 30%, 29% and 28% of the Company's net revenues in the
1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively,
were attributable to sales made to customers outside North America. The Company
expects that international sales will continue to be a significant portion of
its business. The Company's international sales efforts are focused primarily on
large business organizations with computing resources located throughout the
world. The Company has sales and/or marketing staff located in Argentina,
Australia, Brazil, Canada, England, France, Germany, Ireland, Italy, Japan,
Mexico, Singapore and Spain. Currently, the Company's sales in Europe are made
primarily through local resellers and distributors. Agreements with local
resellers and distributors generally provide the resellers nonexclusive rights
to sell the Company's products in a specified geographic area. Resellers
typically are required to pay license fees for all products shipped to them and
to market the products. Generally, the agreement may be terminated by the
Company if the reseller breaches the agreement or fails to reach agreed-upon
sales quotas and, after one year, may be terminated by either party with three
months' notice. See Note 14 of Notes to Consolidated Financial Statements for
more information regarding foreign operations and export sales.
During the 1998 Four Month Period, the Company acquired all the outstanding
shares of First Service Computer Dienstleistungs-GmbH ("First Service") of
Hattingen, Germany and related companies. See Note 8 of Notes to Consolidated
Financial Statements.
The Company faces certain risks inherent in international business
operations, including fluctuations in foreign currency exchange rates, the
instability of certain overseas economic environments, longer accounts
receivable payment cycles, difficulties in staffing and managing international
operations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, potentially adverse tax consequences, repatriation of earnings
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the Company's results
of operations. See "-- Important Factors Regarding Forward-Looking
Statements -- International Operations."
PRODUCT DEVELOPMENT
The Company intends to enhance and expand its product lines in connection
with evolving customer requirements, industry standards and technologies. The
Company believes its future success will depend on its ability to do so and any
failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delay in product
development or introduction, could have a material adverse effect on the
Company's results of operations. Historically, the Company generally has
developed new products internally but, from time to time, has acquired or
licensed technologies from third parties. Although there can be no guarantee
that product development efforts will result in commercially viable products,
Wall Data intends to continue to make substantial investments in product
development. See "-- Important Factors Regarding Forward-Looking
Statements -- New Products; Technological Change; Uncertain Acceptance of the
Company's New Products." Wall Data's product development expenses totaled $6.2
million, $19.7 million, $22.9 million and $19.8 million in the 1998 Four Month
Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
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COMPETITION
The enterprise software market is intensely competitive and subject to
rapidly changing technology and standards incorporated into PCs, networks, host
computers and enterprise servers.
The market for the Company's products is also characterized by significant
price competition, and the Company expects it will face increasing pricing
pressures. There can be no assurance that the Company will be able to maintain
its historic prices, and an inability to do so could materially adversely affect
the Company's results of operations.
The principal competitive factors affecting the market for the Company's
products include product functionality, ease of use, price, quality, performance
and reliability; product localization for specific geographic markets; quality
of customer service and support; product availability; vendor credibility; and
ability to keep pace with technological change. There can be no assurance that
the Company will continue to compete successfully in the face of increasing
competition from new products and enhancements introduced by existing
competitors and new companies entering the market.
The Company competes with providers of PC-to-host connectivity products,
including, without limitation, IBM, Attachmate Corporation and WRQ, Inc. In
addition, the Company competes with providers of software products for TCP/IP
networks such as Novell, Inc. ("Novell"), FTP Software, Inc., NetManage, Inc.
and Hummingbird Communications, Limited. With the introduction of Internet-based
solutions, the Company also may compete with providers of software products for
Internet and corporate intranet information publishing products such as IBM and
Netscape Communications Corp.
In general, customers and prospective customers of the Company's products
also have competitors' connectivity products installed, and the Company competes
with these vendors for customer orders. The Company derives a substantial
portion of its net revenues from sales of its RUMBA products for IBM and
IBM-compatible mainframe computers and IBM AS/400 midrange computers. IBM sells
products that compete with those of the Company and can exercise significant
customer influence and technology control in the IBM PC-to-host connectivity
market. The Company also competes with providers of LAN systems and software
products that can provide PC-to-host connectivity. Microsoft currently
incorporates limited PC-to-host connectivity technology in Windows. The Company
expects that Microsoft will continue to include and expand this capability in
its future products and product enhancements. The introduction by Microsoft of a
client software connectivity product or formation of a significant relationship
with a competitor of the Company could materially adversely affect sales of the
Company's products. Many of the Company's competitors have substantially greater
financial, technical, sales and marketing and other resources, as well as
greater name recognition and a larger installed base, than the Company. The
Company believes that competition will increase in the future.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a combination
of patent, trademark and copyright laws, trade secrets, confidentiality
procedures and contractual provisions, including employee and third-party
nondisclosure and proprietary rights agreements, to protect its proprietary
rights. The Company has registered and filed applications to register its
trademarks "WALL DATA," "RUMBA," "ONESTEP," "SALSA" and "ARPEGGIO" and their
associated logos in the United States and other countries and has pending
trademark applications in the United States and other countries for "Cyberprise"
and "The Power of Cyberprise." The laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, it expects software piracy to be a persistent problem.
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The Company typically distributes its products to users under nonexclusive,
nontransferable licenses, which restrict use of the product solely for the
customer's internal operations. In licensing some of its products, the Company
relies on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable. In other circumstances, the Company makes
available enterprise-wide licenses, which permit use and copying of the product
for internal purposes only and typically are for limited terms. In addition, the
Company has entered into certain agreements pursuant to which it has licensed
object code for specific products and, in certain cases, has entered into source
code escrow agreements. Pursuant to these escrow agreements, the Company
deposits the source code for the licensed product and related materials with an
escrow agent or trustee who must maintain the confidentiality of the source code
and may release the source code and materials to the licensee only in the event
of insolvency or dissolution of, or reasonably certain nonperformance by, the
Company. Upon such release, the licensee may use the released source code and
materials only in accordance with the restrictions under the terms of its
license or OEM agreement with the Company.
No material claims have been made against the Company for infringement of
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against the Company in the
future.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will become increasingly subject to infringement claims. The
cost of responding to any such assertion may be material, whether or not the
assertion is valid. See "-- Important Factors Regarding Forward-Looking
Statements -- Intellectual Property and Proprietary Rights."
SEASONALITY
The Company's business is seasonal. A substantial portion of the Company's
annual net revenues and operating income typically have occurred in the fourth
calendar quarter, and in each of the last five years, the first calendar quarter
revenues have been down sequentially compared with revenues for the immediately
preceding fourth calendar quarter. In addition, the third calendar quarter of
each year typically is characterized by more difficult sales cycles,
particularly in Europe, as customers tend to procure more slowly during the
summer months. The change in the Company's fiscal year end was made to improve
the Company's ability to manage operations in light of seasonal buying patterns.
There can be no assurance, however, that the change in the fiscal year end will
improve the Company's results of operations.
EMPLOYEES
As of April 30, 1998, the Company's headcount totaled 813 persons,
including employees and contractors. The Company believes that its future
success continues to depend on its ability to attract and retain skilled
technical, marketing and management personnel. Competition for such personnel in
the computer industry is intense. The Company believes its relations with its
employees are good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following important factors, among others, could cause Wall Data's
actual results to differ materially from those expressed in Wall Data's
forward-looking statements in this Report and presented elsewhere by management
from time to time.
New Products; Technological Change; Uncertain Acceptance of the Company's
New Products. The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in customer needs and
frequent new product introductions. The Company's future success will depend on
its ability to enhance its current products, to develop new products on a timely
and cost-effective basis that meet changing customer needs and to respond to
emerging industry standards and other technological changes. In particular, the
Company must be able to modify its products to maintain compatibility with IBM
and IBM-compatible mainframe computers, IBM AS/400 midrange computers, Digital
VAX computers, Novell LAN operating systems, Microsoft Windows, and
industry-standard PCs,
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hosts and communications interfaces. In addition, the Company must adapt its
current products, and develop new ones, to address the rapidly evolving Internet
and corporate intranet market. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences or industry
standards, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's results of operations.
There can be no assurance that the Company will be successful in developing new
products or enhancing its existing products on a timely basis, or that such new
products or product enhancements will achieve market acceptance. See "-- Product
Development" and "-- Competition."
Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite significant testing by the
Company and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in loss of or
delay in market acceptance. Furthermore, from time to time the Company and
others may announce new products, capabilities or technologies that have the
potential to replace or shorten the life cycles of the Company's existing
products. There can be no assurance that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products or cause distributors to return products to the Company. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on the Company's results of operations.
New Markets; Longer Sales Cycle. The Company's initial software products
provided client-based software that operated in a LAN/WAN environment. The
Company has now announced products that allow organizations to extend their
enterprise applications and information beyond the LAN/WAN environment to their
corporate intranet, extranets and the Internet. The Company's new Cyberprise
strategy and products are focused on enabling organizations to migrate their
existing enterprise information to Internet-based technologies. As the Company
increases its focus on providing leading Internet-based enterprise solutions for
its customers, the Company's business is expected to be characterized by longer
sales cycles and more complex use of its software. These sales generally include
increased involvement by application developers, integrators or other
consultants and involve a significant commitment of capital by prospective
customers, with attendant delays. The Company has relatively limited experience
with sales of Internet-based server software products or licensing models used
in that environment. There can be no assurance that the Company will be able to
successfully manage its new product line, and the failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.
Variability in Quarterly Performance. The Company's results of operations
have historically varied substantially from quarter to quarter, and the Company
expects that they will continue to do so. The timing and amount of the Company's
quarterly net revenues depend on a number of factors, such as the size and
timing of customer orders or license agreements, the timing of the introduction
and customer acceptance of new products or product enhancements by the Company
or its competitors, changes in computer operating systems introduced by
Microsoft, IBM or other companies, changes in pricing policies by the Company or
its competitors, product returns or rotations, fluctuations in foreign exchange
rates, customers postponing purchases of software products while expending funds
to be year 2000 compliant and changes in general economic conditions. Products
generally are shipped as orders are received. Accordingly, the Company
historically has operated with little or no backlog. In addition, the Company's
operating expenses are relatively fixed in the short term, and a significant
portion of the revenues for each quarter typically is received in the months of
March, June, September and December due to customer buying patterns. As a
result, variations in timing of revenues can cause significant variations in
quarterly results of operations. The Company does not generally take measures
that are specifically designed to limit fluctuations in the Company's quarterly
results of operations. There can be no assurance that the Company will be
profitable on a quarter-to-quarter basis in the future.
The growth in net revenues and operating income experienced by the Company
in past years is not necessarily indicative of future results. In view of the
significant growth of the Company's operations in past years, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied on as an indication of future
performance.
8
<PAGE> 10
The Company's business is seasonal. A substantial portion of the Company's
annual net revenues and operating income have typically occurred in the fourth
calendar quarter, and in each of the last five years, the first calendar quarter
revenues have been down sequentially compared with revenues for the immediately
preceding fourth quarter. In addition, the third calendar quarter of each year
typically is characterized by more difficult sales cycles, particularly in
Europe, as customers tend to procure more slowly in the summer months. The
change in the Company's fiscal year end was made to improve the Company's
ability to manage operations in light of seasonal customer buying patterns.
There can be no assurance, however, that the change in the fiscal year end will
improve the Company's results of operations.
Competition. The "enterprise software market" is intensely competitive and
subject to rapidly changing technology and evolving standards incorporated into
PCs, networks, host computers and enterprise servers. In general, customers and
prospective customers of the Company's products also have competitors'
connectivity products installed, and the Company competes with these vendors for
customer orders. The introduction by Microsoft of a client software connectivity
product or formation of a significant relationship with a competitor of the
Company could adversely affect sales of the Company's products. Also, the
introduction of Internet and corporate intranet technology by the Company's
traditional competitors or by any other company in the Internet/intranet
technology market could reduce the demand for the Company's products. Many of
the Company's competitors have substantially greater financial, technical, sales
and marketing and other resources, as well as greater name recognition and a
larger installed base, than the Company. The Company believes that competition
will increase in the future. The market for the Company's products is also
characterized by significant price competition, and the Company expects that it
will face increasing price pressures. There can be no assurance that the Company
will be able to maintain its historic prices, and an inability to do so could
materially adversely affect the Company's results of operations. There can be no
assurance that the Company will continue to compete successfully in the face of
increasing competition from new products and enhancements introduced by existing
competitors and new companies entering the market.
Dependence on a Single Product Line. The Company has derived a substantial
portion of its net revenues to date from sales of its RUMBA client software
connectivity products, and the RUMBA product line and related enhancements are
expected to continue to account for a substantial portion of the Company's net
revenues for the foreseeable future. Some of the features of the Company's
Cyberprise products deliver, through a Web browser, similar access to enterprise
information and applications to the access delivered by RUMBA client software
products. As a result, acceptance of the Company's Cyberprise products will have
a negative impact on RUMBA sales. A decline in demand for RUMBA products as a
result of competition, technological change or otherwise would have a material
adverse effect on the Company's results of operations. See "-- Products" and
"-- Competition."
Dependence on Host Computers. The Company's products are designed for use
with IBM and IBM-compatible mainframe computers, IBM AS/400 midrange computers
and Digital VAX computers. If business organizations were to reduce their use of
these host computers, the market for the Company's products would be materially
adversely affected. In addition, because the Company's products operate in
conjunction with IBM and Digital system software, the Company must adapt its
products to technological changes by IBM and Digital. Any failure by the Company
to do so in a timely manner would materially adversely affect the Company's
results of operations. See "-- Products" and "-- Competition."
Dependence on Microsoft Windows. Substantially all the Company's net
revenues are derived from the sales of products designed to achieve host
connectivity within a Microsoft Windows environment and are marketed primarily
to Windows users. As a result, sales of the Company's products could be
materially adversely affected by market developments adverse to Windows. In
addition, the Company's strategy of developing products using the Windows
environment is substantially dependent on its ability to gain access to, and to
develop expertise in, current and future Windows developments by Microsoft in a
timely fashion. See "-- Products" and "-- Competition."
Dependence on the Internet. As the Company focuses on delivering
Internet-based solutions for its customers' enterprise application needs, sales
of the Company's products will increasingly depend on adequate access to the
Internet. The Internet also may develop more slowly than expected for a variety
of reasons, such
9
<PAGE> 11
as inadequate development of the necessary infrastructure or complementary
products. There can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by potential growth. If
the necessary infrastructure or complementary products are not developed, or if
the Internet develops more slowly than expected, the Company's business,
operating results and financial condition will be materially adversely affected.
Reliance on Resellers and Distributors. Although the Company intends to
continue to expand its own sales and marketing staff to sell products directly
to its customers, in the future the Company expects to continue to rely on
resellers and distributors for sales of its products. There can be no assurance,
however, that such resellers and distributors will be able to market the
Company's products effectively. The Company's agreements with resellers and
distributors are not exclusive and may be terminated by either party without
cause. Many of the Company's resellers and distributors carry competing product
lines. There can be no assurance that any resellers or distributors will
continue to represent the Company's products. In addition, the Company will be
increasingly dependent on the continued viability and financial stability of
resellers and distributors, which, in turn, are substantially dependent on the
PC industry. The inability to recruit, or the loss of, important resellers or
distributors could materially adversely affect the Company's results of
operations. See "-- Sales, Marketing and Distribution."
The Company also expects to rely increasingly on resellers and distributors
to support its products. There can be no assurance, however, that the Company
will be able to attract resellers and distributors qualified to provide timely
and cost-effective customer support or service. Any deficiencies in the service
or support provided by such entities could have a material adverse effect on the
Company's results of operations. See "-- Sales, Marketing and Distribution."
International Operations. The Company expects that international sales will
continue to account for a significant portion of its business. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products less competitive in those markets in which the Company's
products are sold. The Company does not currently engage in foreign currency
hedging transactions, although it may implement such transactions in the future.
Operating expenses relating to foreign offices also are subject to the effects
of fluctuations of foreign currency exchange rates. The Company faces certain
risks inherent in international business operations, including fluctuations in
foreign currency exchange rates, the instability of certain overseas economic
environments, longer accounts receivable payment cycles, difficulties in
staffing and managing international operations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, potentially adverse tax
consequences, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's results of operations.
Risks Related to the Year 2000. The Company has developed plans to address
issues related to the impact on its products and systems of the year 2000.
Products have been modified, financial and operational systems have been
assessed and plans have been developed to address modification requirements. If
the Company or its vendors or distributors are unable to resolve such issues in
a timely manner or if the Company's products are used in conjunction with the
software of other suppliers that have not adequately addressed year 2000 issues,
it could result in a material financial risk. Accordingly, the Company plans to
continue to devote the necessary resources to resolve significant year 2000
issues in a timely manner.
Dependence on Key Personnel; Management of Growth. The Company's success
depends to a significant extent on a number of senior management personnel,
including the President and Chief Executive Officer, John R. Wall, and the Chief
Operating Officer, Kevin B. Vitale. The loss of the services of these key
persons would have a material adverse effect on the Company. The Company has no
employment agreement with Mr. Wall or Mr. Vitale. The Company's success also
depends in part on its ability to continue to attract and retain skilled
technical, marketing and management personnel. Competition for such personnel in
the computer industry is intense. There can be no assurance that the Company
will be successful in attracting and retaining the personnel it requires to
develop new and enhanced products and to conduct its operations successfully.
The ability of the Company to sustain growth will depend in part on the ability
of its officers and key personnel to manage growth successfully through
implementation of appropriate management systems
10
<PAGE> 12
and controls. The Company's results of operations could be materially adversely
affected if the Company were unable to attract, hire, assimilate, train and
manage these personnel, or if revenues failed to increase at a rate sufficient
to absorb the resulting increase in expenses. See "-- Sales, Marketing and
Distribution" and "-- Employees."
