<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21176
WALL DATA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1189299
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
11332 N.E. 122ND WAY, KIRKLAND, WASHINGTON 98034-6931
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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. [ ]
The aggregate market value of the voting and nonvoting stock held by
nonaffiliates of the registrant at March 1, 1998 was approximately $144,380,927.
The number of shares of the registrant's Common Stock outstanding at March
1, 1998 was 9,904,492.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement for its annual meeting of
shareholders on May 20, 1998, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year, is
incorporated by reference in Part III hereof.
================================================================================
<PAGE> 2
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 software products and associated application tools and
provides comprehensive support and services for its products. The Company's
products deliver 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 to allow their 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 their enterprise information and
applications to the Internet, the Company has launched its Cyberprise(TM)
strategy and is increasingly focused on emerging markets for Internet-based
enterprise application solutions.
RECENT DEVELOPMENTS
NEW CORPORATE DIRECTION
In January 1998, Wall Data announced the Cyberprise strategy to the public.
Cyberprise products and services enable customers to use existing enterprise
information systems in conjunction with Internet-based technologies. By
migrating existing systems, customers can gain a competitive advantage 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."
PLANNED PRODUCTS AND RELEASES
In connection with the launch of the Cyberprise strategy, Wall Data
announced the rollout of a complete line of Cyberprise products in 1998.
CYBERPRISE(TM) 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 their existing enterprise
computing applications and information, as well as public information, through
an easy-to-use, channel-based interface. This channel interface can be easily
customized and accessed through a browser. Cyberprise Server
1
<PAGE> 3
software products include features such as Web-based administration and
management, centralized system controls and domain security.
CYBERPRISE HOST PRODUCTS
Cyberprise Host software 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 presentation of information to users, migrate
client/server applications to the Web and build Web applications that connect to
host transaction applications.
CYBERPRISE DATA PRODUCTS
Cyberprise Data software products publish database queries and reports,
database applications, spreadsheets, word processing documents and other data
sources that make data available to anyone with a Web browser. Additionally,
Cyberprise Data products publish solutions developed with Cyberprise Tool
products, enabling end-users to have relevant, browser-based solutions.
CYBERPRISE CHANNEL PRODUCTS
Cyberprise Channel products deliver business-specific corporate and public
content solutions in an organized fashion to employees, partners and customers
through a browser.
CYBERPRISE SERVICES
Cyberprise Services include service and support, consulting services and
specialized programs that facilitate moving mission-critical systems to the
Cyberprise environment.
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 solution platforms, 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.
In addition to the products discussed above under "--Planned Products and
Releases," Wall Data's product line currently includes the following products:
HOST CONNECTIVITY SOFTWARE PRODUCTS
The Company's principal product line is the RUMBA family of PC-based host
connectivity software products, which operate 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 system configurations, including several
types of direct and LAN communication hardware, multiple LAN operating systems
and a broad range of communications servers and gateways. RUMBA software is
designed to be implemented enterprise-
2
<PAGE> 4
wide and to leverage customers' existing investments in host computers,
applications, PCs and networking infrastructure, including investments in
corporate intranets and the Internet.
The Company has derived a substantial majority of its net revenues to date
from sales of its RUMBA client software products, which accounted for 81%, 86%
and 88% of net revenues in 1997, 1996 and 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 1998. 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. The Company's
client software products operate on PCs. 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 in
conjunction with RUMBA software. By implementing industry-standard architectures
for custom solution development, including Microsoft's ActiveX component
architecture, RUMBA tool products give developers the ability to produce custom
software solutions that meet specific user needs without having to create the
enterprise information access technology themselves.
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 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. These
products are licensed on a per-unit basis and may be available pursuant to
enterprise-wide or site licenses.
3
<PAGE> 5
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 providing responsive, high-quality product
support and product 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 information base,
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 these ranges of sales and marketing opportunities, Wall Data uses a
combination of direct sales, telesales, resellers, distributors and OEM
arrangements.
The direct sales force focuses on large business organizations and markets
to several levels within these organizations, including the executive,
management information systems, department/division and user levels. 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 staffs. In addition, the
Company relies on resellers and distributors to market and support its products
in certain 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. Additionally, 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. 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. The Company's distributors generally are permitted
inventory exchange or rotation rights.
Wall Data also 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 for
nonexclusive licenses of specific versions of RUMBA software and allow the OEMs
to combine the specific version of RUMBA software with their product-specific
software and to distribute and market the derivative of the RUMBA 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 RUMBA
distributed to end users or used internally. The Company's OEM agreement with
IBM expires in 2001. Such agreements may be terminated by either party upon
breach by the other party, and the agreement with IBM is terminable by IBM upon
90 days' notice. The Company intends to pursue OEM agreements with additional
companies. Sales pursuant to OEM agreements accounted for approximately 7% of
the Company's net revenues in 1997.
4
<PAGE> 6
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 30%, 29% and 28% of the Company's net revenues in 1997, 1996
and 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 that may have 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, Spain and the United States.
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 agree 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 12
of Notes to Consolidated Financial Statements for more information regarding
foreign operations and export sales.
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 and industry standards and other
technological changes. 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. The Company employs engineers to
develop new products and product enhancements. 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 $19.7
million, $22.9 million and $19.8 million in 1997, 1996 and 1995, respectively.
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.
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.
5
<PAGE> 7
The principal competitive factors affecting the market for the Company's
products include product functionality, ease of use, price, quality, performance
and reliability; 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. These products allow PCs to access information
from enterprise servers or host systems using Internet browsers, and may cause
customers to re-evaluate their information and application access strategy in
ways that reduce the need for the Company's client products.
In general, customers and prospective customers of the Company's products
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 technology 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. 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.
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.
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
6
<PAGE> 8
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 occur in the fourth quarter,
and in each of the last five years, the first quarter revenues have been down
sequentially compared with the immediately preceding fourth quarter. In
addition, the third 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.
EMPLOYEES
As of December 31, 1997, the Company's headcount totaled 793 persons,
including employees and contractors. The Company believes that its future
success continues to depend, 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. 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, such as Web-based
technologies. 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, 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."
7
<PAGE> 9
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, and 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
historically have 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 they find year
2000 fixes, 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 near the end of the quarter.
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.
The Company's business is seasonal. A substantial portion of the Company's
annual net revenues and operating income typically occur in the fourth quarter,
and in each of the last five years, the first quarter revenues have been down
sequentially compared with the immediately preceding fourth quarter. In
addition, the third 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.
Competition. The connectivity market within the computer industry 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
8
<PAGE> 10
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 may 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 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 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. See "--Competition."
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. 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 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 adversely affect the Company's results of operations. See
"--Products" and "--Competition."
Dependence on Microsoft Windows. Substantially all of 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 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 reseller or distributor 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
9
<PAGE> 11
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
devote the necessary resources to resolve all 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 attract and retain qualified professional,
technical, managerial and marketing personnel. Competition for such personnel in
the software 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 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 that 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
10
<PAGE> 12
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."
EXECUTIVE OFFICERS AT DECEMBER 31, 1997
The executive officers of the Company and their ages at December 31, 1997
are as follows:
<TABLE>
<S> <C> <C>
John R. Wall 40 President and Chief Executive Officer of the Company
since August 1997; President since May 1996; Director
since May 1994; Executive Vice President from June
1991 to May 1996; Secretary from January 1993 to May
1994; Director from inception to May 1991 and
Chairman of the Board of Directors from 1985 to 1991;
President from 1982 to 1985; Vice President, Research
and Development from 1985 to 1991; Chairman of The
Washington Software Association from January 1994 to
December 1995; Founding Trustee and Chairman of the
Washington Software Foundation; Board of Trustees of
the Corporate Council for the Arts.
Kevin B. Vitale 40 Chief Operating Officer and a Director of the Company
since August 1997; Executive Vice President from
April 1996 to July 1997; Vice President, Operations
and Services of the Company from July 1993 to April
1996; Vice President, Corporate Quality and Customer
Service of NetFRAME Systems Incorporated from July
1989 to July 1993; Director of The Washington
Software Association since 1997; Director of
DataChannel, Inc.; founding member of the Technical
Support Alliance Network ("TSANet"), served as board
member and Treasurer for the past four years.
Alexandra A. Brookshire 43 Vice President, General Counsel and Secretary of the
Company since April 1994; lawyer with Perkins Coie
LLC law firm from 1985 to April 1994, becoming a
partner in 1989; lawyer with Dewey Ballantine law
firm from 1981 to 1985.
Richard Van Hoesen 42 Vice President Finance, Chief Financial Officer and
Treasurer of the Company since May 1996; Vice
President Finance and Chief Financial Officer of
Consilium, Inc. from October 1994 to May 1996;
Director, Investor Relations of Sun Microsystems,
Inc. from April 1992 to October 1994.
</TABLE>
The Company has announced that Rick Fox will join the Company as Vice
President Finance, Chief Financial Officer and Treasurer effective April 1998,
following the departure of Mr. Van Hoesen in March 1998. During his 28-year
tenure with Ernst & Young, Mr. Fox held many leadership positions with the firm,
including managing partner of the firm's Seattle office and a member of the
Ernst & Young National Partner Advisory Counsel. Immediately prior to joining
Wall Data, Mr. Fox served as senior vice president of PACCAR Inc responsible for
the company's accounting, treasury and information systems.
11
<PAGE> 13
BOARD OF DIRECTORS AT DECEMBER 31, 1997
The directors of the Company at December 31, 1997 are as follows:
<TABLE>
<S> <C> <C>
Robert J. Frankenberg 50 Chairman of the Board of Wall Data; President and
Chief Executive Officer of Encanto Networks, Inc.
Jeffrey A. Heimbuck 51 Former President and Chief Executive Officer of Inmac
Corporation
Henry N. Lewis 59 Managing Director and Principal of Computer Ventures
Group Limited
David F. Millet 53 Managing Director of Gemini Investments
Steve Sarich, Jr. 77 President of 321 Investment Company
Bettie A. Steiger 64 Principal, Market and Technology Innovation of Xerox
Corporation
John R. Wall 40 President and Chief Executive Officer of Wall Data
Kevin B. Vitale 40 Chief Operating Officer of Wall Data
</TABLE>
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
None.