Intellectual Property and Proprietary Rights. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, it expects software piracy to be a
persistent problem. In licensing some of its products, the Company relies on
"shrink wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable. In addition, the laws of some foreign countries may 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 these protections will be adequate or
that the Company's competitors will not independently develop similar
technology. There can be no assurance that third parties will not assert
infringement claims against the Company in the future. As the number of software
products in the industry increases and the functionality of these products
further overlaps, the Company believes that software programs will become
increasingly subject to infringement claims. The cost of responding to any such
assertion may be material, whether or not the assertion is valid. See
"-- Proprietary Rights."
ITEM 2. PROPERTIES
The Company's headquarters is located in Kirkland, Washington, where it
leases approximately 65,000 square feet for its principal executive,
administrative, sales and marketing, customer support and service and product
development activities. The Company also leases approximately 12,500 square feet
of office space in London, England and leases space for its other national and
international offices.
ITEM 3. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings or claims, either asserted
or unasserted, that arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, management does not believe
that any pending legal matters will have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the period covered by this report.
In accordance with the Company's Bylaws, a shareholder proposing to
transact business at the Company's annual meeting must provide notice of such
proposal, in the manner required by the Company's Bylaws, no later than 60 days
prior to the date of such annual meeting (or, if the Company provides less than
60 days' notice of such meeting, no later than 10 days after the date of the
Company's notice). For shareholder proposals to be considered for inclusion in
the Company's proxy statement and proxy relating to its 1999 Annual Meeting of
Shareholders, such proposals must be received by the Secretary of the Company by
April 16, 1999. In addition, if the Company receives notice of a shareholder
proposal after July 1, 1999, the persons named as proxies in such proxy
statement and proxy will have discretionary authority to vote on such
shareholder proposal.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (symbol
"WALL"). The number of shareholders of record of the Company's Common Stock at
July 1, 1998 was 301.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in the expansion and operations of its business and does not anticipate
paying cash dividends in the foreseeable future.
High and low sales prices for the Company's Common Stock for each quarter
in 1996 and 1997 and for the 1998 Four Month Period are as follows. Such prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
STOCK PRICE
----------------
YEAR HIGH LOW
---- ------ ------
<S> <C> <C>
Fiscal 1996
First Quarter............................................ $17.25 $13.00
Second Quarter........................................... 23.75 14.75
Third Quarter............................................ 27.50 16.25
Fourth Quarter........................................... 24.75 12.25
Fiscal 1997
First Quarter............................................ 19.63 14.50
Second Quarter........................................... 29.13 15.13
Third Quarter............................................ 28.25 17.00
Fourth Quarter........................................... 20.50 11.31
1998 Four Month Period..................................... 18.25 13.50
</TABLE>
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
WALL DATA INCORPORATED
SELECTED FIVE-YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ----------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net revenues........................ $ 39,106 $ 46,386 $140,851 $139,364 $110,741 $101,240 $64,641
Gross margin........................ 29,673 37,056 113,556 108,890 86,522 85,754 55,097
Operating expenses.................. 35,449 33,364 113,865 103,829 91,737 64,726 40,613
Income (loss) from operations....... (5,776) 3,692 (309) 5,061 (5,215) 21,028 14,484
Net income (loss)................... (4,648) 2,673 2,251 4,193 7,251 14,184 9,545
Earnings (loss) per
share -- assuming dilution........ (0.47) 0.27 0.23 0.43 0.72 1.40 1.00
Pro forma net income (loss)*........ (4,648) 2,673 9,581 6,145 2,766 16,664 11,529
Pro forma earnings (loss) per
share -- assuming dilution........ (0.47) 0.27 0.97 0.63 0.28 1.65 1.21
Average shares
outstanding -- assuming
dilution.......................... 9,805 9,780 9,886 9,721 10,027 10,124 9,520
BALANCE SHEET
Cash and cash equivalents........... $ 57,490 $ 82,384 $ 70,814 $ 62,483 $ 51,969 $ 48,927 $50,308
Working capital..................... 56,477 74,874 72,849 71,798 60,720 56,308 55,333
Total assets........................ 140,205 130,585 136,576 127,154 109,339 105,626 74,431
Long-term obligations, net of
current portion................... -- -- -- -- -- -- 127
Shareholders' equity................ 92,768 92,951 94,887 90,803 83,702 81,206 62,333
KEY RATIOS
Current ratio....................... 2.3 3.0 2.7 3.0 3.3 3.3 5.6
Pro forma return on net revenues*... (11.9%) 5.8% 6.8% 4.4% 2.5% 16.5% 17.8%
Pro forma return on average total
assets*........................... (3.4%) 2.2% 7.3% 5.2% 2.6% 18.5% 25.5%
Pro forma return on average
stockholders' equity*............. (5.0%) 3.0% 10.3% 7.0% 3.4% 23.2% 32.3%
</TABLE>
- ---------------
* Excludes non recurring gain in 1995 of $14.0 million ($8.7 million, or $0.87
per share on a diluted basis, after income taxes) and non recurring charges in
1997, 1996, 1995, 1994 and 1993 of $11.5 million ($7.3 million, or $0.74 per
share on a diluted basis, after income taxes), $3.1 million ($2.0 million, or
$0.20 per share on a diluted basis, after income taxes), $6.8 million ($4.2
million, or $0.42 per share on a diluted basis, after income taxes), $4.0
million ($2.5 million, or $0.25 per share on a diluted basis, after income
taxes), and $3.2 million ($2.0 million, or $0.21 per share on a diluted basis,
after income taxes), respectively. See Notes 8 and 13 of Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
This report on Form 10-K is being filed as a result of the change in the
Company's fiscal year end from December 31 to April 30, beginning with the 1998
Four Month Period. Prior periods ended December 31, 1997, 1996 and 1995 will be
referred to as Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. The 1998
Four Month Period will be compared to the unaudited results for the four months
ended April 30, 1997 (the "1997 Four Month Period"). The Liquidity and Capital
Resources discussion will be as of April 30, 1998,
13
<PAGE> 15
December 31, 1997, December 31, 1996 and December 31, 1995. The change in the
Company's fiscal year end was made to improve the Company's ability to manage
operations in light of seasonal customer buying patterns.
The results of operations for the 1998 Four Month Period (i.e., January to
April 1998) reflect a loss. The Company has historically experienced lower
levels of revenues in the first month of each calendar quarter (January, April,
July and October). Accordingly, previously reported three-month periods have
significantly different results from the 1998 Four Month Period and are not
comparative. In addition, the 1998 Four Month Period was affected by an increase
in the valuation allowance for deferred tax assets, which resulted from the
operating loss in the 1998 Four Month Period. As a result of the change in the
Company's fiscal year end, under generally accepted accounting principles, the
Company was unable to recognize the tax benefits associated with the losses the
Company incurred during the 1998 Four Month Period. These deferred tax benefits
are available to offset future income. (See Note 9 of Notes to Consolidated
Financial Statements.)
The Company's results of operations have historically varied substantially
from quarter to quarter, and the Company expects that they will continue to do
so. The timing and amount of the Company's quarterly net revenues are dependent
on a number of factors, such as the size and timing of customer orders or
license agreements, the timing of the introduction and customer acceptance of
new products or product enhancements by the Company or its competitors, changes
in PC operating systems introduced by Microsoft, IBM or other companies, changes
in pricing policies by the Company or its competitors, product returns or
rotations, fluctuations in foreign exchange rates, customers postponing
purchases of software products while expending funds to be year 2000 compliant,
and changes in general economic conditions. Net revenues will also depend on the
success of the Company's Cyberprise strategy. Products generally are shipped as
orders are received and, accordingly, the Company historically has operated with
little or no backlog. In addition, the Company's operating expenses are
relatively fixed in the short term and a significant portion of revenues for
each quarter typically is received in the months of March, June, September and
December due to customer buying patterns. As a result, variations in timing of
revenues can cause significant variations in quarterly results of operations.
The Company has developed plans to address issues related to the impact on
its products and systems of the year 2000. Products have been modified,
financial and operational systems have been assessed and plans have been
developed to address modification requirements. If the Company or its vendors or
distributors are unable to resolve such issues in a timely manner or if the
Company's products are used in conjunction with the software of other suppliers
that have not adequately addressed year 2000 issues, it could result in a
material financial risk. Accordingly, the Company plans to continue to devote
the necessary resources to resolve significant year 2000 issues in a timely
manner.
The Company expects to experience fluctuations in future net revenues and
operating income that may be caused by the competitive nature of its industry
and market acceptance of the Company's new Cyberprise products, among other
factors. As a result, the Company believes that period-to-period comparisons of
its financial results are not necessarily meaningful and should not be relied on
as an indication of future performance.
The Company's business is seasonal, with a substantial percentage of its
annual net revenues and operating income typically occurring in the last quarter
of the calendar year. The Company has frequently incurred higher operating
expenses in each sequential quarter primarily due to an increase in the number
of employees.
Operating expenses incurred in local currencies relating to the Company's
offices in Europe, Japan, Australia, Singapore and Latin America are also
subject to the effects of fluctuations of foreign currency exchange rates.
Foreign currency exchange rate changes did not have a significant effect on net
revenues in the 1998 Four Month Period, the 1997 Four Month Period, Fiscal 1997,
Fiscal 1996 and Fiscal 1995, but exchange rate fluctuations could have an
adverse effect on future net revenues. The Company has experienced limited
difficulties in hiring, training and retaining management-level staff abroad and
in selecting international resellers with technological and sales personnel to
distribute the Company's products. Additional risks inherent in the Company's
international business activities, which have not materially affected the
Company's
14
<PAGE> 16
business to date, generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, longer accounts receivable
payment cycles, difficulties in managing international operations, potentially
adverse tax consequences, repatriation of earnings and the burdens of complying
with a wide variety of foreign laws.
During the 1998 Four Month Period, the Company acquired all the outstanding
shares of First Service and related companies. (See Note 8 of Notes to
Consolidated Financial Statements.)
REVENUES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------ FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------- ------ ----------- -------- ------ -------- ------ --------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License fees.......... $30,225 (24)% $39,972 $118,905 (5%) $124,815 21% $102,800
Services.............. 8,881 38% 6,414 21,946 51% 14,549 83% 7,941
------- --- ------- -------- -- -------- -- --------
Total net
revenues....... $39,106 (16)% $46,386 $140,851 1% $139,364 26% $110,741
======= === ======= ======== == ======== == ========
</TABLE>
Total net revenue. Net revenues decreased 16% in the 1998 Four Month Period
to $39.1 million from $46.4 million in the 1997 Four Month Period. The decrease
was primarily due to declining license fees, principally from RUMBA for the
Mainframe and RUMBA OFFICE. The decline in revenue for these products was a
result of lower unit pricing due to competition, as opposed to lower volume.
Declines in license fees were partially offset by increases in revenues from
ONESTEP customer support contracts. Net revenues in Fiscal 1997 of $140.9
million were flat as compared to net revenues in Fiscal 1996 of $139.4 million.
Net revenues increased 26% in Fiscal 1996 to $139.4 million from $110.7 million
due to increases in revenues from the Windows version of RUMBA OFFICE and
ONESTEP customer support contracts.
Net revenues related to sales of the Company's products and services
outside North America represented $13.5 million, or 35% of net revenues, during
the 1998 Four Month Period compared to $10.9 million, or 24% of net revenues, in
the 1997 Four Month Period. Revenue outside North America increased as a
percentage of net revenues in the 1998 Four Month Period as compared to the 1997
Four Month Period due mainly to revenue increases in Europe. Net revenues
related to sales of the Company's products and services outside North America
represented $42.4 million, or 30% of net revenues, in Fiscal 1997, $40.0
million, or 29% of net revenues, in Fiscal 1996 and $30.6 million, or 28% of net
revenues, in Fiscal 1995. The increases in international net revenues in the
1998 Four Month Period, Fiscal 1997 and Fiscal 1996 were primarily due to
increased acceptance of RUMBA products and increased sales and marketing
activities in Europe, particularly in the United Kingdom. Most of the Company's
international revenues in the 1998 Four Month Period, Fiscal 1997, Fiscal 1996
and Fiscal 1995 were generated through its indirect distribution channels. The
Company's international sales are denominated in U.S. dollars and local
currencies.
In January 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") No. 97-2, "Software
Revenue Recognition," as amended. SOP No. 97-2 provides guidance on recognizing
revenue on software transactions. The adoption of SOP No. 97-2 did not have a
material impact on the Company's current licensing or revenue recognition
practices.
License fees. License fees for the 1998 Four Month Period, the 1997 Four
Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $30.2 million, $40.0
million, $118.9 million, $124.8 million and $102.8 million, respectively. Most
of the decrease in license fees in the 1998 Four Month Period compared to the
1997 Four Month Period resulted from decreased sales of RUMBA for the Mainframe
and RUMBA OFFICE resulting from lower unit prices. A RUMBA license to one
customer accounted for approximately 18% of the net revenues in the 1997 Four
Month Period. Approximately 82% and 18% of license fees in the 1998 Four Month
Period related to products containing 32-bit technology and 16-bit technology,
respectively, as compared to 65% and 35% of license fees in the 1997 Four Month
Period.
License fees in Fiscal 1997 declined 5% from Fiscal 1996. The Company
believes that the decline in license fees in Fiscal 1997 was due to lengthening
sales cycles for its core products as its customers evaluated Internet
technology strategies for future mission-critical systems. Approximately 67% and
33% of license fees
15
<PAGE> 17
in Fiscal 1997 related to products containing 32-bit technology and 16-bit
technology, respectively. License fees increased 21% in Fiscal 1996 primarily
due to increases in revenues from the Windows version of RUMBA OFFICE, the
Company's multi-host product, partially offset by reductions in sales of certain
single host products, principally RUMBA for the Mainframe. In March 1996, the
Company released commercial versions of a number of RUMBA software products,
incorporating the ActiveX component architecture designed for the Windows 95 and
Windows NT 32-bit operating systems. Approximately 32% and 68% of net revenues
in Fiscal 1996 related to products containing the 32-bit technology and 16-bit
technology, respectively. In Fiscal 1995, approximately 89% of license fees
resulted from 16-bit products.
The Company has derived the majority of its net revenues to date from
licenses of its RUMBA client software products, which accounted for 76%, 80%,
81%, 86% and 88% of net revenues in the 1998 Four Month Period, the 1997 Four
Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. The RUMBA
product line and related enhancements are expected to account for a majority of
the Company's net revenues during the next year. A decline in demand for RUMBA
products as a result of competition, technological changes or otherwise would
have a material adverse effect on the Company's results of operations. The
Company recently announced its Cyberprise strategy, which is designed to enable
companies to move existing mission-critical systems and public information to
the Web and extend those systems to remote users, vendors and customers. Some of
the features of the Company's Cyberprise products deliver, through a Web
browser, similar access to enterprise information and applications to the access
delivered by RUMBA client software products. As a result, the acceptance of the
Company's Cyberprise products will have a negative impact on RUMBA sales. There
can be no assurance that the Company's Cyberprise strategy will be successful.
See "Business -- Important Factors Regarding Forward-Looking Statements -- New
Markets; Longer Sales Cycles."
Service revenue. Service revenues for the 1998 Four Month Period, the 1997
Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $8.9 million,
$6.4 million, $21.9 million, $14.5 million and $7.9 million, respectively.
Increases in revenue from ONESTEP customer support contracts are correlated with
increases in license fees. Increases in service revenue are also due to renewal
contracts of previous license customers.
COST OF REVENUE
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------ FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------- ------ ----------- -------- ------ -------- ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST OF LICENSE
FEES............... $ 6,253 (9)% $ 6,845 $ 19,645 (16)% $ 23,474 19% $19,661
Percentage of
license fees.... 21% 17% 17% 19% 19%
COST OF SERVICE
REVENUES........... 3,180 28% 2,485 7,650 9% 7,000 54% 4,558
Percentage of
service
revenues........ 36% 39% 35% 48% 57%
------- --- ------- -------- --- -------- -- -------
TOTAL GROSS MARGIN... $29,673 (20)% $37,056 $113,556 4% $108,890 26% $86,522
Percentage of net
revenues........ 76% 80% 81% 78% 78%
</TABLE>
Cost of license fees. Cost of license fees consists primarily of software
publishing costs, which include labor, product media, packaging and
documentation, publishing, and product quality assurance costs, royalties and
licensing costs, amortization of product localization costs and provisions for
obsolete inventory, and reseller rebates. Cost of license fees for the 1998 Four
Month Period increased as a percentage of license fees to 21% as compared to 17%
in the 1997 Four Month Period primarily due to increases in amortization of
localization costs and product quality assurance costs as revenues from license
fees decreased. The amortization of localization costs for the 1998 Four Month
Period increased primarily due to third-party localization costs incurred in
Fiscal 1997 relating to certain RUMBA products for various European countries.
The Company amortizes third-party localization costs over a 24-month period.
Software publishing costs decreased in Fiscal 1997 due to the conversion of all
product media from diskettes to compact discs and the
16
<PAGE> 18
adoption of simplified, uniform product packaging. Royalties and licensing costs
decreased in Fiscal 1997 due to lower RUMBA software license revenues and lower
costs for third-party technology. Expenses for royalties and amortization of
prepaid licenses will increase in the future as the Company begins to amortize
prepaid royalties related to a recent licensing agreement and introduces more
products incorporating software licensed from third parties. Amortization of
product localization costs will increase as the Company introduces new products
in international markets.
Cost of service revenues. Cost of service revenues consist primarily of
technical support, post-sales engineering and consulting services. Cost of
service revenues increased in absolute dollars from Fiscal 1995 through Fiscal
1997 and from the 1997 Four Month Period to the 1998 Four Month Period primarily
due to increases in staffing levels related to technical support associated with
increased service. The cost of service revenues has not increased at the same
rate as the increase in service revenues, which has resulted in a decline in the
cost of service revenues as a percentage of service revenues.
OPERATING EXPENSES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
----------------------------- FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------ ------ ----------- ------- ------ ------- ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Product development......... $6,204 (9)% $6,839 $19,675 (14)% $22,924 16% $19,765
Percentage of net
revenues................. 16% 15% 14% 16% 18%
</TABLE>
All internal software development expenses are expensed as incurred.
Product development expenses are primarily associated with the enhancement of
existing products and the development of new software products, such as
Cyberprise Server products, Cyberprise Host products, Cyberprise Tools products
and RUMBA OBJECTX, which were developed and released in Fiscal 1997, and RUMBA
95/NT, SALSA and ARPEGGIO, which were developed in Fiscal 1995 and Fiscal 1996
and released in the first half of Fiscal 1996. In Fiscal 1997, various
technologies were consolidated into the Company's Cyberprise products. Product
development expenses decreased in the 1998 Four Month Period and in Fiscal 1997
due to lower average headcount, arising from the completion of initial versions
of RUMBA 95/NT and SALSA products in Fiscal 1996 from Fiscal 1995. The reduction
also reflects the benefits obtained from the object-based architecture that was
developed during Fiscal 1996 and Fiscal 1995. Product development expenses as a
percentage of net revenues increased in the 1998 Four Month Period compared to
the 1997 Four Month Period due to a 16% decline in net revenues for the same
periods. Product development expenses increased in Fiscal 1996 due to increases
in labor costs (due in part to a small increase in average staffing levels),
support costs for third-party technology, and depreciation. Product development
expenses as a percentage of net revenues decreased in Fiscal 1997 compared to
Fiscal 1996 due to the completion of the two major development projects, RUMBA
95/NT and SALSA in early Fiscal 1996; the percentage decreased in Fiscal 1996
compared to Fiscal 1995 due to the completion of these development projects
together with the higher revenue growth rate in Fiscal 1996.
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------ FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------- ------ ----------- ------- ------ ------- ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Sales and marketing..... $23,090 8% $21,412 $66,938 5% $63,939 17% $54,615
Percentage of net
revenues............. 59% 46% 48% 46% 49%
</TABLE>
From Fiscal 1995 through the 1998 Four Month Period, the Company generally
expanded its sales and marketing operations by increases in staffing levels
coupled with increases in the number and breadth of its cooperative advertising
programs with resellers and distributors, other marketing programs and trade
show activities. The increase in sales and marketing in the 1998 Four Month
Period as compared to the 1997 Four Month Period is primarily due to increases
in the sales management and staff related to Cyberprise products.
17
<PAGE> 19
The number of sales offices maintained by the Company totaled 57, 49, 57 and 54
at April 30, 1998 and December 31, 1997, 1996 and 1995, respectively. At April
30, 1998, the total sales offices included eight offices in Europe, two offices
in Canada, two offices in Latin America, two offices in Australia and one office
each in Japan, Mexico and Singapore. The increase in expenses in Fiscal 1996 was
also a result of higher incentive compensation resulting from increased net
revenues and product launch expenses relating to the introduction of the RUMBA
95/NT, SALSA and ARPEGGIO product families. Sales and marketing expenses as a
percentage of net revenues increased in the 1998 Four Month Period and in Fiscal
1997 compared to the 1997 Four Month Period and Fiscal 1996, respectively,
primarily due to the lower revenue growth rate in the 1998 Four Month Period and
in Fiscal 1997; the percentage decreased in Fiscal 1996 compared to Fiscal 1995
primarily due to the higher revenue growth rate in Fiscal 1996.
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
----------------------------- FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------ ------ ----------- ------- ------ ------- ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
General and
administrative........ $6,155 20% $5,113 $15,764 14% $13,818 31% $10,552
Percentage of net
revenues.............. 16% 11% 11% 10% 10%
</TABLE>
General and administrative expenses include general administrative, finance
and accounting, and legal expenses, costs for the management information systems
("MIS") and human resources departments, and the amortization of goodwill
relating to certain acquisitions. General and administrative expenses increased
in the 1998 Four Month Period as compared to the 1997 Four Month Period due to
increases in staffing and increased MIS costs. The increase is also a result of
increased amortization of intangible assets related to the Software Development
Tools, Inc. ("SDTI") acquisition in November 1997 and the First Service Computer
Dienstleistungs-GmbH ("First Service") acquisition in March 1998. (See Note 8 of
Notes to Consolidated Financial Statements.) The increases in general and
administrative expenses in Fiscal 1997 and Fiscal 1996 resulted primarily from
increased staffing and associated expenses necessary to manage and support the
Company's growth and also, in Fiscal 1996, from higher legal fees as a result of
the shareholders' class action lawsuit. (See Notes 8 and 13 of Notes to
Consolidated Financial Statements.) The Company intends to continue to maintain
its general and administrative expenses as necessary to support its operations.
The amortization of goodwill and other intangible assets will increase in Fiscal
1999 as a result of the Company's acquisition of SDTI in November 1997 and First
Service in March 1998.
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
--------------------------- FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
---- ------ ----------- ------- ------ ------ ------ ------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Nonrecurring
charges........... -- -- -- $11,488 265% $3,148 (54)% $6,805
Percentage of net
revenues.......... -- -- 8% 2% 6%
</TABLE>
During Fiscal 1997, the Company recorded nonrecurring charges totaling
$11.5 million ($7.3 million, or $0.74 per share on a diluted basis, after tax).
In June 1997, the Company agreed to settle the shareholders' class action
lawsuit for $9.1 million, including related legal fees. (See Notes 8 and 13 of
Notes to Consolidated Financial Statements.) The Company also recorded
nonrecurring charges in Fiscal 1997 of $1.0 million for the restructuring of the
SALSA business unit, $0.6 million for retirement payments to the Company's
former Chairman, President and CEO, and $0.7 million for the write-off of
in-process research and development resulting from the acquisition of Software
Development Tools, Inc. (See Note 8 of Notes to Consolidated Financial
Statements.) During Fiscal 1996, the Company streamlined its business operations
and recorded nonrecurring charges totaling $3.1 million ($2.0 million, or $0.20
per share on a diluted basis, after tax) primarily relating to the write-off of
technology investments and prepaid royalties no longer relevant to the Company's
ongoing product offerings and programs. In Fiscal 1995, the Company recorded
nonrecurring charges totaling $6.8 million ($4.2 million, or $0.42 per share on
a diluted basis, after tax) primarily for the write-off of in-process research
and development resulting from the acquisition of Concentric Data Systems,
18
<PAGE> 20
Inc. in April 1995 and the write-off of the remaining goodwill from another
acquisition. (See Note 8 of Notes to Consolidated Financial Statements.)
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------ FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------ ------ ----------- ------ ------ ------ ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER INCOME (EXPENSE)
Gain on sale of equity
investment.............. -- -- -- -- -- -- -- $14,040
Percentage of net
revenues................ -- -- -- -- 13%
Interest income........... $1,106 -- $1,103 $3,538 21% $2,934 (8)% $ 3,191
Percentage of net
revenues................ 3% 2% 3% 2% 3%
Other income (expense),
net..................... 139 -- $ (487) $ (735) (2)% $ (748) 131% $ (324)
Percentage of net
revenues................ -- (1)% (1)% (1)% --
</TABLE>
Interest income did not fluctuate from the 1997 Four Month Period to the
1998 Four Month Period. Interest income increased in Fiscal 1997 compared to
Fiscal 1996 due to higher investment balances; interest income decreased in
Fiscal 1996 compared to Fiscal 1995 due to lower average interest rates. Other
income, net of other expenses, includes interest expense, foreign currency
transaction gains and losses and miscellaneous income and expenses. Foreign
currency transactions resulted in net exchange losses of $0.8 million in Fiscal
1997, $0.6 million in Fiscal 1996 and $0.5 million in Fiscal 1995. To date, the
Company has not engaged in currency hedging transactions against receivables
denominated in currencies other than U.S. dollars, although the Company may do
so in the future. In April 1995, the Company sold its equity investment in SPRY,
Inc. for a gain of $14.0 million ($8.7 million, or $0.87 per share on a diluted
basis, after income taxes). (See Note 8 of Notes to Consolidated Financial
Statements.)
INCOME TAXES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------ FISCAL FISCAL FISCAL
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------ ------ ----------- ------ ------ ------ ------ -------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROVISION FOR INCOME
TAXES..................... $ 117 (93)% $1,635 $ 243 (92)% $3,054 (31)% $ 4,441
Percentage of net
revenues................ -- 4% .2% 2% 4%
Effective tax rate........ (3)% 38% 10% 42% 38%
</TABLE>
The provision for income taxes includes U.S. federal, state and
international taxes currently payable and deferred taxes arising from temporary
differences in determining income for financial statement and tax purposes. The
income tax provision for the 1998 Four Month Period relates to taxes payable on
income in the Company's European subsidiaries. No tax benefit has been
recognized for tax purposes for U.S. losses. As of April 30, 1998, the Company
and its foreign subsidiaries have unused net operating loss carryforwards, for
income tax purposes of $2.8 million and $5.7 million, respectively. Such
benefits are available to offset future taxable income in the U.S. The decrease
in the Company's effective tax rate in Fiscal 1997 as compared to Fiscal 1996
resulted primarily from Foreign Sales Corporation tax benefits and from
operating losses incurred in higher tax rate jurisdictions combined with
significant late Fiscal 1997 operating profits earned in jurisdictions with
lower tax rates. The increase in the Company's effective tax rate in Fiscal 1996
was due to higher profits in certain international subsidiaries, which are
subject to higher tax rates, coupled with certain non-deductible expenses. The
Company anticipates that the effective tax rate in the fiscal year ending April
30, 1999 will increase from the 1998 Four Month Period and Fiscal 1997 and be
somewhat lower than in Fiscal 1996.
19
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
FOUR MONTHS ENDED -----------------------------
APRIL 30, 1998 1997 1996 1995
----------------- ------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $57,490 $70,814 $62,483 $51,969
Working capital............................. $56,477 $72,849 $71,798 $60,720
Net cash flow provided by (used in)
operating activities...................... $(1,897) $19,970 $18,256 $ 5,736
</TABLE>
The Company's cash and cash equivalents totaled $57.5 million, or 41% of
total assets, at April 30, 1998, $70.8 million, or 52% of total assets, at
December 31, 1997, and $62.5 million, or 49% of total assets, at December 31,
1996. The reduction on cash and cash equivalents from December 31, 1997 to April
30, 1998 resulted primarily from the acquisition of First Service for $9.8
million, net of cash acquired.
The Company's expenditures for property and equipment for the 1998 Four
Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995 totaled $1.8 million,
$3.9 million, $5.1 million and $7.1 million, respectively. The decrease in
expenditures in Fiscal 1997 compared to Fiscal 1996 and in Fiscal 1996 compared
to Fiscal 1995 primarily resulted from reduced growth in average staffing
levels. Although the Company does not currently have any specific commitments
with regard to capital expenditures, it expects to continue to acquire new
capital equipment and make other capital expenditures. Purchases of prepaid
software technology totaled $1.3 million, $2.4 million, $1.3 million and $3.2
million in the 1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively. Capitalized third-party localization expenditures totaled $0.2
million in the 1998 Four Month Period and $3.0 million in both Fiscal 1997 and
Fiscal 1996; such costs were not material in Fiscal 1995. The decrease in
capitalized localization costs in Fiscal 1997 as compared to Fiscal 1996 and the
increase in such costs in Fiscal 1996 as compared to Fiscal 1995 resulted from
the significant increase in the volume of new product introductions in Fiscal
1996 compared to Fiscal 1997 and Fiscal 1995 and the expansion of sales
operations into new international markets.
In April 1995, the Board of Directors authorized a stock repurchase program
of up to $10.0 million. Through December 31, 1995, the Company had repurchased
488,200 shares with a total cost of $8.5 million. No shares were repurchased in
the 1998 Four Month Period, Fiscal 1997 or Fiscal 1996.
On March 12, 1998, the Company acquired First Service for $11.0 million. Of
the $11.0 million cash payment, $2.0 million remains in escrow for one year to
cover claims, if any. In October 1997, the Company acquired a 15% percent equity
interest in Suntek Information Systems Co., Ltd. for approximately $0.9 million.
In November 1997, the Company acquired SDTI for $2.0 million. In connection with
the acquisition of SDTI, the Company expects that the additional contingent
consideration of $1.0 million will be payable in November 1998. Also, in
November 1997, the Company acquired a 10% equity interest in DataChannel, Inc.
for approximately $1.7 million. In April 1995, the Company acquired Concentric
Data Systems, Inc. ("Concentric") for approximately $7.8 million. (See Note 8 of
Notes to Consolidated Financial Statements.) The Company will consider, from
time to time, joint ventures, additional acquisitions or investments in other
businesses or third-party technology. The Company believes that existing cash
and cash equivalents, together with funds from operations, will provide the
Company with sufficient funds to finance its operations through Fiscal 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are
included beginning on page 31 of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Income Statements four months ended April 30,
1998 and years ended December 31, 1997, 1996 and 1995..... 31
Consolidated Balance Sheets -- April 30, 1998 and December
31, 1997 and 1996......................................... 32
Consolidated Statements of Shareholders' Equity -- four
months ended April 30, 1998 and years ended December 31,
1997, 1996 and 1995....................................... 33
Consolidated Statements of Cash Flow -- four months ended
April 30, 1998 and years ended December 31, 1997, 1996 and
1995...................................................... 34
Notes to Consolidated Financial Statements.................. 35
Report of Ernst & Young LLP, Independent Auditors........... 48
Selected Quarterly Financial Data and Market Information.... 49
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Registrant are as follows. Each Director's term
expires at the annual meeting shown below each Director's name.
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
---- --- -----------------------------
<S> <C> <C>
Robert J. Frankenberg 51 Mr. Frankenberg has been Chairman of the Board since August 1997 and a
(2000) Director of the Company since December 1996. Since June 1997, he has been
President and Chief Executive Officer of Encanto Networks, Inc., a
company that develops and markets Internet products. Mr. Frankenberg was
Chief Executive Officer and President of Novell, Inc. from April 1994 to
August 1996, and Chairman of the Board of Novell, Inc. from August 1994
to August 1996. From February 1991 to April 1994, he was Vice President,
General Manager of Hewlett-Packard Company's ("H-P") Personal Information
Products Group. Prior to February 1991, he led H-P's Information Networks
Group and Information Systems Group. Mr. Frankenberg currently serves on
the Board of Directors of America Online, Caere Corporation, Daw
Technologies, Electroglas and Secure Computing Corporation. Mr.
Frankenberg also serves on the advisory board of the Sundance Film
Festival and on the Board of Trustees of Westminster College.
Jeffrey A. Heimbuck 51 Mr. Heimbuck has been a Director of the Company since December 1996. From
(2000) July 1992 to July 1996, he was President and Chief Executive Officer of
Inmac Corporation, a catalog marketer of personal computer products and
accessories. Prior to joining Inmac Corporation, he was President of
Quantum Commercial Products, a division of Quantum Corporation, the
manufacturer of Winchester disk drives. Mr. Heimbuck also serves on the
Board of Directors of Visioneer, Inc., a company that develops and
markets personal imaging hardware and software.
Henry N. Lewis 59 Mr. Lewis has been a Director of the Company since January 1993 and a
(1999) director of the Company's United Kingdom subsidiary, Wall Data (U.K.)
Ltd., since its inception in 1990. Since 1976, he has been a Managing
Director and a principal in Computer Ventures Group Limited, a
London-based investment company investing primarily in the computer
industry. Mr. Lewis is also a director of Action Computer Supplies
Limited, Action Computer Supplies Holdings, p.l.c., AES Limited, and
ComputerCall Limited.
David F. Millet 53 Mr. Millet has been a Director of the Company since October 1992. Since
(2001) 1997, he has served as Managing Director of Gemini Investors, a private
investment firm, and since 1988, he has also served as President of
Chatham Venture Corporation, an investment advisory company. He is also a
director of Thomas Emery & Sons, LLC, a private investment company, and
Chairman of Holographix, Inc., a manufacturer of holographic optical
components and systems. Mr. Millet is also a director of View Tech, Inc.,
Natural MicroSystems, Inc. and Mohawk Metal Products.
Steve Sarich, Jr. 77 Mr. Sarich has been a Director of the Company since June 1991. He has
(2001) been President of 321 Investment Co., a venture capital company, since
1980 and President of C.S.S. Management Co., a management
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
---- --- -----------------------------
<S> <C> <C>
company, since 1986. Mr. Sarich is also a director of Back Technologies,
Inc., Cyclops Corporation, Flo Scan Instrument Company and Omega
Environmental Inc.
Bettie A. Steiger 64 Ms. Steiger has been a Director of the Company since May 1995. Since June
(2001) 1988, she has served in various capacities with Xerox Corporation
("Xerox"). Since June 1992, she has been a Principal for Xerox's Market
and Technology Innovation Group, which sponsors new business initiatives
for Xerox based on emerging technologies invented at Xerox. From December
1990 to June 1992, Ms. Steiger was Worldwide Marketing Resident at the
Palo Alto Research Center. Formerly, Ms. Steiger was Vice President,
Videotex, of the Gartner Group and the Executive Director of the
Association of Information and Image Management. She is a founding member
of Source Telecomputing Corporation. Ms. Steiger is also a director of
Alumnae Resources, the International School of Information Management,
and the Washington State University President's Associates Foundation.