12
<PAGE> 14
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
January 31, 1998 was 336.
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 are as follows:
<TABLE>
<CAPTION>
STOCK PRICE
--------------------
YEAR HIGH LOW
- ---- ------ ------
<S> <C> <C>
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
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
</TABLE>
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
WALL DATA INCORPORATED
SELECTED FIVE-YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net revenues............................. $140,851 $139,364 $110,741 $101,240 $64,641
Gross margin............................. 113,556 108,890 86,522 85,754 55,097
Operating expenses....................... 113,865 103,829 91,737 64,726 40,613
Income (loss) from operations............ (309) 5,061 (5,215) 21,028 14,484
Net income............................... 2,251 4,193 7,251 14,184 9,545
Earnings per share -- assuming
dilution............................... 0.23 0.43 0.72 1.40 1.00
Pro forma net income*.................... 9,581 6,145 2,766 16,664 11,529
Pro forma earnings per share -- assuming
dilution............................... 0.97 0.63 0.28 1.65 1.21
Average shares outstanding -- assuming
dilution............................... 9,886 9,721 10,027 10,124 9,520
BALANCE SHEET
Cash and cash equivalents................ $ 70,814 $ 62,483 $ 51,969 $ 48,927 $50,308
Working capital.......................... 72,849 71,798 60,720 56,308 55,333
Total assets............................. 136,576 127,154 109,339 105,626 74,431
Long-term obligations, net of current
portion................................ -- -- -- -- 127
Shareholders' equity..................... 94,887 90,803 83,702 81,206 62,333
KEY RATIOS
Current ratio............................ 2.7 3.0 3.3 3.3 5.6
Pro forma return on net revenues*........ 6.8% 4.4% 2.5% 16.5% 17.8%
Pro forma return on average total
assets*................................ 7.3% 5.2% 2.6% 18.5% 25.5%
Pro forma return on average stockholders'
equity*................................ 10.3% 7.0% 3.4% 23.2% 32.3%
</TABLE>
- ---------------
* Excludes nonrecurring gain in 1995 of $14.0 million ($8.7 million, or $0.87
per share on a diluted basis, after income taxes) and nonrecurring charges in
1997, 1996 and 1995 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), and $6.8 million ($4.2 million,
or $0.42 per share on a diluted basis, after income taxes), respectively. See
Notes 6 and 11 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
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
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 they find
14
<PAGE> 16
year 2000 fixes and changes in general economic conditions. Net revenues will
also depend upon the success of the Company's recently announced 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 the revenues for each quarter typically is
received near the end of the quarter. 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. The financial impact of making
the required changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows. However,
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
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
The growth in net revenues and operating income experienced by the Company
during the past five years is not necessarily indicative of future results. In
view of the significant growth of the Company's operations in recent 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.
The Company's business is seasonal, with a substantial percentage of its
annual net revenues and operating income typically occurring in the fourth
quarter of the year. Since 1991, the Company has frequently incurred higher
operating expenses in each sequential quarter primarily due to an increase in
the number of employees. The Company expects that in the first quarter of 1998
lower net revenues, as compared to the fourth quarter of 1997, will result in
significantly lower net income.
Revenues
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
-------- ------ -------- ------ --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Revenues..................... $140,851 1% $139,364 26% $110,741
</TABLE>
Net revenues increased 1% in 1997. Increases in revenue from ONESTEP
customer support contracts was substantially offset by decreases in revenue from
licenses of RUMBA products. The Company believes that the growth in net revenues
in 1997 was lower than in prior years due to lengthening sales cycles for its
core products as its customers continue to evaluate Internet technology
strategies for future mission-critical systems. Approximately 60% and 25% of net
revenues in 1997 related to products containing 32-bit technology and 16-bit
technology, respectively.
Net revenues increased 26% in 1996 primarily due to increases in revenues
from the Windows version of RUMBA OFFICE, the Company's multi-host product, and
ONESTEP customer support contracts, 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 29% and 61% of
net revenues in 1996 related to products containing 32-bit technology and 16-bit
technology, respectively. In 1995, approximately 89% of net revenues resulted
from 16-bit products. Net revenues from the SALSA product family, which the
Company introduced in March 1996, were not significant.
The Company has derived a substantial majority of its net revenues to date
from licenses of its RUMBA client software products, which accounted for 81%,
86% and 88% of net revenues in 1997, 1996 and 1995, respectively. The RUMBA
product line and related enhancements are expected to account for a majority of
the Company's net revenues for 1998. 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
15
<PAGE> 17
to move existing mission-critical systems and public information to the Web and
extend those systems to remote users, vendors and customers. There can be no
assurance that the Cyberprise strategy will be successful. See "--Important
Factors Regarding Forward-Looking Statements -- New Products; Technological
Change; Uncertain Acceptance of the Company's New Products" and "--New Markets;
Longer Sales Cycle."
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 1997
compared to $40.0 million, or 29% of net revenues, in 1996 and $30.6 million, or
28% of net revenues, in 1995. The increases in international net revenues in
1997 and 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 1997, 1996 and 1995
were generated through its indirect distribution channels. The Company's
international sales are denominated in U.S. dollars and local currencies.
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 1997, 1996 and 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 expertise to
distribute the Company's products. Additional risks inherent in the Company's
international business activities, which have not materially affected the
Company's 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.
The Financial Accounting Standards Board recently approved the new American
Institute of Certified Public Accountants Statement of Position ("SOP") No.
97-2, "Software Revenue Recognition." SOP No. 97-2 will be effective for the
Company beginning in the first quarter of 1998. The Company is currently
assessing the impact, if any, of SOP No. 97-2 on its revenue recognition policy.
GROSS MARGIN AND COST OF REVENUE
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
---- ------ ---- ------ ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GROSS MARGIN...................... $113,556 4% $108,890 26% $86,522
Percentage of net revenues...... 81% 78% 78%
</TABLE>
Cost of revenues consists of software publishing costs, which include
labor, product media, packaging and documentation, publishing, engineering,
technical support and product quality assurance costs, royalties and licensing
costs, amortization of product localization costs and provisions for obsolete
inventory, doubtful accounts, and reseller rebates. Gross margin, as a
percentage of net revenues, increased in 1997 from 1996 primarily due to lower
software publishing costs and lower royalties and licensing costs, partially
offset by an increase in the amortization of localization costs. Software
publishing costs decreased in 1997 due to the conversion of all product media
from diskettes to compact discs and the adoption of simplified, uniform product
packaging. Royalties and licensing costs decreased in 1997 due to lower RUMBA
software license revenues and lower costs for third-party technology. The
amortization of localization costs increased primarily due to third-party
localization costs incurred in 1996 relating to the major product launches for
certain RUMBA products. The Company amortizes third-party localization costs
over a 24-month period. Gross margin, as a percentage of net revenues, in 1996
approximated the percentage in 1995. Expenses for royalties and amortization of
prepaid licenses may increase in the future if the Company introduces more
products incorporating software licensed from third parties, and amortization of
product localization costs will increase as the Company introduces new products
in international markets.
16
<PAGE> 18
OPERATING EXPENSES
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
---- ------ ---- ------ ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Product development............... $19,675 (14%) $22,924 16% $19,765
Percentage of net revenues........ 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 ARPEGGIO
LIVE! and RUMBA OBJECTX which were developed and released in 1997 and RUMBA
95/NT, SALSA and ARPEGGIO which were developed in 1995 and 1996 and released in
the first half of 1996. Product development expenses decreased in 1997 due to
lower average headcount, arising from the completion of initial versions of
RUMBA 95/NT and SALSA products in 1996. The reduction also reflects the benefits
obtained from the object-based architecture that was developed during 1996 and
1995. Product development expenses increased in 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 1997 compared to 1996 due to the
completion of the two major development projects, RUMBA 95/NT and SALSA in early
1996; the percentage decreased in 1996 compared to 1995 due to the completion of
these development projects, together with the higher revenue growth rate in
1996.
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Sales and marketing............... $66,938 5% $63,939 17% $54,615
Percentage of net revenues........ 48% 46% 49%
</TABLE>
During 1995 through 1997 the Company generally expanded its sales and
marketing operations by increasing staffing levels coupled with increases in the
amount and breadth of its cooperative advertising programs with resellers and
distributors, other marketing programs and trade show activity. The number of
sales offices maintained by the Company totaled 49, 57 and 54 at the end of
1997, 1996 and 1995, respectively, including, at the end of 1997, six offices in
Europe, two offices in Canada, three offices in Latin America and one office
each in Australia, Japan, Mexico and Singapore. The increase in expenses in 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 1997 compared to 1996 primarily due to
the lower revenue growth rate in 1997; the percentage decreased in 1996 compared
to 1995 primarily due to the higher revenue growth rate in 1996.
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
General and administrative........ $15,764 14% $13,818 31% $10,552
Percentage of net revenues........ 11% 10% 10%
</TABLE>
General and administrative expenses include general administrative, finance
and accounting, and legal expenses, costs for the management information systems
and human resources departments, and the amortization of goodwill relating to
certain acquisitions. The increases in general and administrative expenses in
1997 and 1996 resulted primarily from increased staffing and associated expenses
necessary to manage and support the Company's growth and, in 1996, also from
higher legal fees as a result of the shareholders' class action lawsuit. (See
Notes 6 and 11 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 will increase
in 1998 as a result of the Company's acquisition of Software Development Tools,
Inc. in November 1997 and of First Service Computer Dienstleistungs-GmbH ("First
Service") in March 1998. (See Note 14 of Notes to Consolidated Financial
Statements.)
17
<PAGE> 19
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
------- ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <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 1997, the Company recorded nonrecurring charges totaling $11.5
million ($7.3 million, or $0.74 per share on a diluted share 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 6 and 11 of
Notes to Consolidated Financial Statements.) The Company also recorded
nonrecurring charges in 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 6 of Notes to Consolidated Financial Statements.) During
1996, the Company determined to streamline its business operations and recorded
nonrecurring charges totaling $3.1 million ($2.0 million, or $0.20 per share on
a diluted basis, after income taxes) 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 1995, the Company recorded
nonrecurring charges totaling $6.8 million ($4.2 million, or $0.42 per share on
a diluted basis, after income taxes) primarily for the write-off of in-process
research and development resulting from the acquisition of Concentric Data
Systems, Inc. in April 1995 and the write-off of the remaining goodwill from
another acquisition. (See Note 6 of Notes to Consolidated Financial Statements.)
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
------ ------ ------ ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER INCOME (EXPENSE)
Gain on sale of equity investment... -- -- -- -- $14,040
Percentage of net revenues.......... -- -- 13%
Interest income..................... $3,538 21% $2,934 (8)% $ 3,191
Percentage of net revenues....... 3% 2% 3%
Other income (expense), net......... $ (735) (2)% $ (748) 131% $ (324)
Percentage of net revenues....... (1)% (1)% --
</TABLE>
Interest income increased in 1997 compared to 1996 due to higher investment
balances; interest income decreased in 1996 compared to 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 1997, $0.6 million in 1996 and $0.5 million in 1995. To date,
the Company has not engaged in currency hedging transactions against sales
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 6 of Notes to Consolidated Financial
Statements.)
INCOME TAXES
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
---- ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PROVISION FOR INCOME TAXES.................. $243 (92)% $3,054 (31)% $4,441
Percentage of net revenues................ 0.2% 2% 4%
Effective tax rate........................ 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
decrease in the Company's effective tax rate in 1997 as compared to 1996
resulted primarily
18
<PAGE> 20
from Foreign Sales Corporation tax benefits and from operating losses incurred
in higher tax rate jurisdictions combined with significant operating profits
earned in jurisdictions with lower tax rates. The increase in the Company's
effective tax rate in 1996 was due to higher profits in certain international
subsidiaries, which are subject to higher tax rates coupled with certain
nondeductible expenses. The Company anticipates that the effective tax rate in
1998 will increase significantly from 1997 and be somewhat lower than in 1996.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents..................... $70,814 $62,483 $51,969
Working capital............................... $72,849 $71,798 $60,720
Net cash flow provided by operating
activities.................................. $19,888 $18,143 $ 5,736
</TABLE>
The Company's cash and cash equivalents totaled $70.8 million, or 52% of
total assets, at December 31, 1997, compared to $62.5 million, or 49% of total
assets, at December 31, 1996.
The Company's expenditures for property and equipment for the years ended
December 31, 1997, 1996 and 1995 totaled $3.9 million, $5.1 million and $7.1
million, respectively. The decrease in expenditures in 1997 compared to 1996 and
in 1996 compared to 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 $2.4 million, $1.3 million and $3.2 million
in 1997, 1996 and 1995, respectively. Capitalized third-party localization costs
totaled $3.0 million in both 1997 and 1996; such costs were not material in
1995. The decrease in capitalized localization costs in 1997 as compared to 1996
and the increase in such costs in 1996 as compared to 1995 resulted from the
significant increase in the volume of new product introductions in 1996 compared
to 1997 and 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
1997 or 1996.
In October 1997, the Company acquired a 15% interest in Suntek Information
System Co. Ltd. for approximately $0.9 million. In November 1997, the Company
acquired Software Development Tools, Inc. for $2.0 million. 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. for approximately $7.8 million. See Note 6 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 1998.
On March 12, 1998, the Company acquired all the outstanding capital stock
of First Service of Hattingen, Germany and related entities. 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 total purchase price
approximates $11.0 million, including deferred payments of approximately $2.0
million that are substantially payable in one year, contingent on the
satisfaction of certain guarantees and warranties. The acquisition will be
accounted for under the purchase method of accounting. See Note 14 of Notes to
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are
included beginning on page F-1 of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Income Statements -- years ended December 31,
1997, 1996 and 1995....................................... F-1
Consolidated Balance Sheets -- December 31, 1997 and 1996... F-2
Consolidated Statements of Shareholders' Equity -- years
ended December 31, 1997, 1996 and 1995.................... F-3
Consolidated Statements of Cash Flow -- years ended December
31, 1997, 1996 and 1995................................... F-4
Notes to Consolidated Financial Statements.................. F-5
Report of Ernst & Young LLP, Independent Auditors........... F-16
Selected Quarterly Financial Data and Market Information.... F-17
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 22
PART III
Part III is incorporated herein by reference from the Company's definitive
proxy statement issued in connection with the Company's 1998 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's 1997 fiscal year. Certain
information regarding the executive officers and directors of the Company is set
forth in Part I of this Report.
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 F-16 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.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of Wall Data
Incorporated.*
3.2 Restated Bylaws of Wall Data Incorporated.*
+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.*
+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.*
10.4 Restated Employee Stock Purchase Plan (Incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996).
+10.5 Separation Agreement and General Release dated June 30, 1997
between Wall Data Incorporated and James Simpson.*
10.6 Agreement for Information Technology Services dated May 31,
1997 between Wall Data Incorporated and Electronic Data
Systems Corporation.**
+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).
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
11.1 Computation of Earnings Per Share.*
21.1 Subsidiaries of Wall Data Incorporated.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
27.1 Financial Data Schedule.*
27.2 Restated Financial Data Schedule for 1997.*
27.3 Restated Financial Data Schedule for 1996.*
</TABLE>
- ---------------
+ Management contract or compensatory plan
* Included herewith
** Included herewith; confidential treatment has been requested as to a portion
of this document
(b) Reports on Form 8-K:
None.
22
<PAGE> 24
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
License Fees............................................. $118,905 $124,815 $102,800
Services................................................. 21,946 14,549 7,941
-------- -------- --------
Total net revenues............................... 140,851 139,364 110,741
Cost of revenues:
License Fees............................................. 19,645 23,474 19,661
Services................................................. 7,650 7,000 4,558
-------- -------- --------
Total cost of revenues........................... 27,295 30,474 24,219
-------- -------- --------
Gross margin............................................... 113,556 108,890 86,522
Operating expenses:
Product development...................................... 19,675 22,924 19,765
Sales and marketing...................................... 66,938 63,939 54,615
General and administrative............................... 15,764 13,818 10,552
Non-recurring charges.................................... 11,488 3,148 6,805
-------- -------- --------
Total operating expenses......................... 113,865 103,829 91,737
-------- -------- --------
Operating income (loss).................................... (309) 5,061 (5,215)
Other income (expense):
Gain on sale of equity investment........................ -- -- 14,040
Interest income.......................................... 3,538 2,934 3,191
Other, net............................................... (735) (748) (324)
-------- -------- --------
Total other income, net.......................... 2,803 2,186 16,907
-------- -------- --------
Income before income taxes................................. 2,494 7,247 11,692
Provision for income taxes................................. 243 3,054 4,441
-------- -------- --------
Net income................................................. $ 2,251 $ 4,193 $ 7,251
======== ======== ========
Earnings per share -- basic................................ $ 0.24 $ 0.46 $ 0.79
======== ======== ========
Earnings per share -- assuming dilution.................... $ 0.23 $ 0.43 $ 0.72
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE> 25
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 70,814 $ 62,483
Accounts receivable, net of allowances of $3,757 and
$3,740................................................. 35,113 38,694
Inventories............................................... 738 733
Deferred income taxes..................................... 5,701 3,977
Prepaid expenses and other current assets................. 2,172 2,262
-------- --------
Total current assets.............................. 114,538 108,149
Fixed assets, net........................................... 10,597 12,735
Deferred income taxes....................................... 458 155
Long-term investments....................................... 2,636 --
Other assets................................................ 8,347 6,115
-------- --------
$136,576 $127,154
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,106 $ 6,774
Accrued compensation...................................... 7,365 7,989
Other accrued liabilities................................. 7,167 5,676
Income taxes payable...................................... 3,735 4,722
Deferred revenues......................................... 15,316 11,190
-------- --------
Total current liabilities......................... 41,689 36,351
-------- --------
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 9,312,480 shares
(9,132,980 in 1996).................................... 56,771 54,357
Retained earnings......................................... 37,762 35,791
Cumulative translation adjustment......................... 354 655
-------- --------
Total shareholders' equity........................ 94,887 90,803
-------- --------
$136,576 $127,154
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 26
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT 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
Net income for the year..................... -- -- 7,251 -- 7,251
Translation adjustment...................... -- -- -- (188) (188)
--------- -------- ------- ----- -------
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
Unrealized gain on investment............... -- -- 88 -- 88
Net income for the year..................... -- -- 4,193 -- 4,193
Translation adjustment...................... -- -- -- 758 758
--------- -------- ------- ----- -------
Balance at December 31, 1996.................. 9,132,980 54,357 35,791 655 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
Unrealized loss on investment............... -- -- (280) -- (280)
Net income for the year..................... -- -- 2,251 -- 2,251
Translation adjustment...................... -- -- -- (301) (301)
--------- -------- ------- ----- -------
Balance at December 31, 1997.................. 9,312,480 $ 56,771 $37,762 $ 354 $94,887
========= ======== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 27
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 3L
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 2,251 $ 4,193 $ 7,251
Adjustments to reconcile net income to net cash provided
by operations:
Deferred income taxes................................. (2,031) 684 (2,164)
Provision for doubtful accounts....................... 434 455 425
Depreciation and amortization......................... 9,635 10,149 7,024
Non-recurring charges................................. 1,639 3,148 6,805
Gain on sale of equity investment..................... -- -- (14,040)
Other, net............................................ 102 168 129
Decrease (increase) in operating assets:
Accounts receivable................................. 2,964 (10,794) (578)
Inventories......................................... (265) 321 (31)
Other current assets................................ 171 549 (919)
Increase (decrease) in operating liabilities:
Accounts payable.................................... 1,169 (302) (387)
Accrued liabilities................................. 293 4,149 775
Income taxes payable................................ (587) 2,130 (3,337)
Deferred revenues................................... 4,113 3,293 4,783
-------- -------- --------
Net cash provided by operating activities........ 19,888 18,143 5,736
-------- -------- --------
INVESTING ACTIVITIES
Sales of short-term investments.......................... -- -- 22,000
Proceeds from sale of equity investment.................. -- -- 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) -- --
Investment in Suntek Information System Co. Ltd. and
DataChannel, Inc...................................... (2,636) -- --
Purchases of fixed assets................................ (3,857) (5,056) (7,133)
Purchases of prepaid software technology................. (2,397) (1,337) (3,223)
Capitalized localization costs........................... (2,973) (3,019) --
Other.................................................... (368) (618) (1,166)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (14,137) (10,030) 25,530
-------- -------- --------
FINANCING ACTIVITIES
Payments pursuant to repurchase and retirement of
stock................................................. -- -- (8,539)
Tax benefit from stock options exercised................. 271 375 1,150
Proceeds from issuances under stock plans................ 2,143 1,574 1,251
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 2,414 1,949 (6,138)
-------- -------- --------
Net increase in cash and cash equivalents.................. 8,165 10,062 25,128
Effect of exchange rate changes on cash.................... 166 452 (86)
Cash and cash equivalents at beginning of year............. 62,483 51,969 26,927
-------- -------- --------
Cash and cash equivalents at end of year................... $ 70,814 $ 62,483 $ 51,969
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 28
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 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 to allow their 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.