Kevin B. Vitale 40 Mr. Vitale has been a Director and Chief Operating Officer of the Company
(1999) since July 1997. He served as Executive Vice President of the Company
from April 1996 to July 1997 and Vice President, Operations and Services
from July 1993 to April 1996. Prior to joining the Company, Mr. Vitale
was Vice President, Corporate Quality and Customer Service of NetFRAME
Systems Incorporated from July 1989 to July 1993. Mr. Vitale also serves
as a director and the chairman of the Long Range Planning Committee for
the Washington Software Association and as a director of DataChannel,
Inc., an Internet technology company. He is also a founding member of the
Technical Support Alliance Network, where he served as a board member and
Treasurer for the past four years.
John R. Wall 41 Mr. Wall has been a Director of the Company since May 1994, President of
(2000) the Company since May 1996 and Chief Executive Officer since August 1997.
Mr. Wall is the founder of the Company, was its Executive Vice President
from June 1991 to May 1996 and served as Secretary from January 1993 to
May 1994. Mr. Wall was a Director of the Company from its inception to
May 1991 and Chairman of the Board of Directors from 1985 to 1991. He has
been the chief technologist and an officer of the Company since its
inception, serving as President from 1982 to 1985 and Vice President,
Research and Development from 1985 to 1991. Mr. Wall served as chairman
of the Washington Software Association from January 1994 to December 1995
and is a former co-chair of the Washington Software Association Education
Committee. Mr. Wall also serves as a founding Trustee and Chairman of the
Washington Software Foundation. He is also on the Board of Trustees of
the Corporate Council for the Arts.
</TABLE>
23
<PAGE> 25
The Executive Officers of the Registrant who are not also Directors are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE AND BUSINESS EXPERIENCE
---- --- -----------------------------
<S> <C> <C>
Richard P. Fox 50 Mr. Fox has been Vice President Finance, Chief Financial Officer and
Treasurer of the Company since April 1998. Immediately prior to joining
the Company, Mr. Fox was Senior Vice President of PACCAR Inc from March
1997 to January 1998. Prior to that, he was with Ernst & Young LLP,
becoming a partner in 1979. His last position was managing partner of the
firm's Seattle office. Mr. Fox is a certified public accountant and
serves on the Board of Trustees of the Seattle Repertory Theatre and the
Seattle Repertory Foundation.
Barry Horn 55 Mr. Horn has been Vice President Worldwide Sales of the Company since
March 1998 and was Vice President North America from October 1997 to
March 1998. Prior to joining the Company, Mr. Horn was President of Safe
Data Corporation from January 1997 through September 1997 and Executive
Vice President of Attachmate Corporation from September 1991 through
December 1996. Mr. Horn is also a director of Liberty Check Co.
Craig E. Shank 39 Mr. Shank joined the Company as General Counsel in March 1998 and was
elected Vice President, General Counsel and Secretary of the Company in
May 1998. Prior to joining the Company, he was a lawyer with the Perkins
Coie LLP law firm from November 1986 to May 1998, becoming a partner in
January 1993.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and executive officers, and persons who own more than
10% of a registered class of the Company's securities, to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, Directors and greater-than-10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that, during the 1998 Four Month Period, its officers,
Directors and greater-than-10% shareholders complied with all Section 16(a)
filing requirements.
24
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth for the 1998 Four Month Period and for
Fiscal 1997, Fiscal 1996 and Fiscal 1995 the compensation received by the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1998 FOUR MONTH
PERIOD AND LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------- ------------
SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) OPTIONS(#) ($)(2)
------------------ ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John R. Wall.............................. 4 mos. $ 75,000 $ -0- -0- $602
President and Chief 1997 218,750 40,689 80,000 306
Officer 1996 193,750 55,000 52,500(3) 198
1995 171,250 40,000 -0- 198
Kevin B. Vitale........................... 4 mos. 70,000 -0- -0- 602
Chief Operating Officer 1997 203,750 37,976 65,000 306
1996 175,000 55,000 30,000 198
1995 140,000 40,000 31,500(4) 190
Barry Horn................................ 4 mos. 58,333 -0- 10,000 950
Vice President Worldwide Sales(5) 1997 43,750 32,108 40,000 216
Richard Van Hoesen........................ 4 mos. 43,747 -0- -0- 64
Vice President and Chief 1997 182,500 26,764 -0- 306
Financial Officer(6) 1996 108,815 30,000 75,000 194
Alexandra A. Brookshire................... 4 mos. 54,110 -0- -0- 602
Vice President, General 1997 131,414 23,147 -0- 255
Counsel and Secretary(7) 1996 146,250 40,000 7,500 306
1995 131,250 32,500 25,000(8) 283
</TABLE>
- ---------------
(1) For all officers except Mr. Horn, such amounts represent payments under the
Company's Management Incentive Plan, in which certain of the Company's
officers and other employees participate. With respect to Mr. Horn, $32,000
represents sales incentive bonuses and $108 represents a holiday bonus.
(2) For all officers except Mr. Van Hoesen, amounts represent group term life
premiums paid by the Company during the 1998 Four Month Period and during
Fiscal 1997, Fiscal 1996 and Fiscal 1995 and a $500 travel benefit for each
of the officers' spouses during the transition period. For Mr. Van Hoesen,
such amount represents only group term life premiums paid by the Company.
(3) Options granted in 1996 include the repricing of options granted in 1994
that were canceled in connection with an exchange of options with exercise
prices in excess of the then fair market value for new options with exercise
prices equal to the then fair market value.
(4) Options granted in 1995 represent the repricing of options granted in 1993
that were canceled in connection with an exchange of options with exercise
prices in excess of the then fair market value for new options with exercise
prices equal to the then fair market value.
(5) Mr. Horn's employment with the Company commenced on October 3, 1997.
(6) Mr. Van Hoesen's employment with the Company commenced May 20, 1996 and
terminated on March 13, 1998.
(7) Ms. Brookshire resigned from her position as General Counsel on March 30,
1998 and from her positions as Vice President and Secretary on May 20, 1998.
She continues to work with the Company in a part-time capacity.
25
<PAGE> 27
(8) Options granted in 1995 represent the repricing of options granted in 1994
that were canceled in connection with an exchange of options with exercise
prices in excess of the then fair market value for new options with exercise
prices equal to the then fair market value.
STOCK OPTION GRANTS DURING THE 1998 FOUR MONTH PERIOD
The following table sets forth information concerning the grant of stock
options during the 1998 Four Month Period to the named executive officers.
OPTION GRANTS DURING THE 1998 FOUR MONTH PERIOD
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO FAIR ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES MARKET PRICE APPRECIATION FOR
OPTIONS IN 1998 EXERCISE VALUE OPTION TERM(1)(2)
GRANTED FOUR-MONTH PRICE ON DATE EXPIRATION ----------------------
NAME (#) PERIOD ($/SH) OF GRANT DATE 5%($) 10%($)
---- ---------- ---------- -------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Wall............. -- -- -- -- -- -- --
Kevin B. Vitale.......... -- -- -- -- -- -- --
Barry Horn............... 10,000(3) 3.9% $15.1875 $15.1875 4/22/08 $95,513 $393,925
Richard Van Hoesen....... -- -- -- -- -- -- --
Alexandra A.
Brookshire............. -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates required by applicable regulations of the SEC and,
therefore, are not intended to forecast possible future appreciation, if
any, of the Common Stock price. Assumes all options are exercised at the end
of their respective 10-year terms. Actual gains, if any, on stock option
exercises depend on the future performance of the Common Stock and overall
stock market conditions, as well as the option holders' continued employment
through the vesting period. The amounts reflected in this table may not be
achieved.
(2) The increase in the market value of the holdings of all of the Company's
shareholders, over a 10-year period based on 9,905,245 shares of Common
Stock outstanding as of April 30, 1998, at assumed annual rates of
appreciation of 5% and 10% from a base price of $15.375 per share (the
closing market price as of April 30, 1998), would be $95,776,339 and
$242,716,047, respectively.
(3) Options become fully vested and exercisable four years from March 11, 1998,
with 25% of the total option becoming fully vested and exercisable on March
11, 1999 and 2.0833% becoming fully vested and exercisable each month
thereafter so long as employment with the Company continues. Upon the
occurrence of certain business combination transactions, the exercisability
of the options is accelerated.
26
<PAGE> 28
OPTION EXERCISES DURING THE 1998 FOUR MONTH PERIOD
The following table sets forth information concerning the exercise of stock
options during the 1998 Four Month Period by the named executive officers, and
their options outstanding at the end of the 1998 Four Month Period.
AGGREGATED OPTION EXERCISES DURING 1998 FOUR MONTH PERIOD AND
OPTION VALUES AT END OF 1998 FOUR MONTH PERIOD
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT END
ACQUIRED OPTIONS AT END OF 1998 OF 1998 FOUR MONTH
ON VALUE FOUR MONTH PERIOD(#) PERIOD($)(1)
EXERCISE REALIZED --------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Wall............... 225,000 $3,090,938 32,499 100,001 -- $144,960
Kevin B. Vitale............ -0- -0- 36,648 89,852 $1,191 118,322
Barry Horn................. -0- -0- -0- 50,000 -- --
Richard Van Hoesen......... -0- -0- 29,271 -0- 8,653 --
Alexandra A. Brookshire.... -0- -0- 20,936 11,564 -- --
</TABLE>
- ---------------
(1) Amounts equal the closing price of the Common Stock on April 30, 1998
($15.375 per share), less the option exercise price, multiplied by the
number of shares exercisable or unexercisable.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive any fee for their
services as Directors. Mr. Frankenberg receives an annual cash retainer of
$50,000 per year for his services as Chairman of the Board. Other Directors who
are not employees of the Company are paid a $10,000 annual retainer. Directors
are also paid $1,000 per meeting and $500 per telephonic meeting of the Board of
Directors and are reimbursed for their expenses incurred in attending meetings.
Non-employee Directors who are members of a committee of the Board are paid
$1,000 per committee meeting and $500 per telephonic meeting and are reimbursed
for their expenses incurred in attending committee meetings.
Non-employee Directors are compensated for service on the Boards of
Directors of subsidiaries of the Company. They are paid a $10,000 annual
retainer plus $1,000 per day for attending subsidiary Board or committee
meetings that are not held on the same day as a Company Board or Committee
meeting at which the Director is in attendance. The Company compensates
Directors for services rendered at the request of the Company other than at or
in preparation for Board of Directors meetings or Committee meetings at the rate
of $1,000 per diem. During the 1998 Four Month Period, one payment of $1,000 for
such services was made to Ms. Steiger.
Non-employee Directors also receive stock option grants under the Company's
1993 Stock Option Plan for Non-Employee Directors (the "Directors Plan"). Each
new non-employee Director upon election or appointment to the Board of Directors
receives an initial option to purchase 10,000 shares of Common Stock at an
exercise price equal to the fair market value per share of Common Stock on the
grant date. In addition, each non-employee Director automatically receives an
annual grant of options to purchase 2,500 shares of Common Stock at each annual
meeting of shareholders at which he or she is reelected or continues as a
Director at an exercise price per share equal to the fair market value per share
of Common Stock on the grant date. Options granted to non-employee Directors
upon their initial appointment or election will become fully vested and
exercisable four years from the date of grant, with 25% of the total option
becoming fully vested and exercisable on the first anniversary date of the grant
and 2.0833% becoming fully vested and exercisable each month thereafter. The
annual options granted as of each annual meeting of shareholders will vest and
become exercisable upon the date of the next annual meeting of shareholders.
Options granted under the Directors Plan generally expire five years from the
grant date.
27
<PAGE> 29
In addition, in consideration of Mr. Frankenberg's assumption of the
position of Chairman of the Board, Mr. Frankenberg received a one-time option
under the Directors Plan to purchase 30,000 shares of Common Stock at an
exercise price equal to the fair market value per share of Common Stock on
October 28, 1997, the grant date. This option vests over three years, one-third
at each anniversary date, so long as Mr. Frankenberg continues serving as
Chairman of the Board. This option terminates six years from the date of grant,
except that early termination shall be based on Mr. Frankenberg's service as the
Company's outside Chairman of the Board rather than on his service as a
director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 1, 1998 by (i) each person known by the
Company to own beneficially 5% or more of the Common Stock, (ii) each Director
of the Company, (iii) each named executive officer, and (iv) all Directors and
executive officers as a group.
<TABLE>
<CAPTION>
OUTSTANDING SHARES
OF COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
---------------- ------------------ ----------------
<S> <C> <C>
State of Wisconsin Investment Board(1)...................... 865,000 8.7%
P.O. Box 7842
Madison, WI 53707
George B. Bjurman & Associates.............................. 632,868 6.4%
George Andrew Bjurman
and Owen Thomas Barry III(2)
10100 Santa Monica Boulevard
Los Angeles, CA 90067
Thomson Horstmann & Bryant, Inc............................. 545,600 5.5%
Park 80, West Plaza Two
Saddle Brook, NJ 07663
Robert J. Frankenberg(3).................................... 16,666 *
Jeffrey A. Heimbuck(4)...................................... 6,666 *
Henry N. Lewis(5)........................................... 47,834 *
David F. Millet(6).......................................... 7,500 *
Steve Sarich, Jr.(7)........................................ 148,370 1.5%
Bettie A. Steiger(8)........................................ 9,062 *
Kevin B. Vitale(9).......................................... 41,772 *
John R. Wall(10)............................................ 414,569 4.2%
Barry Horn.................................................. -0- *
Richard Van Hoesen(11)...................................... 5,840 *
Alexandra A. Brookshire(12)................................. 25,797 *
All Directors and executive officers as a group
(13 persons)(13).......................................... 731,259 7.3%
</TABLE>
- ---------------
* Represents less than 1%.
(1) Based on publicly available information as of December 31, 1997.
(2) Based on publicly available information as of December 31, 1997. George B.
Bjurman & Associates, George Andrew Bjurman and Owen Thomas Barry III share
voting and dispositive power of the 632,868 shares reported and are
beneficial owners of those shares.
(3) Represents options for 16,666 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(4) Represents options for 6,666 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
28
<PAGE> 30
(5) Includes 40,334 shares of Common Stock held of record by ComputerCall
Limited, a substantial majority of the capital stock of which is owned by
Mr. Lewis and members of his family. Also includes options for 7,500 shares
of Common Stock that are exercisable within 60 days of July 1, 1998.
(6) Represents options for 7,500 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(7) Includes options for 7,500 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(8) Represents options for 9,062 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(9) Represents options for 41,772 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(10) Includes options for 35,832 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(11) Represents 5,840 shares of Common Stock as to which Mr. Van Hoesen shares
voting and investment power with his wife.
(12) Includes options for 23,645 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
(13) Includes options for 153,226 shares of Common Stock that are exercisable
within 60 days of July 1, 1998.
CHANGES IN CONTROL
Upon a merger (other than a merger of the Company in which the holders of
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock in the surviving corporation immediately after the
merger), consolidation, acquisition of property or stock, separation,
reorganization (other than a mere reincorporation or the creation of a holding
company) or liquidation of the Company, as a result of which the Company's
shareholders receive cash, stock or other property in exchange for or in
connection with their shares of Common Stock, options granted under the 1983 and
1993 Amended and Restated Stock Option Plans will terminate (with certain
exceptions), but the optionee would have the right immediately prior to any such
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to exercise his or her option in whole or in part
whether or not the vesting requirements set forth in the option agreement have
been satisfied.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and its subsidiaries purchased certain software, supplies and
services from Action Computer Supplies Limited ("Action Computer"), in which
Henry N. Lewis and members of his family hold controlling interests. Payments
during the one-year period ended April 30, 1998 for such purchases aggregated
approximately $110,061. The Company believes that these purchases and sales were
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements -- all consolidated financial statements of
the Company as set forth under Item 8 of this Report.
(2) Financial Statement Schedules -- Schedule II Valuation and
Qualifying Accounts.
The independent auditors' report with respect to the
financial statement schedules appears on page 48 of this
Report. All other financial statements and schedules not
listed are omitted because either they are not applicable or
not required, or the required information is included in the
consolidated financial statements.
29
<PAGE> 31
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of Wall Data Incorporated
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1997).
3.2 Restated Bylaws of Wall Data Incorporated. (Incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1997).
+10.1 Amended and Restated 1983 Stock Option Plan (Incorporated by
reference to Registration Statement No. 33-57816).
+10.2 Restated 1993 Stock Option Plan (Incorporated by reference
to the Company's Form 10-K for the fiscal year ended
December 31, 1996). Amendment thereto dated March 11, 1998.
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1997).
+10.3 Restated 1993 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1996). Amendment thereto
dated October 28, 1997. (Incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
1997).
10.4 Restated Employee Stock Purchase Plan.*
+10.5 Separation Agreement and General Release dated June 30, 1997
between Wall Data Incorporated and James Simpson
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1997.)
10.6 Agreement for Information Technology Services dated May 31,
1997 between Wall Data Incorporated and Electronic Data
Systems Corporation (Incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
1997).
+10.7 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Registration Statement No.
33-57816).
10.8 Lease between Totem Skyline Associates III as Landlord and
Wall Data Incorporated as Tenant dated as of December 2,
1993 and Sublease between Wall Data Incorporated as Landlord
and Totem Skyline Associates III as Tenant dated as of
December 2, 1993 (Incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.9 Rights Agreement dated as of July 19, 1995 between Wall Data
Incorporated and First Interstate Bank of Washington, N.A.,
as rights agent (Incorporated by reference to the Company's
Form 8-A dated July 19, 1995).