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 recognized 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. The Company's revenue recognition policies conform to
Statement of Position 91-1, "Software Revenue Recognition," promulgated by the
American Institute of Certified Public Accountants.
The Financial Accounting Standards Board recently approved the new American
Institute of Certified Public Accountants Statement of Position ("SOP") No.
97-2, "Software Revenue Recognition." SOP No. 97-2 will be effective for the
Company beginning in 1998. The Company is currently assessing the impact, if
any, of SOP No. 97-2 on its revenue recognition policy.
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.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid instruments purchased 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.
F-5
<PAGE> 29
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 investments, consisting of equity investments, are recorded at
cost due to the lack of significant influence.
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.
Stock Based Compensation
During 1996, the Company adopted the disclosure provisions under Statement
of Financial Accounting 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 $5.7 million, $6.9 million and $4.5 million in 1997, 1996 and 1995,
respectively.
Earnings per Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS
No. 128 requires presentation of basic earnings per share and diluted earnings
per share. Basic earnings per share excludes dilution and 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. The adoption of this
new accounting standard did not have a material effect on the reported earnings
per share of the Company. Prior year earnings per share have been adjusted to
conform to the new accounting standard. The amount of the adjustments was not
material.
F-6
<PAGE> 30
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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. MARKETABLE SECURITIES
Marketable securities consist primarily of investment-grade commercial
paper and are classified as available-for-sale. Marketable debt securities with
maturity dates less than three months at December 31, 1997 and 1996 total $45
million and $48 million, respectively, at cost, and are included in cash and
cash equivalents. The estimated fair value of the commercial paper approximates
cost. Marketable equity securities, which are not material, are included in
other assets.
3. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Equipment......................................... $25,624 $21,834
Furniture and fixtures............................ 6,100 5,685
------- -------
31,724 27,519
Less -- accumulated depreciation and
amortization.................................... 21,127 14,784
------- -------
$10,597 $12,735
======= =======
</TABLE>
4. OTHER ASSETS
Other assets primarily consists of prepaid software technology license
fees, external product localization costs and intangible assets resulting from
the acquisitions of Software Development Tools, Inc. ("SDTI") in 1997 and
Concentric Data Systems, Inc. ("Concentric") in 1995. See Note 6. As of December
31, 1997 and 1996, prepaid software technology license fees totaled $2.0 million
and $1.2 million, net of accumulated amortization of $1.1 million and $1.5
million, respectively. Royalties and amortization of prepaid licenses totaled
$1.7 million, $4.1 million and $2.7 million in 1997, 1996 and 1995,
respectively, and are included in cost of revenues. As of December 31, 1997 and
1996, external product localization costs totaled $3.3 million and $2.7 million,
net of accumulated amortization of $2.8 million and $0.6 million, respectively.
Amortization of external product localization costs totaled $2.2 million and
$0.6 million in 1997 and 1996, respectively; such costs were not material in
1995. Intangible assets arising from acquisitions, including goodwill, totaled
$2.3 million and $1.4 million at December 31, 1997 and 1996, respectively, net
of accumulated amortization of $0.7 million in 1997 and $0.4 million in 1996.
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.
F-7
<PAGE> 31
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. LEASES
The Company rents office facilities under operating lease agreements.
Future minimum lease payments under noncancelable operating leases with terms in
excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
1998....................................... $ 3,089
1999....................................... 2,706
2000....................................... 2,288
2001....................................... 2,027
2002....................................... 1,894
Thereafter................................. 2,777
-------
Total minimum lease payments..... $14,781
=======
</TABLE>
Rental expenses under operating leases amounted to approximately $5.2
million, $5.4 million and $4.2 million in 1997, 1996 and 1995, respectively.
6. INVESTMENTS, DISPOSITIONS AND OTHER NON-RECURRING ITEMS
In October 1997, the Company acquired a 15% equity interest in Suntek
Information System Co. Ltd. ("Suntek") for approximately $0.9 million. Suntek
distributes and supports software products in Korea. Management believes that
the investment has not been impaired since the acquisition date.
In November 1997, the Company acquired all the outstanding shares of SDTI
for $2.0 million. An additional $1.0 million is payable contingent on the future
earnings performance of SDTI. 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 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.
In November 1997, the Company and DataChannel, Inc. ("DataChannel") entered
into an agreement under which DataChannel licensed its ChannelManager technology
to the Company. DataChannel is a software development company that 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 $1.0 million. The Company is required to pay an
additional $4.0 million for minimum royalties in 1998. In addition, the Company
acquired a 10% equity interest in DataChannel for approximately $1.7 million.
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 inventory, 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.
F-8
<PAGE> 32
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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 has been 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 also 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 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.
7. INCOME TAXES
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. ........................................... $ 839 $2,775 $ 9,375
International................................... 1,655 4,472 2,317
------ ------ -------
Total income before income taxes........... $2,494 $7,247 $11,692
====== ====== =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
U.S. federal................................. $ 1,375 $ 125 $ 5,130
State........................................ 149 52 626
International................................ 427 2,203 849
------- ------ -------
Total current provision................... 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 $ 243 $3,054 $ 4,441
======= ====== =======
</TABLE>
F-9
<PAGE> 33
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The effective rate differs from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision at statutory rate............ $ 848 $2,463 $4,092
International losses producing no current tax
benefit......................................... 847 312 366
Utilization of international operating loss
carryforward.................................... -- -- (234)
Tax credits....................................... (300) (100) (300)
State taxes, net.................................. 60 68 255
Foreign Sales Corporation......................... (715) (215) (315)
Nondeductible expenses............................ 112 246 200
Effect of lower tax rates in certain foreign
countries....................................... (663) -- --
Other, net........................................ 54 280 377
----- ------ ------
$ 243 $3,054 $4,441
===== ====== ======
</TABLE>
The Company received compensation deductions in 1997, 1996 and 1995 for
income tax purposes of $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 $0.3 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,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Tax credits............................................... $ 1,226 $ --
Accrued compensation and benefits......................... 1,057 943
Other accrued expenses.................................... 943 701
Reserves for sales returns and doubtful accounts.......... 1,196 1,217
Cooperative advertising reserves.......................... 655 428
Depreciation and amortization............................. 270 155
Intercompany profit elimination........................... 26 553
Net operating losses of international subsidiaries........ 1,571 723
Other, net................................................ 786 135
------- ------
7,730 4,855
Valuation allowance....................................... (1,571) (723)
------- ------
Net deferred tax assets................................... $ 6,159 $4,132
======= ======
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
net operating losses of certain international subsidiaries. The increase in the
valuation allowance in 1997 results from additional net operating losses of
these subsidiaries. As of December 31, 1997, the Company's international
subsidiaries have unused net operating loss carryforwards, for income tax
purposes, of $4.5 million, which expire primarily in 2002.
Income taxes paid in 1997 and 1995 totaled $0.7 million and $8.2 million,
respectively. In 1996, the Company received net refunds of $0.5 million.
F-10
<PAGE> 34
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. 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 $10.0 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
1997 or 1996.
In July 1995, the Board of Directors adopted a shareholder rights
agreement, designed to protect shareholders from coercive 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 1997, 1996 and 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 and earnings per share in 1997, 1996 and 1995
would have been $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 for
1997, 1996 and 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 anticipated. The pro forma amounts have been
determined using the Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 5.9%, 6.5% and 6.3%; volatility factors of 79%, 74% and 77%;
expected life of five years and a zero dividend yield for each year.
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.
F-11
<PAGE> 35
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock option activity and option price information for all option plans is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
NUMBER WEIGHTED AVERAGE
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
==========
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995,
as determined under the method prescribed in SFAS No. 123, is $11.12, $11.10 and
$11.76, respectively.
Additional information concerning outstanding stock options and exercisable
stock options as of December 31, 1997 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..................... 521,978 3.59 $ 0.22 517,309 $ 0.21
$2.00 to $15.00..................... 408,921 9.13 13.52 60,377 13.74
$15.00 to $20.00.................... 1,095,014 8.28 16.22 465,564 16.18
Greater than $20.00................. 267,736 7.99 22.31 104,261 21.95
--------- ---------
2,293,649 7.33 $12.80 1,147,511 $ 9.38
========= =========
</TABLE>
Approximately 380,000 shares were available for future grant as of December
31, 1997. At December 31, 1996 and 1995, options for the purchase of
approximately 827,000 and 753,000 shares were exercisable at a weighted average
exercise price of $6.33 and $4.10 per share, respectively.
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 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 December 31, 1997,
approximately 137,000 shares had been issued under the plan, and 263,000 shares
are reserved for future issuance.
F-12
<PAGE> 36
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. 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>
NET AVERAGE
INCOME SHARES PER SHARE
1997 (NUMERATOR) (DENOMINATOR) AMOUNT
---- ----------- ------------- ---------
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1996
----
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1995
----
<S> <C> <C> <C>
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 earnings per share because the options' exercise price
was greater than the average market price of the common shares. The total shares
that were thus excluded approximated 1,650,000, 1,513,000 and 1,089,000 in 1997,
1996 and 1995, respectively.
10. 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. To date, the Company has made no
contributions to the plan.
11. LITIGATION
In July 1997, the Company agreed to settle a shareholders' 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.
12. 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 15.6% of total net revenues in 1997 and 10.3% of net revenues
in 1996; net revenues from services did not exceed 10% of the total in prior
years. 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.
F-13
<PAGE> 37
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Sales to one unaffiliated customer, an OEM customer, accounted for 10% of
net revenues in 1995. Sales to any one customer did not exceed 10% of net
revenues in 1997 or 1996.
Information regarding the Company's operations in different geographic
areas in 1997, 1996 and 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 4%, 4% and 5% of consolidated net revenues in 1997, 1996 and
1995, respectively. Total international revenues equaled 30%, 29% and 28% of
consolidated net revenues in 1997, 1996 and 1995, respectively. Foreign currency
exchange transactions, which are included in other income (expense), resulted in
net exchange losses of $0.8 million, $0.6 million and $0.5 million in 1997, 1996
and 1995, respectively. The Company has not engaged in currency hedging
transactions against sales denominated in foreign currencies; however, it may do
so in the future.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUES
North America............................ $119,501 $121,657 $ 99,174
Europe................................... 36,373 35,140 25,387
Eliminations............................. (15,023) (17,433) (13,820)
-------- -------- --------
Total net revenues............... $140,851 $139,364 $110,741
======== ======== ========
OPERATING INCOME (LOSS)
North America............................ $ (3,935) $ 476 $ (6,383)
Europe................................... 3,283 5,103 1,348
Eliminations............................. 343 (518) (180)
-------- -------- --------
Total operating income (loss).... $ (309) $ 5,061 $ (5,215)
======== ======== ========
IDENTIFIABLE ASSETS
North America............................ $125,522 $115,252 $108,039
Europe................................... 19,999 18,915 8,778
Eliminations............................. (8,945) (7,013) (7,478)
-------- -------- --------
Total identifiable assets........ $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.
13. 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 1998 is approximately $3.4 million. Annual commitments will
increase each year, thereafter, based on the growth of the Company and
inflation.
F-14
<PAGE> 38
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. SUBSEQUENT EVENT
On March 12, 1998, the Company acquired all the outstanding capital stock
of First Service Computer Dienstleistungs-GmbH ("First Service") of Hattingen,
Germany and related entities. 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 total purchase price approximates $11.0 million, including
deferred payments of approximately $2.0 million that are substantially payable
in one year, contingent on the satisfaction of certain guarantees and
warranties. The acquisition will be accounted for under the purchase method of
accounting.
F-15
<PAGE> 39
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 December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows 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 schedules,
when considered in relation to the basic financial statement taken as a whole,
present fairly in all material respects the information set forth therein.
Seattle, Washington /s/ ERNST & YOUNG LLP
January 19, 1998
except for Note 14, as to which the date is
March 12, 1998
F-16
<PAGE> 40
WALL DATA INCORPORATED
SELECTED QUARTERLY FINANCIAL DATA AND MARKET INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
SEPTEMBER DECEMBER
MARCH 31 JUNE 30 30 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 January 31, 1998, there were 336 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 6 and
11 of Notes to Consolidated Financial Statements.
(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 6 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 6 of Notes to Consolidated
Financial Statements.
F-17
<PAGE> 41
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: March 25, 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 25th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN R. WALL President, Chief Executive Officer and
- ----------------------------------------------------- Director
John R. Wall
/s/ KEVIN B. VITALE Chief Operating Officer and Director
- -----------------------------------------------------
Kevin B. Vitale
/s/ KERRY D. PALMER Acting Chief Financial Officer (Principal
- ----------------------------------------------------- Financial Officer and Principal Accounting
Kerry D. Palmer Officer)
/s/ ROBERT J. FRANKENBERG Director
- -----------------------------------------------------
Robert J. Frankenberg
/s/ JEFFREY A. HEIMBUCK Director
- -----------------------------------------------------
Jeffrey A. Heimbuck
/s/ HENRY N. LEWIS Director
- -----------------------------------------------------
Henry N. Lewis
/s/ DAVID F. MILLET Director
- -----------------------------------------------------
David F. Millet
/s/ STEVE SARICH, JR. Director
- -----------------------------------------------------
Steve Sarich, Jr.
/s/ BETTIE A. STEIGER Director
- -----------------------------------------------------
Bettie A. Steiger
</TABLE>
<PAGE> 42
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WALL DATA INCORPORATED
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- --------------------------------- ------------ ---------------------------- -------------- --------------
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF REVENUE, COSTS ACCOUNTS DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD OR EXPENSES -- DESCRIBE -- DESCRIBE(A) OF PERIOD
----------- ------------ -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
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 asset................. $ 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 asset........ $ 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 asset................. $ 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> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation of Wall Data
Incorporated*...............................................
3.2 Restated Bylaws of Wall Data Incorporated*..................
+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*.......................................................
+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*.....................................
10.4 Restated Employee Stock Purchase Plan (Incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996)....................................
+10.5 Separation Agreement and General Release dated June 30, 1997
between Wall Data Incorporated and James Simpson*...........
10.6 Agreement for Information Technology Services dated May 31,
1997 between Wall Data Incorporated and Electronic Data
Systems Corporation**.......................................
+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)...............................
11.1 Computation of Earnings Per Share*..........................
21.1 Subsidiaries of Wall Data Incorporated*.....................
23.1 Consent of Ernst & Young LLP, Independent Auditors*.........
27.1 Financial Data Schedule*....................................
27.2 Restated Financial Data Schedule for 1997.*
27.3 Restated Financial Data Schedule for 1996.*
</TABLE>
- ---------------
+ Management contract or compensatory plan
* Included herewith
** Included herewith; confidential treatment has been requested as to a portion
of this document
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
WALL DATA INCORPORATED
Pursuant to RCW 23B.10.070, the following constitute Restated Articles
of Incorporation of the undersigned, a Washington corporation. These Restated
Articles of Incorporation correctly set forth without change the corresponding
provisions of the Articles of Incorporation as heretofore amended and supersede
the original Articles of Incorporation and all amendments thereto.
ARTICLE 1. NAME
The name of this corporation is Wall Data Incorporated.
ARTICLE 2. DURATION
The period of this corporation's duration shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
This corporation is organized to engage in any business, trade or
activity which may lawfully be conducted by a corporation organized under the
Washington Business Corporation Act.
This corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the foregoing
purpose or purposes of this corporation and to exercise any and all powers
authorized or permitted under any laws that may be now or hereafter applicable
or available to this corporation.
ARTICLE 4. SHARES
4.1 AUTHORIZED CAPITAL
The total number of shares which this corporation is authorized to issue
is 50,000,000, consisting of 45,000,000 shares of Common Stock of no par value
and 5,000,000 shares of Preferred Stock of no par value. The Common Stock is
subject to the rights and preferences of the Preferred Stock as hereinafter set
forth.
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 1
<PAGE> 2
4.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more
series in any manner permitted by law and the provisions of these Articles of
Incorporation, as determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance thereof,
prior to the issuance of any shares thereof. The Board of Directors shall have
the authority to fix and determine and to amend, subject to the provisions
hereof, the designation, preferences, limitations and relative rights of the
shares of any series that is wholly unissued or to be established. Unless
otherwise specifically provided in the resolution establishing any series, the
Board of Directors shall further have the authority, after the issuance of
shares of a series whose number it has designated, to amend the resolution
establishing such series to decrease the number of shares of that series, but
not below the number of shares of such series then outstanding.
4.3 DIVIDENDS
The holders of shares of the Preferred Stock shall be entitled to
receive dividends, out of the funds of the corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. If such dividends on the Preferred Stock
shall be cumulative, then if dividends shall not have been paid, the deficiency
shall be fully paid or the dividends declared and set apart for payment at such
rate, but without interest on cumulative dividends, before any dividends on the
Common Stock shall be paid or declared and set apart for payment. The holders of
the Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
4.4 REDEMPTION
The Preferred Stock may be redeemable at such price, in such amount, and
at such time or times as may be provided by the Board of Directors in
designating a particular series of Preferred Stock. In any event, such Preferred
Stock may be repurchased by this corporation to the extent legally permissible.
4.5 LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
affairs of this corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 2
<PAGE> 3
Stock at the time outstanding shall be entitled to be paid the preferential
amount or amounts per share as may be provided by the Board of Directors in
designating a particular series of Preferred Stock and dividends accrued thereon
to the date of such payment. The holders of the Preferred Stock shall not be
entitled to receive any distributive amounts upon the liquidation, dissolution
or winding up of the affairs of the corporation other than the distributive
amounts referred to in this section, unless otherwise provided by the Board of
Directors in designating a particular series of Preferred Stock.
4.6 CONVERSION
Shares of Preferred Stock may be convertible into Common Stock of the
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
4.7 VOTING RIGHTS
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
ARTICLE 5. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 6. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE 7. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws of this corporation subject to approval by a majority of the
Continuing Directors (as defined in Article 14); provided, however, the Board of
Directors may not repeal or amend any bylaw that the shareholders have expressly
provided may not be amended or repealed by the Board of Directors. The
shareholders shall also have the power to adopt, amend or repeal the Bylaws of
this corporation by the affirmative vote of the holders of not less than
two-thirds of the outstanding shares and, to the extent, if any, provided by
resolution or resolutions of the Board of Directors providing for the issue of a
series of Common or Preferred Stock, not
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 3
<PAGE> 4
less than two-thirds of the outstanding shares entitled to vote thereon, voting
as a class.