21.1 Subsidiaries of Wall Data Incorporated.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
+ Management contract or compensatory plan.
* Included herewith.
(b) Reports on Form 8-K:
None.
30
<PAGE> 32
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------
APRIL 30, 1998 1997 1996 1995
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
License Fees............................... $30,225 $118,905 $124,815 $102,800
Services................................... 8,881 21,946 14,549 7,941
------- -------- -------- --------
Total net revenues................. 39,106 140,851 139,364 110,741
Cost of revenues:
License Fees............................... 6,253 19,645 23,474 19,661
Services................................... 3,180 7,650 7,000 4,558
------- -------- -------- --------
Total cost of revenues............. 9,433 27,295 30,474 24,219
------- -------- -------- --------
Gross margin................................. 29,673 113,556 108,890 86,522
Operating expenses:
Product development........................ 6,204 19,675 22,924 19,765
Sales and marketing........................ 23,090 66,938 63,939 54,615
General and administrative................. 6,155 15,764 13,818 10,552
Non-recurring charges...................... -- 11,488 3,148 6,805
------- -------- -------- --------
Total operating expenses........... 35,449 113,865 103,829 91,737
------- -------- -------- --------
Operating income (loss)...................... (5,776) (309) 5,061 (5,215)
Other income (expense):
Gain on sale of equity investment.......... -- -- -- 14,040
Interest income............................ 1,106 3,538 2,934 3,191
Other, net................................. 139 (735) (748) (324)
------- -------- -------- --------
Total other income, net............ 1,245 2,803 2,186 16,907
------- -------- -------- --------
Income (loss) before income taxes............ (4,531) 2,494 7,247 11,692
Provision for income taxes................... 117 243 3,054 4,441
------- -------- -------- --------
Net income (loss)............................ (4,648) 2,251 4,193 7,251
------- -------- -------- --------
Other Comprehensive Income (loss), net of
tax:
Foreign currency translation adjustments,
net..................................... 341 (301) 758 (188)
Unrealized gains (losses) on securities,
net..................................... 77 (280) 88 --
------- -------- -------- --------
Total other comprehensive income
(loss)........................... 418 (581) 846 (188)
------- -------- -------- --------
Comprehensive income (loss).................. $(4,230) $ 1,670 $ 5,039 $ 7,063
======= ======== ======== ========
Earnings (loss) per share -- basic........... $ (0.47) $ 0.24 $ 0.46 $ 0.79
======= ======== ======== ========
Earnings (loss) per share -- assuming
dilution................................... $ (0.47) $ 0.23 $ 0.43 $ 0.72
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 33
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, --------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 57,490 $ 70,814 $ 62,483
Accounts receivable, net of allowances of $4,519, $3,757
and $3,740............................................ 33,534 35,113 38,694
Inventories.............................................. 952 738 733
Deferred income taxes.................................... 5,701 5,701 3,977
Prepaid expenses and other current assets................ 2,847 2,172 2,262
-------- -------- --------
Total current assets............................. 100,524 114,538 108,149
Fixed assets, net.......................................... 10,665 10,597 12,735
Deferred income taxes...................................... 458 458 155
Long-term investments...................................... 2,965 2,836 642
Intangible assets, net..................................... 16,551 2,281 1,460
Other assets............................................... 9,042 5,866 4,013
-------- -------- --------
$140,205 $136,576 $127,154
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 8,382 $ 8,106 $ 6,774
Accrued compensation..................................... 7,659 7,365 7,989
Other accrued liabilities................................ 9,404 7,167 5,676
Income taxes payable..................................... 3,583 3,735 4,722
Deferred revenues........................................ 15,019 15,316 11,190
-------- -------- --------
Total current liabilities........................ 44,047 41,689 36,351
-------- -------- --------
Deferred income taxes...................................... 3,390 -- --
-------- -------- --------
Shareholders' equity:
Preferred Stock -- Series A Junior
Participating -- 500,000 shares authorized; none
issued and outstanding................................ -- -- --
Common Stock, no par value -- authorized 45,000,000
shares; issued and outstanding 9,905,245 shares
(9,312,480 and 9,132,980 in 1997 and 1996,
respectively)......................................... 58,882 56,771 54,357
Retained earnings........................................ 33,306 37,954 35,703
Accumulated other comprehensive income................... 580 162 743
-------- -------- --------
Total shareholders' equity....................... 92,768 94,887 90,803
-------- -------- --------
$140,205 $136,576 $127,154
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 34
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
--------- ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.................. 9,128,692 $56,862 $24,259 $ 85 $81,206
Issuance of Common Stock in payment of
note payable and related accrued
interest............................... 29,321 1,571 -- -- 1,571
Repurchases of Common Stock............... (488,200) (8,539) -- -- (8,539)
Exercise of Common Stock options.......... 271,610 853 -- -- 853
Stock issued under stock purchase plan.... 17,685 398 -- -- 398
Income tax benefit from exercise of Common
Stock options.......................... -- 1,150 -- -- 1,150
Comprehensive income:
Net income for the year................ -- -- 7,251 --
Foreign currency translation
adjustment........................... -- -- -- (188)
Total comprehensive income................ 7,063
--------- ------- ------- ----- -------
Balance at December 31, 1995................ 8,959,108 52,295 31,510 (103) 83,702
Exercise of Common Stock options.......... 134,475 1,101 -- -- 1,101
Stock issued under stock purchase plan.... 39,397 473 -- -- 473
Income tax benefit from exercise of Common
Stock options.......................... -- 375 -- -- 375
Stock option compensation................. -- 113 -- -- 113
Comprehensive income:
Net income for the year................ -- -- 4,193 --
Unrealized gain on investment.......... -- -- -- 88
Foreign currency translation
adjustment........................... -- -- -- 758
Total comprehensive income................ 5,039
--------- ------- ------- ----- -------
Balance at December 31, 1996................ 9,132,980 54,357 35,703 743 90,803
Exercise of Common Stock options.......... 106,413 1,009 -- -- 1,009
Stock issued under stock purchase plan.... 73,087 1,052 -- -- 1,052
Income tax benefit from exercise of Common
Stock options.......................... -- 271 -- -- 271
Stock option compensation................. -- 82 -- -- 82
Comprehensive income:
Net income for the year................ -- -- 2,251 --
Unrealized loss on investment.......... -- -- -- (280)
Foreign currency translation
adjustment........................... -- -- -- (301)
Total comprehensive income................ 1,670
--------- ------- ------- ----- -------
Balance at December 31, 1997................ 9,312,480 56,771 37,954 162 94,887
Exercise of Common Stock options.......... 549,705 1,002 -- -- 1,002
Stock issued under stock purchase plan.... 43,060 618 -- -- 618
Income tax benefit from exercise of Common
Stock options.......................... -- 200 -- -- 200
Stock option compensation................. -- 291 -- -- 291
Comprehensive income:
Net loss for the period................ -- -- (4,648) --
Unrealized gain on investment.......... -- -- -- 77
Foreign currency translation
adjustment........................... -- -- -- 341
Total comprehensive income................ (4,230)
--------- ------- ------- ----- -------
Balance at April 30, 1998................... 9,905,245 $58,882 $33,306 $ 580 $92,768
========= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
FOUR MONTHS ENDED ------------------------------
APRIL 30, 1998 1997 1996 1995
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ (4,648) $ 2,251 $ 4,193 $ 7,251
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Deferred income taxes............................... -- (2,031) 684 (2,164)
Provision for doubtful accounts..................... 116 434 455 425
Depreciation and amortization of fixed assets and
intangible assets................................. 2,324 6,367 6,555 4,943
Amortization of prepaid licenses and localization
costs............................................. 1,393 3,268 3,594 2,081
Stock option compensation........................... 291 82 113 --
Non-recurring charges............................... -- 1,639 3,148 6,805
Gain on sale of equity investment................... -- -- -- (14,040)
Other, net.......................................... 50 102 168 129
Decrease (increase) in operating assets:
Accounts receivable............................... 3,953 2,964 (10,794) (578)
Inventories....................................... (124) (265) 321 (31)
Other current assets.............................. 1,345 171 549 (919)
Increase (decrease) in operating liabilities:
Accounts payable.................................. (3,059) 1,169 (302) (387)
Accrued liabilities............................... (2,736) 293 4,149 775
Income taxes payable.............................. (152) (587) 2,130 (3,337)
Deferred revenues................................. (650) 4,113 3,293 4,783
-------- -------- -------- --------
Net cash provided by (used in) operating
activities................................... (1,897) 19,970 18,256 5,736
-------- -------- -------- --------
INVESTING ACTIVITIES
Sales of short-term investments........................ -- -- -- 22,000
Proceeds from sale of equity investments............... -- -- -- 20,000
Acquisition of Concentric Data Systems, Inc., net of
cash acquired....................................... -- -- -- (4,948)
Acquisition of Software Development Tools, Inc., net of
cash acquired....................................... -- (1,906) -- --
Acquisition of First Service, net of cash acquired..... (9,811) -- -- --
Investments in Suntek Information Systems Co., Ltd. and
DataChannel, Inc.................................... -- (2,636) -- --
Purchases of fixed assets.............................. (1,833) (3,857) (5,056) (7,133)
Purchases of prepaid software technology............... (1,347) (2,397) (1,337) (3,223)
Capitalized localization costs......................... (221) (2,973) (3,019) --
Other.................................................. -- (368) (618) (1,166)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities................................... (13,212) (14,137) (10,030) 25,530
-------- -------- -------- --------
FINANCING ACTIVITIES
Payments pursuant to repurchase and retirement of
stock............................................... -- -- -- (8,539)
Tax benefit from stock options exercised............... 200 271 375 1,150
Proceeds from issuances under stock plans.............. 1,620 2,061 1,461 1,251
-------- -------- -------- --------
Net cash provided by (used in) financing
activities................................... 1,820 2,332 1,836 (6,138)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents..... (13,289) 8,165 10,062 25,128
Effect of exchange rate changes on cash.................. (35) 166 452 (86)
Cash and cash equivalents at beginning of period......... 70,814 62,483 51,969 26,927
-------- -------- -------- --------
Cash and cash equivalents at end of period............... $ 57,490 $ 70,814 $ 62,483 $ 51,969
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 36
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Wall Data Incorporated ("Wall Data" or the "Company") develops and markets
enterprise software products and associated application tools and provides
comprehensive support and services for its products. The Company's products
deliver access to existing corporate computing systems, including various host,
database, client/server and public information, to users in a browser or
Windows-based environment. Using Wall Data solutions, organizations can extend
their enterprise information systems to allow internal users, remote users,
third party partners and customers to access information and applications over
corporate intranets, extranets, the Internet, Local Area Networks and Wide Area
Networks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs and
expenses are translated at the average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown separately
in shareholders' equity. Gains and losses from foreign currency transactions are
included in other income.
Revenue Recognition
Revenue from sales of software and hardware products to end-users,
distributors and dealers is recognized when the products are shipped. The
Company's agreements with certain distributors and resellers permit them to
exchange products under certain circumstances and permit returns from certain
resellers subject to specific limitations; an accrual is recorded for estimated
sales returns and exchanges. Revenue from software products licensed to original
equipment manufacturers is recognized as earned. Revenue from service fees is
deferred and recognized on a straight-line basis over the term of the related
agreements.
In January 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position (SOP 97-2), "Software Revenue
Recognition," as amended. SOP 97-2 provides guidance on recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's current licensing or revenue recognition practices.
Income Taxes
The provision for income taxes includes U.S. federal, state and
international taxes currently payable and deferred taxes arising from temporary
differences between income tax and financial reporting. Deferred tax benefits
from operating losses are not recognized until they can be used to offset
taxable income.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid instruments with a maturity of three months or less
at the date of purchase to be cash equivalents. Cost approximates market value
for all cash and cash equivalents. All cash equivalents are classified as
available-for-sale.
35
<PAGE> 37
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives ranging from two to ten years
for financial reporting purposes and by different methods approved for income
tax purposes.
Long-term Investments
Long-term equity investments in non-public companies are recorded at cost
due to the lack of significant influence and readily determinable fair value.
For investments in companies that are quoted on an exchange, investments are
classified as available-for-sale and carried at market value with unrealized
gains and losses included in shareholders' equity. Investments are regularly
reviewed for possible impairment of value and downward adjustments are made as
deemed appropriate.
Prepaid Software Technology Fees
Prepaid software technology license fees are amortized to cost of revenue
using the shorter of the straight-line method over periods not to exceed 24
months or fees based on actual product shipments.
Product Development Costs
A Financial Accounting Standards Board statement requires the
capitalization of certain internal software development costs. Such costs are
not material. Internal product development costs are expensed as incurred.
External costs incurred to localize software products into local market
languages are capitalized and amortized to cost of revenue using the
straight-line method over periods not to exceed 24 months.
Intangible Assets
Excess of cost over fair market value of net identifiable assets of
acquired companies and other intangible assets are amortized on a straight-line
basis over various periods between four and ten years. The carrying value of
intangible assets is periodically reviewed by the Company based on the expected
future undiscounted operating cash flows of the related business unit. Based
upon its most recent analysis, the Company believes that no material impairment
of intangible assets exists at April 30, 1998.
Stock Based Compensation
During 1996, the Company adopted the disclosure provisions under Statement
of Financial Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require companies to record
compensation expense for stock-based employee compensation based on a prescribed
method for determining fair value. The Company has elected to continue to
account for stock option grants to employees in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes
compensation expense for stock options only when the exercise price is less than
the quoted market price at the date of grant.
Advertising Costs
All advertising costs are expensed as incurred. Total advertising expenses
approximated $1.5 million, $5.7 million, $6.9 million and $4.5 million in the
1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
36
<PAGE> 38
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
Earnings per Share
Basic earnings per share is based on the weighted average number of shares
of Common Stock outstanding during the period. Diluted earnings per share
includes the effect of dilutive Common equivalent shares from stock options,
using the treasury stock method.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
changed the method for determining and reporting business segment information.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997, and therefore the Company will adopt the new
requirements retroactively in Fiscal 1999.
Management has not completed its review of SFAS No. 131 but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results may differ from
those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
2. CHANGE IN YEAR END
As previously reported, the Company's Board of Directors approved a change
in the Company's fiscal year-end from December 31 to April 30, beginning with
the four months ended April 30, 1998 ("1998 Four Month Period"). Prior periods
ended December 31, 1997, 1996 and 1995 will be referred in these notes to the
consolidated financial statements as Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively. This change is being made to improve the Company's ability to
manage operations in light of seasonal customer buying patterns. Comparative
information for the four months ended April 30, 1998 and 1997:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1997
------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues............................................... $39,106 $46,386
Gross margin........................................... 29,673 37,056
Operating income (loss)................................ (5,776) 3,692
Provision for income taxes............................. 117 1,635
Net income (loss)...................................... (4,648) 2,673
Earnings (loss) per share -- assuming dilution......... $ (0.47) $ 0.27
</TABLE>
37
<PAGE> 39
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
3. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in
January 1998. This standard requires disclosure of total non-owner changes in
stockholders' equity, which is defined as net income plus direct adjustments to
stockholders' equity such as unrealized gains and losses on equity investments
adjustments and cumulative translation adjustments. The balances of the
components of the Company's total comprehensive income were:
<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED CUMULATIVE OTHER
GAINS (LOSSES) ON TRANSLATION COMPREHENSIVE
EQUITY INVESTMENTS ADJUSTMENTS INCOME
------------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1995................. $ -- $ 85 $ 85
Before-tax amount for the year........... -- (285) (285)
Tax (expense) or benefit................. -- 97 97
----- ------ ------
Net-of-tax amount for the year........... -- (188) (188)
----- ------ ------
Balance at December 31, 1995............... -- (103) (103)
Before-tax amount for the year........... 133 1,148 1,281
Tax (expense) or benefit................. (45) (390) (435)
----- ------ ------
Net-of-tax amount for the year........... 88 758 846
----- ------ ------
Balance at December 31, 1996............... 88 655 743
Before-tax amount for the year........... (424) (456) (880)
Tax (expense) or benefit................. 144 155 299
----- ------ ------
Net-of-tax amount for the year........... (280) (301) (581)
----- ------ ------
Balance at December 31, 1997............... (192) 354 162
Before-tax amount for the period......... 117 517 634
Tax (expense) or benefit................. (40) (176) (216)
----- ------ ------
Net-of-tax amount for the period......... 77 341 418
----- ------ ------
Balance at April 30, 1998.................. $(115) $ 695 $ 580
===== ====== ======
</TABLE>
4. MARKETABLE SECURITIES
Marketable securities consist primarily of investment-grade commercial
paper and are classified as available-for-sale. Marketable debt securities with
original maturity dates of less than three months totaled $42 million, $45
million and $48 million at cost as of April 30, 1998, December 31, 1997 and
1996, respectively, and are included in cash and cash equivalents. The estimated
fair value of the commercial paper approximates cost.
5. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, ------------------
1998 1997 1996
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment............................................. $27,937 $25,624 $21,834
Furniture and fixtures................................ 6,347 6,100 5,685
------- ------- -------
34,284 31,724 27,519
Less -- accumulated depreciation and amortization..... 23,619 21,127 14,784
------- ------- -------
$10,665 $10,597 $12,735
======= ======= =======
</TABLE>
38
<PAGE> 40
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
6. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, ------------------
1998 1997 1996
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Prepaid licenses...................................... $ 6,397 $ 3,105 $ 2,742
Accumulated amortization.............................. (399) (1,056) (1,538)
------- ------- -------
Prepaid licenses, net....................... 5,998 2,049 1,204
------- ------- -------
Localization costs.................................... 6,351 6,130 3,248
Accumulated amortization.............................. (3,785) (2,790) (586)
------- ------- -------
Localization costs, net..................... 2,566 3,340 2,662
------- ------- -------
Other................................................. 478 477 147
------- ------- -------
$ 9,042 $ 5,866 $ 4,013
======= ======= =======
</TABLE>
Royalties and amortization of prepaid licenses totaled $0.6 million, $1.7
million, $4.1 million and $2.7 million in the 1998 Four Month Period, Fiscal
1997, Fiscal 1996 and Fiscal 1995, respectively, and are included in cost of
revenues. Amortization of external product localization costs totaled $1.0
million, $2.2 million and $0.6 million in the 1998 Four Month Period, Fiscal
1997 and Fiscal 1996, respectively; such amounts were not material in Fiscal
1995.
Other assets and long-term investments are regularly reviewed for possible
impairment and are written off if, in the opinion of management, their value has
been impaired.
7. LEASES
The Company rents office facilities under operating lease agreements.
Future minimum lease payments at April 30 under non-cancelable operating leases
with terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1999................................................ $ 2,811
2000....................................................... 2,460
2001....................................................... 2,165
2002....................................................... 1,854
2003....................................................... 1,624
Thereafter................................................. 413
-------
Total minimum lease payments............................... $11,327
=======
</TABLE>
Rental expenses under operating leases amounted to approximately $1.5
million, $5.2 million, $5.4 million and $4.2 million in the 1998 Four Month
Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
8. INVESTMENTS, DISPOSITIONS AND OTHER NON-RECURRING ITEMS
In March 1998, the Company acquired all of the outstanding shares of First
Service Computer Dienstleistungs-GmbH ("First Service") of Hattingen, Germany
and related companies for $11 million cash. First Service distributes and
supports a range of connectivity software solutions to major corporations
throughout Germany and has been selling and supporting Wall Data's products and
technologies for more than seven years. The acquisition, accounted for using the
purchase method, included a cash payment of $11 million of which $2 million
remains in escrow for one year to cover claims, if any. As a part of this
transaction, the Company recorded approximately $14.3 million of goodwill and
other intangible assets and approximately $3.3 million in long-term deferred
taxes. The goodwill and other intangible assets are being amortized over a
ten-year period. Pro forma information has not been presented due to
immateriality.
39
<PAGE> 41
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
In October 1997, the Company acquired a fifteen percent equity interest in
Suntek Information Systems Co., Ltd. ("Suntek") for approximately $0.9 million.
Suntek distributes and supports software products in Korea.
In November 1997, the Company and Data Channel, Inc. ("DataChannel")
entered into an agreement under which DataChannel licensed its ChannelManager
technology to the Company. DataChannel is a software development company which
creates tools that streamline the presentation and management of information
over corporate intranets. Pursuant to the licensing agreement, the Company
recorded guaranteed royalties to DataChannel of $5.0 million. The Company has
paid $2.0 million as of April 30, 1998 Four Month Period and is required to pay
an additional $3.0 million for minimum royalties in the remainder of the
calendar year 1998. In addition, the Company acquired a ten percent equity
interest in DataChannel for approximately $1.7 million.
In November 1997, the Company acquired all of the outstanding shares of
Software Development Tools, Inc. ("SDTI") for $2.0 million. An additional $1.0
million to be considered part of the purchase price is payable contingent on the
future earnings performance of SDTI and continued representation and warranties.
SDTI was a privately held developer of Windows development tools designed to
provide a graphical interface to host applications and to migrate IBM AS/400 and
mainframe applications to client/server environments. The acquisition has been
accounted for under the purchase method of accounting. As a result of this
transaction, the Company recorded non-recurring charges of approximately
$741,000 ($667,000, or $0.07 per share on a diluted basis, after income taxes)
for the write-off of in-process research and development. Approximately $1.3
million of the initial purchase price was allocated to developed technology,
goodwill and other intangible assets. The intangible assets are being amortized
on a straight-line basis over periods ranging from four to ten years. Pro forma
information relating to the acquisition of SDTI has not been presented due to
immateriality.
During the second quarter of 1997, the Company recorded several
non-recurring charges totaling $10.7 million ($6.7 million, or $0.67 per share
on a diluted basis, after income taxes) Approximately $9.1 million represents a
charge for the settlement of the shareholders' class action lawsuit. The Company
also recorded restructuring charges of approximately $1.0 million for the
write-off of inventories, technology investments and severance payments relating
to the SALSA business line. The remaining charges represent retirement payments
to the Company's former Chairman and Chief Executive Officer. In July 1997, the
Board of Directors also voted to accelerate the vesting of certain stock options
to the former Chairman. The related compensation expense, which was not
material, was recorded as an expense in the third quarter.
During the fourth quarter of 1996, the Company recorded non-recurring
charges totaling $3.1 million ($2.0 million, or $0.20 per share on a diluted
basis, after income taxes) resulting from decisions to streamline operations and
improve operating efficiencies. The charges primarily related to the write-off
of technology investments and prepaid royalties no longer relevant to the
Company's ongoing product offerings and programs.
In April 1995, the Company acquired all of the outstanding shares of
Concentric, a privately held developer of Windows and DOS-based data access and
reporting tools, for $7.8 million cash. The acquisition was accounted for under
the purchase method of accounting. As a result of this transaction, the Company
recorded non-recurring charges of approximately $5.5 million ($3.4 million, or
$0.34 per share on a diluted basis, after income taxes), for the write-off of
in-process research and development and the write-off of existing Wall Data
prepaid licenses for technology, which was supplanted by the Concentric
technology. Approximately $1.8 million of the purchase price was allocated to
goodwill, which is being amortized over five years. Non-recurring charges in
1995 included a $1.0 million write-off of the remaining unamortized goodwill
from a prior acquisition.
In September 1994, the Company acquired a minority equity interest in SPRY,
Inc. ("SPRY"), a developer of Internet access software, for $6.0 million. The
investment was accounted for under the equity
40
<PAGE> 42
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
method of accounting. In April 1995, the Company sold its equity interest in
SPRY for $20.0 million in cash and recorded a gain of $14.0 million ($8.7
million, or $0.87 per share on a diluted basis, after income taxes), which is
included in other income.
9. INCOME TAXES
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED DECEMBER 31,
-------------- -------------------------
APRIL 30, 1998 1997 1996 1995
-------------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S............................................. $(4,824) $ 839 $2,775 $ 9,375
International................................... 293 1,655 4,472 2,317
------- ------ ------ -------
Total income before income taxes...... $(4,531) $2,494 $7,247 $11,692
======= ====== ====== =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED DECEMBER 31,
-------------- -------------------------
APRIL 30, 1998 1997 1996 1995
-------------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current tax expense:
U.S. federal.................................. $ -- $1,375 $ 125 $ 5,130
State......................................... -- 149 52 626
International................................. 117 427 2,203 849
------- ------ ------ -------
Total current provision............... 117 1,951 2,380 6,605
Deferred tax expense (benefit):
U.S. federal.................................. -- (1,914) 700 (1,903)
State......................................... -- (139) 87 (253)
International................................. -- 345 (113) (8)
------- ------ ------ -------
Total deferred provision (benefit).... -- (1,708) 674 (2,164)
------- ------ ------ -------
Total provision for income taxes...... $ 117 $ 243 $3,054 $ 4,441
======= ====== ====== =======
</TABLE>
The effective rate differs from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED DECEMBER 31,
-------------- -------------------------
APRIL 30, 1998 1997 1996 1995
-------------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income tax provision (benefit) at statutory
rate.......................................... $(1,540) $ 848 $2,463 $ 4,092
International losses producing no current tax
benefit....................................... 364 847 312 366
Utilization of international operating loss
carryforward.................................. -- -- -- (234)
Tax credits..................................... -- (300) (100) (300)
State taxes, net................................ (126) 60 68 255
Foreign Sales Corporation....................... (89) (715) (215) (315)
Nondeductible expenses.......................... 119 112 246 200
Effect of lower tax rates in certain foreign
countries..................................... (413) (663) -- --
Losses providing no benefit..................... 1,859 -- -- --
Other, net...................................... (57) 54 280 377
------- ------ ------ -------
$ 117 $ 243 $3,054 $ 4,441
======= ====== ====== =======
</TABLE>
41
<PAGE> 43
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
The Company received compensation deductions in the 1998 Four Month Period,
Fiscal 1997, Fiscal 1996 and Fiscal 1995 for income tax purposes of $0.6
million, $0.8 million, $1.0 million, and $3.0 million, respectively, resulting
from the exercise of nonqualified stock options and from disqualifying
dispositions of Common Stock received through exercise of incentive stock
options. As required by generally accepted accounting principles, the resulting
tax benefits of $0.2 million, $0.3 million, $0.4 million, and $1.2 million,
respectively, are reported as additions to shareholders' equity rather than as a
reduction of income tax expense.
Deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, -----------------
1998 1997 1996
--------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Tax credits and domestic net operating losses........ $ 2,428 $ 1,226 $ --
Accrued compensation and benefits.................... 752 1,057 943
Other accrued expenses............................... 319 943 701
Reserves for sales returns and doubtful accounts..... 1,368 1,196 1,217
Cooperative advertising reserves..................... 521 655 428
Depreciation and amortization........................ 399 270 155
Intercompany profit elimination...................... 12 26 553
Software localization and R&D write-down............. (373) (298) --
Deferred maintenance revenue......................... 2,071 209 217
Net operating losses of international subsidiaries... 1,935 1,571 723
Other, net........................................... 521 875 (82)
------- ------- ------
9,953 7,730 4,855
Valuation allowance.................................. (3,794) (1,571) (723)
------- ------- ------
Total deferred tax assets.................... 6,159 6,159 4,132
------- ------- ------
Deferred tax liabilities:
Basis difference of intangible assets from acquired
Subsidiaries...................................... (3,390) -- --
------- ------- ------
Net deferred tax assets (liabilities).................. $ 2,769 $ 6,159 $4,132
======= ======= ======
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that have not been realized. The increase in the
valuation allowance in 1997 resulted from additional net operating losses of
certain international subsidiaries, and the increase in the 1998 Four Month
Period resulted from losses in North America and because of the uncertainty to
realize other deferred tax assets. As of April 30, 1998, the Company and its
foreign subsidiaries have unused net operating loss carryforwards, for income
tax purposes, of $2.8 million and $5.7 million, respectively. The Company and
the foreign subsidiary net operating losses expire primarily in 2018 and 2002,
respectively.
Income taxes paid in the 1998 Four Month Period, Fiscal 1997 and Fiscal
1995 totaled $0.1 million, $0.7 million and $8.2 million, respectively. In
Fiscal 1996, the Company received net refunds of $0.5 million.
10. SHAREHOLDERS' EQUITY
In April 1995, the Board of Directors authorized the repurchase of the
Company's Common Stock up to an aggregate purchase price of $10 million. As of
December 31, 1995, the Company had repurchased 488,200 shares of Common Stock
for approximately $8.5 million. The Company did not repurchase any shares in the
1998 Four Month Period, Fiscal 1997 or Fiscal 1996.
42
<PAGE> 44
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
In July 1995, the Board of Directors adopted a shareholder rights
agreement, designed to protect shareholders from certain takeover tactics, and
declared a dividend of one preferred share purchase right for each outstanding
share of the Company's Common Stock to stockholders of record as of July 31,
1995. The rights entitle the holder (a) to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, no par value per share, of the
Company at a price of $110, subject to adjustment to prevent dilution, upon the
occurrence of triggering events, or (b), in certain circumstances, to purchase
Wall Data Common Stock (or Stock of the acquiring entity, as the case may be) at
a 50% discount from its then current market value. Such events would include the
acquisition of Wall Data shares through open market purchases or a tender offer
that, in the aggregate, equals or exceeds 20% of outstanding shares. At the
option of the Board of Directors, the rights may be exchanged for one share of
Wall Data Common Stock for each right. Such rights do not extend to any holder
whose action triggered the rights. The rights expire in August 2005 and may be
redeemed prior to that time at the option of the Board of Directors for nominal
consideration. Until a triggering event occurs, the rights will not trade
separately from the related Wall Data Common Stock.
The Company has several stock-based compensation plans that are described
below. The Company has elected to continue to apply APB Opinion No. 25 in
accounting for its plans and, accordingly, recognizes compensation expense for
employee stock options only when the exercise price is less than the quoted
market price at the date of grant; stock compensation expense was not material
in the 1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995. Had
stock-based compensation been determined based on the prescribed method for
estimating fair value under SFAS No. 123, the Company's pro forma net income
(loss) and earnings (loss) per share in the 1998 Four Month Period, Fiscal 1997,
Fiscal 1996 and Fiscal 1995 would have been $(5.8) million, or $(0.60) per
share, $0.2 million, or $0.02 per share on a diluted basis, $2.7 million, or
$0.28 per share on a diluted basis, and $6.6 million or $0.65 per share on a
diluted basis, respectively. The pro forma effects on net income (loss) for the
1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995 are not
indicative of the pro forma effects in future years because SFAS No. 123 does
not apply to grants prior to 1995 and additional grants in future years are not
anticipated. The pro forma amounts have been determined using the Black-Scholes
option pricing model with the following weighted average assumptions for the
1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively:
risk-free interest rates of 5.7%, 5.9%, 6.5% and 6.3%; volatility factors of
80%, 79%, 74% and 77%; expected life of five years and a zero dividend yield for
each period.
The Company has stock option plans that provide for nonqualified and
incentive stock options for officers, employees and consultants. A committee of
the Board of Directors determines the terms and conditions of options granted
under the plans, including the exercise price; however, the exercise price for
incentive stock options shall not be less than the fair market value at the date
of grant. Options granted under the plans generally become exercisable,
cumulatively, at a rate of 25% per year from the date of grant, and expire 10
years from the date of grant. The Company also has a stock option plan for
non-employee directors providing for grants of nonqualified options at an
exercise price that is not less than the fair market value at the date of grant.
In July 1995 and January 1996, the Compensation Committee of the Board of
Directors authorized the exchange of new options for certain previously granted
stock options. Approximately 818,000 shares, ranging in price from $17.00 to
$54.25 per share, were exchanged for new options with an exercise price ranging
from $15.32 to $18.75 per share.
43
<PAGE> 45
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
Stock option activity and option price information for all option plans is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
NUMBER WEIGHTED
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at January 1, 1995................................. 1,717,370 $ 16.02
Granted.................................................... 1,301,500 17.63
Exercised.................................................. (271,610) 3.29
Canceled................................................... (1,031,479) 29.14
----------
Balance at December 31, 1995............................... 1,715,781 11.38
Granted.................................................... 775,750 16.32
Exercised.................................................. (134,475) 8.19
Canceled................................................... (378,143) 18.33
----------
Balance at December 31, 1996............................... 1,978,913 12.12
Granted.................................................... 685,750 16.39
Exercised.................................................. (106,413) 12.39
Canceled................................................... (264,601) 17.17
----------
Balance at December 31, 1997............................... 2,293,649 12.80
Granted.................................................... 254,750 15.32
Exercised.................................................. (549,705) 1.83
Canceled................................................... (157,173) 17.58
----------
Balance at April 30, 1998.................................. 1,841,521 $ 14.37
==========
</TABLE>
The weighted average fair value of options granted in the 1998 Four Month
Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, as determined under the method
prescribed in SFAS No. 123, is $10.45, $11.12, $11.10 and $11.76, respectively.
Additional information concerning outstanding stock options and exercisable
stock options as of April 30, 1998 is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $2.00..................... 31,575 4.31 $ 0.51 29,237 $ 0.48
$2.00 to $15.00..................... 457,630 9.23 13.84 70,302 13.53
$15.00 to $20.00.................... 1,141,842 8.29 13.89 466,596 16.13
Greater than $20.00................. 210,474 8.24 20.13 99,349 21.56
--------- -------
1,841,521 8.45 $14.37 665,484 $15.98
========= =======
</TABLE>
Approximately 130,000 shares were available for future grants as of April
30, 1998. At December 31, 1997 options for the purchase of approximately
1,148,000 shares were exercisable at a weighted average exercise price of $9.38
per share. At December 31, 1996 options for the purchase of approximately
827,000 shares were exercisable at a weighted average exercise price of $6.33
per share. At December 31, 1995 options for the purchase of approximately
753,000 shares were exercisable at a weighted average exercise price of $4.10
per share.
The Company has an employee stock purchase plan for all eligible employees.
Under the plan, employees may purchase shares of Common Stock having a total
value not exceeding 10% of gross compensation, at a
44
<PAGE> 46
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
price per share equal to 85% of the lower of fair market value of the Common
Stock on the first or last business day of each six-month offering period. As of
April 30, 1998, approximately 180,000 shares had been issued under the plan, and
220,000 shares are reserved for future issuance.
11. RECONCILIATION OF EARNINGS PER SHARE
The following table presents a reconciliation of basic earnings per share
to earnings per share -- assuming dilution (income and shares in thousands):
<TABLE>
<CAPTION>
AVERAGE
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
1998 FOUR MONTH PERIOD
Loss per share -- basic.......................... $(4,648) 9,805 $(0.47)
Effect of Dilutive Securities
Stock options..................................