ARTICLE 8. REGISTERED OFFICE AND AGENT
The name of the current registered agent of this corporation and the
address of its current registered office are as follows:
John R. Wall
17769 N.E. 78th Place
Redmond, Washington 98052
ARTICLE 9. DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. The Board of Directors shall be divided
into three classes, with said classes to be as equal in number as may be
possible, with any Director or Directors in excess of the number divisible by
three being assigned to Class 3 and Class 2, as the case may be. At the first
election of Directors to such classified Board of Directors, each Class 1
Director shall be elected to serve until the next ensuing annual meeting of
shareholders, each Class 2 Director shall be elected to serve until the second
ensuing annual meeting of shareholders and each Class 3 Director shall be
elected to serve until the third ensuing annual meeting of shareholders. At each
annual meeting of shareholders following the meeting at which the Board of
Directors is initially classified, the number of Directors equal to the number
of Directors in the class whose term expires at the time of such meeting shall
be elected to serve until the third ensuing annual meeting of shareholders.
Notwithstanding any of the foregoing provisions of this Article 9, Directors
shall serve until their successors are elected and qualified or until their
earlier death, resignation or removal from office, or until there is a decrease
in the number of Directors.
The Directors of this corporation may be removed only for cause by the
holders of not less than two-thirds of the shares entitled to elect the Director
or Directors whose removal is sought in the manner provided by the Bylaws.
ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION
This corporation reserves the right to amend or repeal, by the
affirmative vote of the holders of two-thirds of the outstanding shares and, to
the extent, if any, provided by resolution or resolutions of the Board of
Directors providing for the issue of a series of Common or Preferred stock,
two-
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 4
<PAGE> 5
thirds of the outstanding shares entitled to vote thereon, voting as a class,
any of the provisions contained in these Articles of Incorporation; provided
that Article 1 ("Name"), Article 2 ("Duration"), Article 3 ("Purposes and
Powers"), Article 4 ("Shares"), Article 8 ("Registered Office and Agent") and
Article 11 ("Incorporator") may be amended in any manner now or hereafter
permitted by law. The rights of the shareholders of this corporation are granted
subject to this reservation; provided, however, that the holders of the
outstanding shares of a class shall be entitled to vote as a class upon a
proposed amendment if the amendment would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class, or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely. If any
proposed amendment would alter or change the powers, preferences or special
rights of one or more series of any class so as to affect them adversely, but
shall not affect the entire class, then only the shares of the series so
affected by the amendment shall be considered as a separate class for the
purposes of this Article 10. Irrespective of the provisions of this Article 10,
the number of authorized shares of any such class or classes of stock may be
increased by the affirmative vote of the holders of two-thirds of the stock of
this corporation entitled to vote thereon or decreased (but not below the number
of shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the stock of this corporation entitled to vote thereon, if so
provided in any amendment which created such class or classes of stock or which
was adopted prior to the issuance of any shares of such class or classes of
stock, or in any amendment which was authorized by a resolution or resolutions
adopted by the affirmative vote of the holders of two-thirds of such class or
classes of stock.
ARTICLE 11. INCORPORATOR
The name and address of the incorporator are as follows:
Charles J. Katz, Jr.
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
ARTICLE 12. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 5
<PAGE> 6
amendments to or repeal of this Article 12 shall not adversely affect any right
or protection of a Director of this corporation for or with respect to any acts
or omissions of such Directors occurring prior to such amendment or repeal.
ARTICLE 13. SPECIAL MEETINGS OF SHAREHOLDERS
The Chairman of the Board of Directors, the President or the Board of
Directors may call special meetings of the shareholders for any purpose.
Further, a special meeting of the shareholders shall be held if the holders of
not less than twenty-five percent (25%) of all the votes entitled to be cast on
any issue proposed to be considered at such special meeting have dated, signed
and delivered to the Secretary one or more written demands for such meeting,
describing the purpose or purposes for which it is to be held; provided,
however, that upon qualification of the corporation as a "public company" under
Title 23B RCW the percentage of votes required to call a special meeting shall
be thirty percent (30%).
ARTICLE 14. SPECIAL VOTING REQUIREMENTS
In addition to any affirmative vote required by law, these Articles of
Incorporation or otherwise, any "Business Combination" (as hereinafter defined)
involving this corporation shall be subject to approval in the manner set forth
in this Article 14.
14.1 DEFINITIONS.
For the purposes of this Article 14:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries with any other
corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance, whether in one transaction or a series of
transactions, by this corporation or any of its Subsidiaries of all or a
substantial part of the corporation's assets otherwise than in the usual and
regular course of business, or (iii) any agreement, contract or other
arrangement providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of Directors who
was a member of the Board of Directors on January 28, 1993 or who is elected to
the Board of Directors after January 28, 1993 upon the recommendation of a
majority of the Continuing Directors voting separately and as a subclass of
Directors on such recommendation.
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 6
<PAGE> 7
(c) "Subsidiary" means a domestic or foreign corporation that has a
majority of its outstanding voting shares owned, directly or indirectly, by this
corporation.
14.2 VOTE REQUIRED FOR BUSINESS COMBINATIONS.
14.2.1 Except as provided in subsection 14.2.2 of this Article 14, the
affirmative vote of not less than two-thirds of the outstanding shares and, to
the extent, if any, provided by resolution or resolutions of the Board of
Directors providing for the issue of a series of Common or Preferred Stock, not
less than two-thirds of the outstanding shares entitled to vote thereon, voting
as a class, shall be required for the adoption or authorization of a Business
Combination.
14.2.2 Notwithstanding subsection 14.2.1 of this Article 14, if a
Business Combination shall have been approved by a majority of the Continuing
Directors, voting separately and as a subclass of Directors, and is otherwise
required by law to be approved by this corporation's shareholders, such Business
Combination shall require the affirmative vote of not less than fifty-one
percent (51%) of the outstanding shares entitled to vote thereon and, to the
extent, if any, provided by resolution or resolutions of the Board of Directors
providing for the issue of a series of Common or Preferred Stock, not less than
fifty-one percent (51%) of the outstanding shares of such series, voting as a
class; provided, however, if a Business Combination approved by a majority of
the Continuing Directors is not otherwise required by law to be approved by this
corporation's shareholders, then no vote of the shareholders of this corporation
shall be required.
These Restated Articles of Incorporation do not further amend the
Articles of Incorporation.
These Restated Articles of Incorporation are executed by said
corporation by its duly authorized officer.
DATED: March 15, 1993
WALL DATA INCORPORATED
By /s/ John R. Wall
-------------------------------------
John R. Wall
Its Executive Vice President
- --------------------------------------------------------------------------------
Restated Articles of Incorporation Page 7
<PAGE> 8
ARTICLES OF SHARE EXCHANGE
WALL DATA INCORPORATED
AND
CAPELLA SYSTEMS, INC.
Pursuant to the provisions of RCW 23B.11.050, the following Articles of
Share Exchange are executed for the purpose of effecting the acquisition of all
of the outstanding shares of stock of Capella Systems, Inc., a Georgia
corporation, by Wall Data Incorporated, a Washington corporation.
1. The Plan of Share Exchange approved by the Board of Directors of Wall
Data Incorporated is attached hereto as Exhibit A.
2. Approval of the Plan of Exchange by the shareholders of Wall Data
Incorporated was not required.
Dated: September 09, 1993.
WALL DATA INCORPORATED
By /s/ James Simpson
--------------------------------------
James Simpson
President
Page 1
<PAGE> 9
EXHIBIT A
WALL DATA ARTICLES OF EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into as of August 17,
1993, by and between Wall Data Incorporated, a Washington corporation, and
Capella Systems, Inc., a Georgia corporation, sometimes collectively referred to
in this Plan as the "Constituent Corporations".
RECITALS
A. The name of the corporation whose shares will be acquired is Capella
Systems, Inc. ("Capella" or the "Company").
B. The name of the acquiring corporation is Wall Data Incorporated (the
"Acquiring Corporation").
C. The Acquiring Corporation, Capella and certain shareholders of
Capella have entered into an Agreement and Plan of Share Exchange dated August
17, 1993 (the "Agreement"), and Capella and the Acquiring Corporation have
deemed it advisable and in the best interests of Capella and the Acquiring
Corporation, respectively, and their respective shareholders, that all of the
outstanding shares of capital stock of Capella be exchanged for shares of common
stock of the Acquiring Corporation (the "Exchange"), and for the Acquiring
Corporation thereby to acquire all outstanding capital stock of Capella, as
authorized by the laws of the State of Washington ("Washington Law") and the
State of Georgia ("Georgia Law") and pursuant to the terms and conditions of the
Agreement. Terms not otherwise defined herein shall have the meanings given to
them in the Agreement.
AGREEMENT
In consideration of the foregoing recitals, the covenants and conditions
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. EXCHANGE; EFFECTIVENESS
All outstanding shares of capital stock of Capella shall be acquired by
the Acquiring Corporation pursuant to the applicable provisions of Washington
Law, Georgia Law and in accordance with the terms and conditions of this Plan
and the Agreement. Upon (a) the execution by the Acquiring Corporation of
Articles of Share Exchange incorporating this Plan and the filing of such
Articles of Share Exchange with the Secretary of State of the State of
Washington and (b) the execution by
Page 1
<PAGE> 10
Capella of Articles of Share Exchange incorporating this Plan and the filing of
such Articles of Share Exchange with the Secretary of State of the State of
Georgia, the Exchange shall become effective (the "Effective Time").
2. CONVERSION OF SHARES
(a) Each share (a "Common Share") of common stock of the Company (the
"Company Common Stock") outstanding immediately prior to the Effective Time,
other than Dissenting Shares (as defined in Section 1.5 of the Agreement), shall
be automatically exchanged at the Effective Time, by virtue of the Exchange and
without any action on the part of the holder thereof or any party hereto, into
the right to receive at the Effective Time (i) a number of shares of Wall Data
Common Stock equal to (A) .0521 multiplied by the Aggregate Stock Amount (as
defined in Section 1.3(e) of the Agreement), divided by (B) 2,550,000, and (ii)
an amount in cash equal to (A) .0521 multiplied by the Aggregate Cash
Consideration (as defined in subsection (e) of this Section 1.3), divided by (B)
2,550,000, such shares and such cash together being referred to herein as the
"Common Consideration."