------- ------ ------
Loss per share -- assuming dilution.............. $(4,648) 9,805 $(0.47)
======= ====== ======
FISCAL 1997
Earnings per share -- basic...................... $ 2,251 9,245 $ 0.24
Effect of Dilutive Securities
Stock options.................................. 641
------- ------ ------
Earnings per share -- assuming dilution.......... $ 2,251 9,886 $ 0.23
======= ====== ======
FISCAL 1996
Earnings per share -- basic...................... $ 4,193 9,058 $ 0.46
Effect of Dilutive Securities
Stock options.................................. 663
------- ------ ------
Earnings per share -- assuming dilution.......... $ 4,193 9,721 $ 0.43
======= ====== ======
FISCAL 1995
Earnings per share -- basic...................... $ 7,251 9,224 $ 0.79
Effect of Dilutive Securities
Stock options.................................. 803
------- ------ ------
Earnings per share -- assuming dilution.......... $ 7,251 10,027 $ 0.72
======= ====== ======
</TABLE>
Certain options to purchase shares of Common Stock were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the Common shares. The total shares that were thus
excluded approximated 1,842,000, 1,650,000, 1,513,000, and 1,089,000 in the 1998
Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively.
12. EMPLOYEE BENEFITS
The Company has a Retirement Savings Plan to provide for voluntary salary
deferral contributions on a pretax basis in accordance with Section 401(k) of
the Internal Revenue Code of 1986, as amended. Effective January 1, 1998, the
Retirement Savings Plan was amended to require the Company to make matching
contributions in an amount equal to 100% of employee pretax contributions but
subject to a maximum of 5%
45
<PAGE> 47
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
of eligible compensation contributed to the plan. Employees receive vesting
credit in the Company's contribution of 25% for each year of employment. During
the 1998 Four Month Period, the Company incurred expenses of $682,000 related to
the Company's contribution to the Retirement Savings Plan. No Company
contributions were made in prior periods.
13. LITIGATION
In July 1997, the Company agreed to settle a class action lawsuit for
$11.25 million, of which $3.0 million was paid by the Company's insurance
carrier. Included in non-recurring expenses in the second quarter of 1997 is a
charge of $9.1 million for the Company's share of the settlement plus related
fees and expenses. The Company paid its share of the settlement in July 1997.
Wall Data denied the allegations of the plaintiffs' claims, but agreed to the
settlement to avoid any further expense and the distraction of continued legal
proceedings.
14. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment: software products and related
services for users of personal computers. Net revenue from ONESTEP service
programs totaled 22.7%, 15.6% and 10.3% of total net revenues in the 1998 Four
Month Period, Fiscal 1997 and Fiscal 1996, respectively. Net revenue from
ONESTEP service programs was less than 10% in Fiscal 1995. The Company
distributes its products through a combination of direct sales, telesales,
resellers, distributors, original equipment manufacturer arrangements and the
Internet. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral.
Sales to one unaffiliated OEM customer accounted for 10% of net revenues in
1995. Sales to any one customer did not exceed 10% of net revenues in the 1998
Four Month Period, Fiscal 1997 or Fiscal 1996.
Information regarding the Company's operations in different geographic
areas in the 1998 Four Month Period, Fiscal 1997, Fiscal 1996 and Fiscal 1995 is
set forth below. Amounts presented for North America include revenues from
customers in North America and certain international revenues, primarily Japan
and Latin America; such international revenues equaled 5%, 4%, 4% and 5% of
consolidated net revenues in the 1998 Four Month Period, Fiscal 1997, Fiscal
1996 and Fiscal 1995, respectively. Total international revenues equaled 35%,
30%, 29% and 28% of consolidated net revenues in the 1998 Four Month Period,
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Foreign currency
exchange transactions, which are included in other income (expense), resulted in
net exchange gains (losses) of $0.2 million, $(0.8) million, $(0.6) million and
$(0.5) million in the 1998 Four Month Period, Fiscal 1997, Fiscal 1996 and
Fiscal 1995, respectively. The Company has not engaged in currency hedging
transactions against accounts receivables denominated in foreign currencies;
however, it may do so in the future.
46
<PAGE> 48
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------
APRIL 30, 1998 1997 1996 1995
-------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
North America...................... $ 30,543 $119,501 $121,657 $ 99,174
Europe............................. 11,675 36,373 35,140 25,387
Eliminations....................... (3,112) (15,023) (17,433) (13,820)
-------- -------- -------- --------
Total net revenues......... $ 39,106 $140,851 $139,364 $110,741
======== ======== ======== ========
OPERATING INCOME (LOSS)
North America...................... $ (6,518) $ (3,935) $ 476 $ (6,383)
Europe............................. 754 3,283 5,103 1,348
Eliminations....................... (12) 343 (518) (180)
-------- -------- -------- --------
Total operating income
(loss)................... $ (5,776) $ (309) $ 5,061 $ (5,215)
======== ======== ======== ========
IDENTIFIABLE ASSETS
North America...................... $118,075 $125,522 $115,252 $108,039
Europe............................. 30,787 19,999 18,915 8,778
Eliminations....................... (8,657) (8,945) (7,013) (7,478)
-------- -------- -------- --------
Total identifiable
assets................... $140,205 $136,576 $127,154 $109,339
======== ======== ======== ========
</TABLE>
Intercompany sales are at prices intended to provide a profit for the
selling entity after coverage of product development, marketing, support and
general and administrative expenses. The identifiable assets by geographic area
are those used in the Company's operations in each area.
15. COMMITMENTS
In May 1997, the Company entered into an agreement with a third party to
provide the Company with information technology services for a ten-year period.
The Company has options to terminate the agreement on the fourth, sixth and
eighth anniversaries of the effective date of the agreement. The minimum
commitment for the year ending April 30, 1999 is approximately $3.4 million.
Annual commitments will increase each year, thereafter, based on the growth of
the Company and inflation.
47
<PAGE> 49
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Wall Data Incorporated
We have audited the accompanying consolidated balance sheets of Wall Data
Incorporated as of April 30, 1998 and December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for the four months ended April 30, 1998 and for each of the three years in the
period ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wall Data Incorporated at April 30, 1998 and December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the four months
ended April 30, 1998 and for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statement taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
May 18, 1998
48
<PAGE> 50
WALL DATA INCORPORATED
SELECTED QUARTERLY FINANCIAL DATA
AND MARKET INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TRANSITION PERIOD--
FOUR MONTHS ENDED
APRIL 30, 1998
-------------------
<S> <C> <C> <C> <C> <C>
1998
Net revenues........................... $39,106
Gross margin........................... 29,673
Net income (loss)...................... (4,648)
Net income (loss) per share -- assuming
dilution............................. (0.47)
Common stock price per share:
High................................. 18.25
Low.................................. 13.50
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1997(1)(2)
Net revenues.......................... $37,023 $35,600 $28,564 $39,664 $140,851
Gross margin.......................... 30,269 27,901 22,049 33,337 113,556
Net income (loss)..................... 3,458 (4,654) 19 3,428 2,251
Net income (loss) per
share -- assuming dilution.......... 0.35 (0.50) 0.00 0.35 0.23
Common stock price per share:
High................................ 19.63 29.13 28.25 20.50 29.13
Low................................. 14.50 15.13 17.00 11.31 11.31
1996(3)
Net revenues.......................... $29,856 $34,826 $30,827 $43,855 $139,364
Gross margin.......................... 23,207 26,801 23,715 35,167 108,890
Net income (loss)..................... 511 1,661 (645) 2,666 4,193
Net income (loss) per
share -- assuming dilution.......... 0.05 0.17 (0.07) 0.28 0.43
Common stock price per share:
High................................ 17.25 23.75 27.50 24.75 27.50
Low................................. 13.00 14.75 16.25 12.25 12.25
</TABLE>
- Wall Data's Common Stock has been traded on the Nasdaq National Market
under the symbol "WALL" since March 15, 1993, the effective date of the
Company's initial public offering.
- The market prices of a share of Common Stock reflect the high and low
trading prices, as reported by the Nasdaq National Market.
- The Company has not paid cash dividends on its Common Stock.
- As of July 1, 1998, there were 301 holders of record of the Company's
Common Stock.
- ---------------
(1) During the quarter ended June 30, 1997, the Company recorded non-recurring
charges totaling $10.7 million before income taxes, consisting of $9.1
million for the settlement of the shareholders' class action lawsuit, $1.0
million for the restructuring of the SALSA business unit, and $0.6 million
for a retirement payment to the Company's former chairman. See Notes 8 and
13 of Notes to Consolidated Financial Statements.
49
<PAGE> 51
(2) During the quarter ended December 31, 1997, the Company recorded
non-recurring charges of $0.7 million before income taxes , for the
write-off of in-process research and development resulting from the
acquisition of Software Development Tools, Inc. See Note 8 of Notes to
Consolidated Financial Statements.
(3) During the quarter ended December 31, 1996, the Company recorded
non-recurring charges of $3.1 million before income taxes, primarily for the
write-off of purchased technologies. See Note 8 of Notes to Consolidated
Financial Statements.
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WALL DATA INCORPORATED
Date: July 24, 1998 By: /s/ JOHN R. WALL
------------------------------------
John R. Wall
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on the 24th day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN R. WALL President and Chief Executive Officer and
- ----------------------------------------------------- Director
John R. Wall
/s/ KEVIN B. VITALE Chief Operating Officer and Director
- -----------------------------------------------------
Kevin B. Vitale
/s/ RICHARD P. FOX Vice President Finance, Chief Financial
- ----------------------------------------------------- Officer
Richard P. Fox and Treasurer
/s/ ROBERT FRANKENBERG Director and Chairman of the Board
- -----------------------------------------------------
Robert Frankenberg
/s/ JEFFREY HEIMBUCK Director
- -----------------------------------------------------
Jeffrey Heimbuck
/s/ HENRY LEWIS Director
- -----------------------------------------------------
Henry Lewis
/s/ DAVID MILLET Director
- -----------------------------------------------------
David Millet
/s/ STEVE SARICH, JR. Director
- -----------------------------------------------------
Steve Sarich, Jr.
/s/ BETTIE A. STEIGER Director
- -----------------------------------------------------
Bettie A. Steiger
</TABLE>
<PAGE> 53
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WALL DATA INCORPORATED
<TABLE>
<CAPTION>
COL. A. COL. B COL. C COL. D COL. E
------- ------ ------ ------ ------
ADDITIONS
-------------------------
CHARGED TO CHARGED TO
BALANCE AT REVENUE, OTHER BALANCE AT
BEGINNING COSTS OR ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(A) PERIOD
----------- ---------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FOUR MONTHS ENDED APRIL 30, 1998
Reserves and allowances
deducted from asset
accounts:
Allowance for
uncollectible accounts,
rebates, and sales
returns................. $3,757,000 $4,645,000 -- $3,883,000 $4,519,000
Valuation allowance for
deferred tax assets..... $1,571,000 $1,787,000 -- -- $3,358,000
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances
deducted from asset
accounts:
Allowance for
uncollectible accounts,
rebates, and sales
returns................. $3,740,000 $5,421,000 -- $5,404,000 $3,757,000
Valuation allowance for
deferred tax assets..... $ 723,000 $ 848,000 -- -- $1,571,000
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances
deducted from asset
accounts:
Allowance for
uncollectible accounts,
rebates, and sales
returns................. $3,180,000 $3,614,000 -- $3,054,000 $3,740,000
Valuation allowance for
deferred tax assets..... $ 411,000 $ 312,000 -- -- $ 723,000
YEAR ENDED DECEMBER 31, 1995
Reserves and allowances
deducted from asset
accounts:
Allowance for
uncollectible accounts,
rebates, and sales
returns................. $2,037,000 $4,107,000 -- $2,964,000 $3,180,000
Valuation allowance for
deferred tax assets..... $ 518,000 $ 127,000 -- $ 234,000 $ 411,000
</TABLE>
- ---------------
(A) Deductions consist of write-offs of uncollectible accounts, reseller rebates
and product returns, and utilization of net operating loss carryforwards by
certain international subsidiaries.
<PAGE> 1
EXHIBIT 10.4
WALL DATA INCORPORATED
RESTATED EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1 PURPOSE .................................................... 1
SECTION 2 DEFINITIONS ................................................ 1
2.1 Account .................................................... 1
2.2 Base Pay ................................................... 1
2.3 Board ...................................................... 1
2.4 Code ....................................................... 2
2.5 Eligible Employee .......................................... 2
2.6 Offering Date .............................................. 2
2.7 Participant ................................................ 2
2.8 Related Corporation ........................................ 2
SECTION 3 ADMINISTRATION ............................................. 2
SECTION 4 STOCK SUBJECT TO THIS PLAN ................................. 3
4.1 Type and Number of Shares .................................. 3
4.2 Limitation on Exercise ..................................... 3
SECTION 5 ELIGIBILITY ................................................ 3
SECTION 6 OFFERINGS .................................................. 4
SECTION 7 PARTICIPATION BY PAYROLL DEDUCTION ......................... 4
SECTION 8 OPTION PRICE ............................................... 5
SECTION 9 GRANTING OF OPTION ......................................... 5
SECTION 10 EXERCISE OF OPTION ......................................... 5
SECTION 11 PARTICIPANT'S RIGHTS AS A SHAREHOLDER ...................... 5
SECTION 12 DELIVERY OF STOCK CERTIFICATES ............................. 6
SECTION 13 WITHDRAWAL ................................................. 6
SECTION 14 CARRYOVER OF ACCOUNT ....................................... 6
</TABLE>
- --------------------------------------------------------------------------------
Wall Data Incorporated Table of Contents
Employee Stock Purchase Plan 7/15/98
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 15 INTEREST ................................................... 6
SECTION 16 RIGHTS NOT TRANSFERABLE .................................... 6
SECTION 17 TERMINATION OF EMPLOYMENT .................................. 7
SECTION 18 DOLLAR AMOUNT LIMITATION ................................... 7
SECTION 19 CONTINUATION OF EMPLOYMENT ................................. 7
SECTION 20 WITHHOLDING TAXES .......................................... 7
SECTION 21 GREATER THAN FIVE PERCENT SHAREHOLDERS ..................... 8
SECTION 22 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION ................. 8
SECTION 23 SECURITIES REGULATION ...................................... 8
SECTION 24 AMENDMENT AND TERMINATION .................................. 9
SECTION 25 INDEMNIFICATION OF BOARD AND PLAN ADMINISTRATOR ............ 9
SECTION 26 EFFECTIVENESS .............................................. 10
</TABLE>
- --------------------------------------------------------------------------------
Wall Data Incorporated Table of Contents
Employee Stock Purchase Plan 7/15/98
-ii-
<PAGE> 4
WALL DATA INCORPORATED
RESTATED EMPLOYEE STOCK PURCHASE PLAN
SECTION 1 PURPOSE
The purpose of this Wall Data Incorporated Restated Employee Stock
Purchase Plan (the "Plan") is to provide a means whereby certain employees of
Wall Data Incorporated (the "Company"), or of any Related Corporation designated
by the Company, may be granted stock options to purchase the common stock of the
Company, in order to attract and retain the services or advice of such employees
and to provide added incentive to them by encouraging stock ownership in the
Company. It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The provisions of the Plan shall, accordingly, be construed in
a manner consistent with the requirements of that Section of the Code.
SECTION 2 DEFINITIONS
2.1 ACCOUNT
"Account" shall mean the funds accumulated with respect to a
Participant as a result of deductions from his or her paycheck for the purpose
of purchasing stock under this Plan. The funds allocated to a Participant's
Account shall remain the property of the respective Participant at all times but
may be commingled with the general funds of the Company.
2.2 BASE PAY
"Base Pay" shall mean the total cash compensation (including bonuses,
overtime, and commissions) as reflected on a Participant's W-2 income tax
statement (excluding moving expenses, reimbursed employee business expenses, and
taxable fringe benefits), except that a Participant may elect on the
Participation Agreement to exclude all bonuses and commissions from Base Pay. If
a Participant so elects, he or she must exclude all bonuses and commission but
not a part thereof.
2.3 BOARD
"Board" shall mean the Board of Directors of the Company.
- --------------------------------------------------------------------------------
Wall Data Incorporated Page 1
Employee Stock Purchase Plan 7/15/98
<PAGE> 5
2.4 CODE
"Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
2.5 ELIGIBLE EMPLOYEE
"Eligible Employee" shall mean any employee who is eligible to
participate in the Plan pursuant to the provisions of Section 5.
2.6 OFFERING DATE
"Offering Date" shall mean the commencement date of an offering, if
such date is a regular business day; otherwise, it shall mean the first regular
business day following such commencement date. A different date may be set by
resolution of the Board.
2.7 PARTICIPANT
"Participant" shall mean an Eligible Employee who has completed and
filed a Participation Agreement pursuant to Section 7.1.
2.8 RELATED CORPORATION
"Related Corporation," when referring to a subsidiary corporation,
shall mean any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock of each of
the corporations other than the Company is owned by one of the other
corporations in such chain. When referring to a parent corporation, the term
"Related Corporation" shall mean any corporation in an unbroken chain of
corporations ending with the Company if, at the time of the granting of the
option, each of the corporations other than the Company owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
SECTION 3 ADMINISTRATION
This Plan shall be administered by the Compensation Committee of the
Board (the "Compensation Committee") or such person or persons designated by
such Compensation Committee, to whom the Compensation Committee may delegate all
or a portion of the Compensation Committee's authority under this Plan. The
Compensation Committee and any such designated person or persons shall
hereinafter be referred to as the Plan Administrator. The Plan Administrator
shall be vested with full authority to make, administer, and interpret such
rules and regulations as it deems necessary to administer the Plan, and any
determination, decision, or action of the Plan Administrator in connection with
the construction,
- --------------------------------------------------------------------------------
Wall Data Incorporated Page 2
Employee Stock Purchase Plan 7/15/98
<PAGE> 6
interpretation, administration, or application of the Plan shall be final,
conclusive, and binding upon all Participants and any and all persons claiming
under or through any Participant.