(b) Each share (a "Series A Preferred Share") of Series A Preferred
Stock of the Company (the "Series A Preferred Stock") outstanding immediately
prior to the Effective Time, other than Dissenting Shares, shall be
automatically exchanged at the Effective Time, by virtue of the Exchange and
without any action on the part of the holder thereof or any party hereto, into
the right to receive at the Effective Time, in respect of each Series A
Preferred Share outstanding immediately prior to the Effective Time, (i) a
number of shares of Wall Data Common Stock equal to (A) .2242 multiplied by the
Aggregate Stock Amount, divided by (B) 990,000, and (ii) an amount in cash equal
to (A) .2242 multiplied by the Aggregate Cash Consideration, divided by (B)
990,000, such shares and such cash together being referred to herein as the
"Series A Consideration."
(c) Each share (a "Series B Preferred Share") of Series B Preferred
Stock of the Company (the "Series B Preferred Stock" and, together with the
Series A Preferred Stock, the "Company Preferred Stock") outstanding immediately
prior to the Effective Time, other than Dissenting Shares, shall be
automatically exchanged at the Effective Time, by virtue of the Exchange and
without any action on the part of the holder thereof or any party hereto, into
the right to receive at the Effective Time, in respect of each Series B
Preferred Share outstanding immediately prior to the Effective Time, (i) a
number of shares of Wall Data Common Stock equal to (A) .7237 multiplied by the
Aggregate Stock Amount, divided by (B) 6,390,000, and (ii) an amount in cash
equal to (A) .7237
Page 2
<PAGE> 11
multiplied by the Aggregate Cash Consideration, divided by (B) 6,390,000, such
shares and such cash together being referred to herein as the "Series B
Consideration."
(d) The Board of Directors of the Company shall take such actions and
adopt such resolutions as are necessary (i) to cause all outstanding options,
warrants or other rights, if any, to purchase capital stock of the Company to
lapse, terminate or be exercised immediately prior to or at the Effective Time
and (ii) to cause 450,000 shares of Company Common Stock held by William Hiller
as of the date of this Agreement to be redeemed, repurchased or cancelled
immediately prior to the Closing, such that no more than 2,550,000 shares of
Company Common Stock will then be outstanding.
(e) (i) The "Aggregate Cash Consideration" shall mean an amount in cash
equal to the number determined in clause (B) of subparagraph (ii) below
multiplied by the average of the high and low trading prices per share of Wall
Data Common Stock on the NASDAQ National Market System for the five trading days
immediately prior to the Closing Date.
(ii) The "Aggregate Stock Amount" shall mean a number equal to
(A) 150,000, less a number equal to (1) the aggregate amount of consideration
payable in connection with the transactions specified in clause (i) of Section
1.3(d) of the Agreement plus the amount owing from the Company to King &
Spalding, the Company's legal counsel, in respect of fees and expenses
associated with the transactions contemplated hereby, as specified on an invoice
to be delivered by King & Spalding at the Closing, divided by (2) the average of
the high and low trading prices per share of Wall Data Common Stock on the
NASDAQ National Market System for the five trading days immediately prior to the
Closing Date, less (B) one percent (1%) of the number determined pursuant to the
preceding clause (A).
(f) Appropriate adjustments to the provisions of subsections (a), (b)
and (c) of Section 1.3 of the Agreement will be made in the event that any
Series A Preferred Shares or Series B Preferred Shares are converted into
Company Common Stock after the date of this Agreement but prior to the Effective
Time.
(g) The Acquiring Corporation shall be deemed to be the holder of all
outstanding shares of Company Common Stock and Company Preferred Stock and shall
have the right to receive stock certificates representing such stock.
<PAGE> 12
Page 3
3. IMPLEMENTATION
Each of the Constituent Corporations shall take, or cause to be taken,
all action or do, or cause to be done, all things necessary, proper or advisable
under Washington Law and Georgia Law to consummate and make effective the
Exchange.
4. TERMINATION
This Plan may be terminated for any reason at any time before the filing
of Articles of Share Exchange with the Secretary of State of the State of
Washington or the State of Georgia (whether before or after approval by the
shareholders of Capella) by resolution of the Board of Directors of both of the
Constituent Corporations.
5. AMENDMENT
This Plan may, to the extent permitted by law, be amended, supplemented
or interpreted at any time by action taken by the Board of Directors of both of
the Constituent Corporations; provided, however, that this Plan may not be
amended or supplemented after having been approved by the shareholders of
Capella except by a vote or consent of shareholders of Capella in accordance
with applicable law.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Wall Data Articles Of Exchange as of the date first set forth above.
WALL DATA INCORPORATED
By /s/James Simpson
--------------------------------------
James Simpson
President
CAPELLA SYSTEMS, INC.
By /s/ James F. Ottinger
---------------------------------------
James F. Ottinger, President
/s/ James F. Ottinger
---------------------------------------
James F. Ottinger
/s/ William Hiller
---------------------------------------
William Hiller
Page 4
<PAGE> 13
ARTICLES OF MERGER
WALL DATA INCORPORATED
AND
CAPELLA SYSTEMS, INC.
Pursuant to the provisions of RCW 23B.11.040, the following Articles of
Merger are executed for the purpose of merging Capella Systems, Inc., a Georgia
corporation, into Wall Data Incorporated, a Washington corporation.
1. The Plan of Merger approved by the Board of Directors of Wall Data
Incorporated is attached hereto as Exhibit A.
2. Approval of the Plan of Merger by the shareholders of Wall Data
Incorporated was not required.
3. These Articles of Merger shall be effective on December 31, 1993.
Dated: December 16, 1993.
WALL DATA INCORPORATED
By /s/ Angelo F. Grestoni
--------------------------------------
Angelo F. Grestoni
Vice President, Finance &
Administration
- --------------------------------------------------------------------------------
<PAGE> 14
Exhibit A
PLAN OF MERGER
BETWEEN
CAPELLA SYSTEMS, INC.
(A GEORGIA CORPORATION)
AND
WALL DATA INCORPORATED
(A WASHINGTON CORPORATION)
DATED AS OF
DECEMBER 31, 1993
<PAGE> 15
PLAN OF MERGER
This PLAN OF MERGER (the "Plan") dated as of December 31, 1993, provides
for the merger of Capella Systems, Inc., a Georgia corporation (the "Georgia
Company"), into Wall Data Incorporated, a Washington corporation (the
"Washington Company"). The Georgia Company and the Washington Company are
sometimes collectively referred to in this Plan as the "Constituent
Corporations."
RECITALS
A. The Georgia Company is a corporation organized and existing under the
laws of the State of Georgia, with its principal office in Atlanta, Georgia. The
authorized capital stock of the Georgia Company consists of 25,000,000 shares of
common stock having no stated par value, of which 2,550,000 shares have been
duly issued and are outstanding on the date hereof, 1,500,000 shares of Series A
preferred stock having no stated par value, of which 990,000 shares have been
duly issued and are outstanding on the date hereof, and 7,200,000 shares of
Series B preferred stock having no stated par value, of which 6,390,000 shares
have been duly issued and are outstanding on the date hereof. All of the capital
stock of the Georgia Company is held by the Washington Company.
B. The Washington Company is a corporation organized and existing under
the laws of the State of Washington, with its principal office in Redmond,
Washington. The authorized capital stock of the Washington Company consists of
45,000,000 shares of common stock having no par value, of which 8,679,031 shares
were outstanding as of September 30, 1993, and 5,000,000 shares of preferred
stock having no par value, none of which shares are outstanding.
C. The Georgia Company is a wholly-owned subsidiary of the Washington
Company.
D. It is deemed advisable and in the best interests of each corporation
and the shareholders thereof that the Georgia Company be merged into the
Washington Company as authorized by the laws of the States of Georgia and
Washington and pursuant to the terms and conditions of this Plan.
PLAN
The Washington Company hereby adopts the following plan of merger:
- --------------------------------------------------------------------------------
Page 1
<PAGE> 16
1. MERGER
The Georgia Company be merged into the Washington Company (hereinafter
sometimes called the "Surviving Corporation") pursuant to Section 23B.11.040 of
the Revised Code of Washington, Section 14-2-1104 of the Georgia Business
Corporation Code and in accordance with the terms and conditions of this Plan.
Upon completion of the following events:
(a) the approval of the plan of merger as stated herein by the Board of
Directors of the Washington Company, and
(b) the execution in duplicate by the Surviving Corporation of Articles
of Merger incorporating this Plan, the filing of such Articles of Merger with
the Secretaries of State of the States of Georgia and Washington, the issuance
of appropriate certificates by such Secretaries of State, and the occurrence of
the "Effective Date" as defined below,
the merger shall be deemed effective and the "date of the merger" as that phrase
is used herein shall be the "Effective Date" set forth below.
2. EFFECTIVE DATE
As of December 31, 1993 (the "Effective Date"), the identity, existence,
purposes, powers, objects, franchises, privileges, rights and immunities of the
Washington Company continue in effect unimpaired by the merger; the corporate
franchises, existence and rights of the Georgia Company be merged into the
Washington Company and the Washington Company, as the Surviving Corporation, be
fully vested therewith; and the separate existence and corporate organization of
the Georgia Company, except as they may continue by statute, cease as of the
Effective Date.
3. ARTICLES OF INCORPORATION
The Articles of Incorporation of the Washington Company in effect on the
date of the merger be and remain the Articles of Incorporation of the Surviving
Corporation until the same shall be altered, amended or repealed as therein
provided.
4. BYLAWS
The Bylaws of the Washington Company in effect on the date of the merger
be and remain the Bylaws of the Surviving Corporation until the same shall be
altered, amended or repealed as therein provided.
- --------------------------------------------------------------------------------
Page 2
<PAGE> 17
5. DIRECTORS AND OFFICERS
The directors and officers of the Washington Company continue in office
as the directors and officers of the Surviving Corporation and hold office in
accordance with and subject to the Articles of Incorporation and Bylaws of the
Surviving Corporation.
6. CANCELLATION OF SHARES OF GEORGIA COMPANY
On the Effective Date of the merger, by virtue of the merger and without
any action on the part of the holder of any shares of stock of the Georgia
Company, all issued and outstanding shares of capital stock of the Georgia
Company that are owned directly or indirectly by the Washington Company shall be
canceled and no consideration shall be delivered in exchange therefor.