SECTION 4 STOCK SUBJECT TO THIS PLAN
4.1 TYPE AND NUMBER OF SHARES
The stock subject to this Plan shall be the Company's Common Stock (the
"Common Stock"), presently authorized but unissued or subsequently acquired by
the Company. Subject to adjustment as provided in Section 22, the aggregate
amount of Common Stock to be delivered upon the exercise of all options granted
under this Plan shall not exceed four hundred thousand (400,000) shares as such
Common Stock was constituted on the effective date of this Plan and after giving
effect to the 4:1 reverse stock split authorized by the Board of Directors of
the Company on January 7, 1993. If any option granted under this Plan shall
expire or terminate for any reason without having been exercised in full, the
unpurchased shares subject thereto shall thereupon again be available for
delivery under this Plan.
4.2 LIMITATION ON EXERCISE
If the total number of shares for which options are to be exercised on
any date in accordance with Section 10 exceeds the number of shares then
available under the Plan (after deduction of all shares for which options have
been exercised or are then outstanding), the Plan Administrator shall make a pro
rata allocation of the shares remaining available in as nearly a uniform manner
as shall be practicable and as it shall determine to be equitable. The Company
shall give written notice of such reduction to each Participant affected thereby
and shall return any unused portion of each Participant's Account to such
Participant.
SECTION 5 ELIGIBILITY
Any regular employee of the Company (or any Related Corporation
designated by the Company) who is in the employ of the Company (or any such
designated Related Corporation) on one or more Offering Dates is eligible to
participate in the Plan, except for (i) employees who have been employed less
than three months, (ii) employees whose customary employment is less than twenty
(20) hours per week, and (iii) employees whose customary employment is for not
more than five (5) months in any calendar year. If the Company permits any
employees of a Related Corporation to participate in this Plan, then all
employees of that Related Corporation who meet the requirements of this Section
5 shall also be considered Eligible Employees.
- --------------------------------------------------------------------------------
Wall Data Incorporated Page 3
Employee Stock Purchase Plan 7/15/98
<PAGE> 7
SECTION 6 OFFERINGS
There will be consecutive offerings, each approximately six months in
length, pursuant to the Plan, until the earlier of the termination of the Plan
or the date when all (except de minimis amounts) of the shares of Common Stock
authorized under Section 4.1 shall have been delivered. The offering that shall
commence on the first day of the first semimonthly payroll beginning after
August 16, 1998 shall terminate one day immediately preceding the first day of
the first semimonthly payroll period beginning after February 28, 1999. For
offerings that commence after February 1, 1999, offerings shall commence on the
first day of the first semimonthly payroll period beginning immediately after
each subsequent February 28 (or February 29 in a 366-day year) and August 31.
Each offering shall terminate on the day immediately preceding the first day of
the first semimonthly payroll period of the subsequent offering. Notwithstanding
the foregoing, the Plan Administrator may, subject to the limitations set forth
in the Code from time to time, establish (a) a different term for one or more
offerings and (b) different commencing and ending dates for offerings.
SECTION 7 PARTICIPATION BY PAYROLL DEDUCTION
7.1 An Eligible Employee may participate by completing a Participation
Agreement provided by the Plan Administrator authorizing payroll deductions, and
completing any other papers deemed necessary by the Company or Plan
Administrator and filing the Agreement and any other such papers with the
Company no later than ten (10) business days prior to the commencement date of
the offering in which the Eligible Employee wishes to participate, or such later
date as the Plan Administrator may designate. Participation, in one offering
under the Plan shall neither limit nor require participation in any other
offering.
7.2 Payroll deductions for a Participant shall commence on the Offering
Date, and shall end on the termination date of such offering unless earlier
terminated by the Participant as provided in Section 13.
7.3 At the time a Participant files his Participation Agreement, the
Participant shall elect to have payroll deductions made from the Participant's
Base Pay, measured by whole number percentages from one percent (1%) up to a
maximum of ten percent (10%) of Base Pay, on each pay day during the time he or
she is a Participant in an offering.
7.4 All payroll deductions made for a Participant shall be credited to
the Participant's Account under the Plan. A Participant may not make any
separate cash payment into such Account, nor may the Participant make payment
for shares other than by payroll deduction.
7.5 A Participant may discontinue his or her participation in the Plan
as provided in Section 13, but no other change can be made during an offering
and, specifically, a Participant may not alter the rate of payroll deductions
for that offering.
- --------------------------------------------------------------------------------
Wall Data Incorporated Page 4
Employee Stock Purchase Plan 7/15/98
<PAGE> 8
SECTION 8 OPTION PRICE
The purchase price per share of Common Stock during any offering shall
be the lesser of (i) 85% of the fair market value of the stock on the Offering
Date, or (ii) 85% of the fair market value of the stock on the last business day
of the offering. Notwithstanding the foregoing, the Plan Administrator may
establish a different purchase price for any offering, which shall not be less
than the purchase price set forth in the preceding sentence. "Fair market value"
shall mean the average of the high and low sales prices for the Common Stock on
a particular day as reported by Nasdaq National Market.
SECTION 9 GRANTING OF OPTION
On each Offering Date, this Plan shall be deemed to have granted to the
Participant an option for as many full shares as he or she will be able to
purchase with the payroll deductions credited to his or her Account during
participation in that offering.
SECTION 10 EXERCISE OF OPTION
Each Eligible Employee who continues to be a Participant in an offering
on the last business day of that offering shall be deemed to have exercised his
or her option on such date and shall be deemed to have purchased from the
Company such number of full shares of Common Stock reserved for the purpose of
the Plan as the accumulated payroll deductions on such date will pay for at the
option price, subject to the limitations of Section 4.2.
SECTION 11 PARTICIPANT'S RIGHTS AS A SHAREHOLDER
11.1 No Participant shall have any right as a shareholder with respect
to any shares of Common Stock until the shares have been purchased in accordance
with Section 10 above.
11.2 Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant, or, if the Participant so directs, by
written notice to the Company prior to the termination date of the pertinent
offering, in the names of the Participant and one such other person as may be
designated by the Participant, as joint tenants with right of survivorship,
tenants in common or as community property, to the extent and in the manner
permitted by applicable law.
SECTION 12 DELIVERY OF STOCK CERTIFICATES
Certificates for stock issued to Participants will be delivered as soon
as practicable after the end of each offering.
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Employee Stock Purchase Plan 7/15/98
<PAGE> 9
SECTION 13 WITHDRAWAL
13.1 A Participant may withdraw from the Plan, in whole but not in
part, at any time prior to the last business day of each offering by delivering
a Withdrawal Notice to the Company, in which event the Company will refund the
entire balance of his or her Account as soon as practicable thereafter.
13.2 To re-enter the Plan, an Eligible Employee who has previously
withdrawn must file a new Participation Agreement in accordance with Section
7.1. Re-entry into the Plan cannot, however, become effective before the
beginning of the next offering following withdrawal.
SECTION 14 CARRYOVER OF ACCOUNT
At the termination of each offering, the Company shall automatically
re-enroll each Participant in the next offering. Upon re-enrollment, the
balance, if any, in the Participant's Account shall be used for option exercises
in the new offering. The Participant may elect not to re-enroll in the Plan by
filing notice of such election with the Company no later than ten (10) business
days prior to the commencement date (February 16 and August 16) of the next
offering. If the Participant does not re-enroll in the Plan or the Plan
terminates, the balance, if any, of each Participant's Account shall be refunded
to him or her.
SECTION 15 INTEREST
No interest will be paid or allowed on any money in the Accounts of
Participants.
SECTION 16 RIGHTS NOT TRANSFERABLE
No Participant shall be permitted to sell, assign, transfer, pledge, or
otherwise dispose of or encumber either the payroll deductions credited to his
or her Account or any rights with regard to the exercise of an option or to
receive shares under the Plan other than by will or the laws of descent and
distribution, and such right and interest shall not be liable for, or subject
to, the debts, contracts, or liabilities of the Participant. If any such action
is taken by the Participant, or any claim is asserted by any other party in
respect of such right and interest whether by garnishment, levy, attachment or
otherwise, such action or claim will be treated as an election by the
Participant to withdraw funds in accordance with Section 13.1.
SECTION 17 TERMINATION OF EMPLOYMENT
Upon termination of employment for any reason, on or prior to the last
business day of the offering, the balance in the Account of a Participant shall
be paid to the Participant or his or her estate.
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Employee Stock Purchase Plan 7/15/98
<PAGE> 10
SECTION 18 DOLLAR AMOUNT LIMITATION
18.1 No Eligible Employee may be granted an option under this Plan
which would permit the Eligible Employee's rights to purchase Common Stock under
all "employee stock purchase plans" of the Company, including any parent
corporation or subsidiary corporation (as the terms "parent corporation" and
"subsidiary corporation" are defined in Sections 424(e) and (f) of the Code), to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such Common Stock (determined at the Offering Date) for each
calendar year in which such option is outstanding at any time.
18.2 For purposes of this Section 18.1, (i) the right to purchase stock
under an option accrues when the option (or any portion thereof) first becomes
exercisable during the calendar year, and (ii) a right to purchase stock which
has accrued under one option granted pursuant to this Plan may not be carried
over to any other option.
SECTION 19 CONTINUATION OF EMPLOYMENT
Nothing in this Plan or in any option granted pursuant to this Plan
shall confer upon any Participant any right to continue in the employ of the
Company or of a Related Corporation, or to interfere in any way with the right
of the Company or of any Related Corporation to terminate his or her employment
or other relationship with the Company or Related Corporation at any time.
SECTION 20 WITHHOLDING TAXES
Each Participant will agree by entering the Plan, promptly to give the
Company notice of any such stock disposed of within two years after the date of
grant of the applicable option, showing the number of such shares disposed of.
As a condition to the exercise of a stock option, the Participant shall make
such arrangements as the Plan Administrator may require for the satisfaction of
any federal, state or local withholding tax obligations that may arise in
connection with the exercise of the stock option and the subsequent sale of the
stock acquired upon the exercise of the option within two years after the date
of grant of the option.
SECTION 21 GREATER THAN FIVE PERCENT SHAREHOLDERS
No Eligible Employee may be granted an option under this Plan if such
employee, immediately after the option is granted, owns stock of the Company
possessing five percent (5%) or more of the total combined voting power of all
classes of stock of the Company or of any Related Corporations. For purposes of
this Section 21, the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and stock which an
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Employee Stock Purchase Plan 7/15/98
<PAGE> 11
employee may purchase under corresponding options (under this Plan or any other
plan or contract) shall be treated as stock owned by such employee.
SECTION 22 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
22.1 The aggregate number and class of shares for which options may be
granted under this Plan, the number and class of shares covered by each
outstanding option and the exercise price per share thereof (but not the total
price), and each such option, may all be proportionately adjusted by the Plan
Administrator as it deems appropriate, for any change in the structure of the
Common Stock of the Company resulting from a reorganization, recapitalization,
stock split, stock dividend, combination of shares, merger, consolidation, or
any other capital adjustment.
22.2 All adjustments under this Section 22 shall be made by the Plan
Administrator, and its determination as to what adjustments shall be made, and
the extent thereof, shall be final, binding and conclusive. Unless a Participant
agrees otherwise, any change or adjustment to an option shall be made in such a
manner so as not to constitute a "modification," as defined in Section 424(h) of
the Code, and so as not to cause the Participant's stock option issued hereunder
to fail to continue to qualify as a stock option granted pursuant to an employee
stock purchase plan, as defined in Section 423(b) of the Code.
SECTION 23 SECURITIES REGULATION
23.1 Shares shall not be issued with respect to an option granted under
this Plan unless the exercise of such option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, the requirements of
any automated quotation system through which shares may then be traded, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance, including the availability of an exemption from registration
for the issuance and sale of any shares hereunder. Inability of the Company to
obtain, from any regulatory body having jurisdiction, the authority deemed by
the Company's counsel to be necessary for the lawful issuance and sale of any
shares hereunder or the unavailability of an exemption from registration for the
issuance and sale of any shares hereunder shall relieve the Company of any
liability in respect of the nonissuance or sale of such shares as to which such
requisite authority shall not have been obtained.
23.2 As a condition to the exercise of an option, the Company may
require the Participant to represent and warrant at the time of any such
exercise that the shares are being
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Wall Data Incorporated Page 8
Employee Stock Purchase Plan 7/15/98
<PAGE> 12
purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any relevant provision of the aforementioned laws.
At the option of the Company, a stop-transfer order against any shares of stock
may be placed on the official stock books and records of the Company, and a
legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates in order to
ensure exemption from registration. The Plan Administrator may also require such
other action or agreement by the Participants as may from time to time be
necessary to comply with the federal and state securities laws. THIS PROVISION
SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK
HEREUNDER.
SECTION 24 AMENDMENT AND TERMINATION
The Board may at any time suspend, amend or terminate this Plan;
provided, however, the Board may not amend this Plan without appropriate
shareholder approval if such approval is required by Section 423 of the Code or
any successor rule or other regulatory requirement. The Compensation Committee
may also amend the Plan to comply with applicable law, to clarify the provisions
of the Plan, or to facilitate administration of the Plan; provided, however,
that the Compensation Committee may not amend the Plan in any way which would
require shareholder approval or which would materially increase the cost to the
Company of operating the Plan.
SECTION 25 INDEMNIFICATION OF BOARD AND PLAN ADMINISTRATOR
In addition to all other rights of indemnification they may have as
Directors of the Company or as members of any body serving as the Plan
Administrator, members of the Board and Plan Administrator, excluding any
members who are not Directors or employees of the Company, shall be indemnified
by the Company to the fullest extent provided by law for all reasonable expenses
and liabilities of any type and nature, including attorneys' fees, incurred in
connection with any action, suit or proceeding to which they or any of them are
a party by reason of, or in connection with, any stock option granted hereunder,
and against all amounts paid by them in settlement thereof (if such settlement
is approved by independent legal counsel selected by the Company).
SECTION 26 EFFECTIVENESS
This Plan shall become effective upon adoption by the Board so long as
it receives any required approval by the holders of a majority of the Company's
outstanding shares of voting capital stock at any time within twelve (12) months
after the adoption of this Plan.
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Wall Data Incorporated Page 9
Employee Stock Purchase Plan 7/15/98
<PAGE> 13
*****
Approved by the Board of Directors on January 7, 1993 and by the
Company's shareholders on January 28, 1993, May 21, 1996 and May 29, 1997.
Amended and restated by the Board of Directors on July 21, 1993, March 5, 1996,
March 6, 1997, April 22, 1998 and May 20, 1998.
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Wall Data Incorporated Page 10
Employee Stock Purchase Plan 7/15/98
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WALL DATA INCORPORATED
AS OF APRIL 30, 1998
<TABLE>
<CAPTION>
STATE OF INCORPORATION
OR COUNTRY IN WHICH
SUBSIDIARY ORGANIZED
-------------------------------------------- ------------------------
<S> <C>
Wall Data (UK) Limited United Kingdom
Wall Data (Canada) Limited Canada
Wall Data (Barbados) Incorporated Barbados
Wall Data France s.a.r.l. France
Wall Data GmbH Germany
Wall Data Australia Pty Ltd. Australia
Wall Data Japan K.K. Japan
Wall Data Mexico S.A. de C.V. Mexico
Wall Data Asia Pte. Ltd. Singapore
Wall Data Limited Ireland
Wall Data International Delaware
Wall Data do Brasil Limitada Brazil
Software Development Tools Limited United Kingdom
Software Development Tools Inc. Delaware
Software Development Tools Inc. France France
Expert Edge Computer Systems Limited Ireland
Radisson Limited Ireland
First Service Computer Dienstleistungs-GmbH, Germany
Dietzenbach
First Service Computer Dienstleistungs-GmbH, Germany
Hattingen
First Service Computer Dienstleistungs-GmbH, Germany
Munchen
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to the Wall Data Incorporated 1983 Restated Stock Option
Plan as of January 7, 1993, Wall Data Incorporated 1993 Stock Option Plan as
Amended and Restated on October 15, 1996 and Amendment No. 1 thereto, Wall
Data Incorporated 1993 Stock Option Plan for Non-Employee Directors as Amended
and Restated on October 15, 1996 and Amendment No. 1 thereto, Wall Data
Incorporated 1994 Nonofficer Stock Option Plan as Amended and Restated on
October 15, 1996 and Amendments Nos. 1, 2 and 3 thereto and the Restated
Employee Stock Purchase Plan of our report dated May 18, 1998, with respect to
the consolidated financial statements and schedule of Wall Data Incorporated
included in this Form 10-K for the four months ended April 30, 1998 filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Seattle, Washington
July 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-30-1998
<CASH> 57,490
<SECURITIES> 0
<RECEIVABLES> 33,534
<ALLOWANCES> 4,519
<INVENTORY> 952
<CURRENT-ASSETS> 100,524
<PP&E> 34,284
<DEPRECIATION> 23,619
<TOTAL-ASSETS> 140,205
<CURRENT-LIABILITIES> 44,047
<BONDS> 0
0
0
<COMMON> 58,882
<OTHER-SE> 33,886
<TOTAL-LIABILITY-AND-EQUITY> 140,205
<SALES> 39,106
<TOTAL-REVENUES> 39,106
<CGS> 9,433
<TOTAL-COSTS> 44,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,531)
<INCOME-TAX> 117
<INCOME-CONTINUING> (4,648)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,648)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