7. RIGHTS, DUTIES, POWERS, LIABILITIES, ETC.
On the Effective Date of the merger, the separate existence of the
Georgia Company cease, and the Georgia Company shall be merged in accordance
with the provisions of this Plan into the Surviving Corporation which shall
possess all the properties and assets, and all the rights, privileges, powers,
immunities and franchises, of whatever nature and description, and shall be
subject to all restrictions, disabilities, duties and liabilities, of each of
the Constituent Corporations; and all such things shall be taken and deemed to
be transferred to and vested in the Surviving Corporation without further act or
deed; and the title to any real estate, or any interest therein, vested by deed
or otherwise in either of the Constituent Corporations, shall not revert or be
in any way impaired by reason of such merger, but shall pass to and be owned by
the Surviving Corporation without further act or deed. Any claim existing or
action or proceeding, whether civil, criminal or administrative, pending by or
against either Constituent Corporation, may be prosecuted to judgment or decree
as if such merger had not taken place, and the Surviving Corporation may be
substituted in any such action or proceeding.
8. IMPLEMENTATION
(a) At any time or from time to time as and when requested by the
Surviving Corporation, or by its successors or assigns, each Constituent
Corporation will so far as it is legally able, execute and deliver, or cause to
be executed and delivered in its name by its last acting officers, or by the
corresponding officers of the Surviving Corporation, each of whom is hereby
irrevocably appointed as attorney-in-fact for such purposes, all such
conveyances, assignments, transfers,
- --------------------------------------------------------------------------------
Page 3
<PAGE> 18
deeds or other instruments, and will take or cause to be taken such further or
other actions as the Surviving Corporation, its successors or assigns, may deem
necessary or desirable in order to evidence the transfer, vesting and devolution
of any property, right, privilege, power, immunity or franchise to vest or
perfect in or confirm to the Surviving Corporation, its successors or assigns,
title to and possession of all the property, rights, privileges, powers,
immunities, franchises and interests referred to in this Plan and otherwise to
carry out the intent and purposes hereof.
(b) Each of the Constituent Corporations shall take, or cause to be
taken, all action or do, or cause to be done, all things necessary, proper or
advisable under the laws of the States of Georgia and Washington to consummate
and make effective the merger.
9. TERMINATION
This Plan may be terminated for any reason at any time before the filing
of Articles of Merger by the Secretaries of State of the States of Georgia and
Washington by resolution of the Board of Directors of the Washington Company.
10. AMENDMENT
This Plan may, to the extent permitted by law, be amended, supplemented
or interpreted at any time by action taken by the Board of Directors of the
Washington Company.
Dated as of December 31, 1993.
WALL DATA INCORPORATED
By /s/ Angelo F. Grestoni
--------------------------------------
Angelo F. Grestoni
Vice President, Finance &
Administration
- --------------------------------------------------------------------------------
Page 4
<PAGE> 19
ARTICLES OF AMENDMENT
OF
WALL DATA INCORPORATED
Pursuant to RCW 23B.06.020, the following Articles of Amendment are
executed by the undersigned, a Washington corporation:
1. The name of the corporation is Wall Data Incorporated.
2. Effective upon filing these Articles of Amendment with the Secretary
of State of the State of Washington, Article 4 of the Restated Articles of
Incorporation of the corporation is amended to add a new Subsection 4.8 as set
forth on Exhibit A attached hereto.
3. The amendment was duly adopted by the Board of Directors of the
corporation on July 18, 1995 and shareholder approval was not required.
These Articles of Amendment are executed by said corporation by its duly
authorized officer.
DATED: July 18, 1995.
WALL DATA INCORPORATED
By: /s/ Alexandra A. Brookshire
--------------------------------
Alexandra A. Brookshire
<PAGE> 20
Exhibit A
4.8 DESIGNATION OF RIGHTS AND PREFERENCES OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
The following series of Preferred Stock is hereby designated, which
series shall have the rights, preferences, privileges and limitations as set
forth below:
4.8.1. Designation of Series A Junior Participating Preferred Stock and
Amount. The shares of such series shall be designated as "Series A Junior
Participating Preferred Stock" (the "Series A Preferred Stock") and the number
of shares constituting the Series A Preferred Stock shall be 450,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the number of shares
of Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the corporation convertible into Series A
Preferred Stock.
4.8.2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, no par
value per share (the "Common Stock"), of the corporation, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $1 and (ii) subject to the provision for adjustment hereinafter set
forth, 100 times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock.
1
<PAGE> 21
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (A) of this Section 4.8.2
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share
on the Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
2
<PAGE> 22
4.8.3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareholders of the
corporation. In the event the corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Articles of
Amendment creating a series of Preferred Stock or any similar stock, or by law,
the holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of shareholders of the corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
4.8.4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section
4.8.2 are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
3
<PAGE> 23
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are payable
or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that the corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of
stock ranking on a parity with the Series A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The corporation shall not permit any subsidiary of the
corporation to purchase or otherwise acquire for consideration any shares of
stock of the corporation unless the corporation could, under paragraph (A) of
this Section 4.8.4, purchase or otherwise acquire such shares at such time and
in such manner.
4.8.5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Articles of Incorporation, or in any other Articles of Amendment creating a
series of Preferred Stock or any similar stock or as otherwise required by law.
4.8.6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the corporation, no distribution shall be made (a)
to the
4
<PAGE> 24
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (b) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(a) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
4.8.7. Consolidation, Merger, etc. In case the corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
5
<PAGE> 25
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
4.8.8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
4.8.9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the corporation's Preferred Stock.
4.8.10. Amendment. The Articles of Incorporation of the corporation
shall not be amended in any manner that would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
6
<PAGE> 26
ARTICLES OF MERGER
CONCENTRIC DATA SYSTEMS, INC
AND
WALL DATA INCORPORATED
Pursuant to the provisions of RCW 23B.11.050, the following Articles of
Merger are executed for the purpose of merging Concentric Data Systems, Inc., a
Massachusetts corporation (the "Disappearing Corporation"), into Wall Data
Incorporated, a Washington Corporation (the "Surviving Corporation").
1. The Agreement and Plan of Merger approved by the Board of Directors
of the Surviving Corporation is attached hereto as EXHIBIT A.
2. The Plan of Merger was duly approved by the Board of Directors of the
Surviving Corporation and, pursuant to RCW 23B.11.040, shareholder approval was
not required.
Dated: December 29, 1997
WALL DATA INCORPORATED
By: /s/ Alexandra A. Brookshire
--------------------------------
Alexandra A. Brookshire
Vice President, General Counsel
and Secretary
1
<PAGE> 27
Exhibit A
PLAN OF MERGER
BETWEEN
WALL DATA INCORPORATED
AND
CONCENTRIC DATA SYSTEMS, INC.
This Agreement and Plan of Merger (this "Agreement") is entered into
this ___ day of December, 1997, by and between Wall Data Incorporated, a
Washington corporation ("Wall Data"), and Concentric Data Systems, Inc., a
Massachusetts corporation ("Concentric"). Wall Data and Concentric are sometimes
referred to jointly as the "Constituent Corporations".
RECITALS
A. Each of the Constituent Corporations is a corporation organized and
existing under the laws of its respective state as indicated in the first
paragraph of this Agreement.
B. Wall Data owns 100% of the outstanding stock of Concentric.
C. The directors of Wall Data have deemed it advisable for the benefit
of the Wall Data and its shareholders that Concentric be merged into Wall Data
pursuant to the provisions of the Washington Business Corporation Act, Section
23B.11.040, and the Massachusetts Business Corporation Law, Chapter 156B,
Section 82 (the "Merger").
AGREEMENT
NOW, THEREFORE, in accordance with the laws of the states of Washington
and Massachusetts, the Constituent Corporations agree that, (i) Concentric shall
be merged into Wall Data, (ii) Wall Data shall continue to be governed by the
laws of the state of Washington, and (iii) the terms of the Merger, and the mode
of carrying them into effect, shall be as follows:
1. MERGER
1.1 Articles of Merger shall be filed with the Secretary of State of the
state of Massachusetts and Articles of Merger and this Agreement with the
Secretary of State of the state of Washington.
1.2 The Merger shall become effective at 5:00 p.m. (Pacific Time) on
December 31, 1997 (the "Effective Time of Merger").
<PAGE> 28
1.3 At the Effective Time of Merger, Concentric shall be merged into
Wall Data (the "Surviving Corporation") and the separate corporate existence of
Concentric shall thereupon cease.
2. ARTICLES OF WALL DATA
The Articles of Incorporation of Wall Data as in effect prior to the
Effective Time of the Merger shall constitute the "Articles" of the Surviving
Corporation within the meaning of Section 23B.01.400(1) of the Washington
Business Corporation Act.
3. BYLAWS
The Bylaws of Wall Data in effect at the Effective Time of Merger shall
be and remain the Bylaws of the Surviving Corporation until the same shall be
altered, amended or repealed as therein provided.
4. DIRECTORS AND OFFICERS
The directors of Wall Data shall continue in office as the directors of
the Surviving Corporation, and the officers of Wall Data shall continue in
office as the officers of the Surviving Corporation, and such directors and
officers shall hold office in accordance with and subject to the Articles of
Incorporation and Bylaws of the Surviving Corporation.
5. CANCELLATION OF SHARES
At the Effective Time of Merger, each outstanding share of the common
stock of Concentric shall automatically be canceled.
6. EFFECT OF THE MERGER
6.1 RIGHTS, PRIVILEGES, ETC. The effect of the Merger shall be as
provided by the applicable provisions of the laws of Washington and
Massachusetts. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time of the Merger: the separate existence of
Concentric shall cease; the Surviving Corporation shall possess all assets and
property of every description, and every interest therein, wherever located, and
the rights, privileges, immunities, powers, franchises and authority, of a
public as well as a private nature, of each of the Constituent Corporations; all
obligations belonging to or due either of the Constituent Corporations shall be
vested in, and become the obligations of, the Surviving Corporation without
further act or deed; title to any real estate or any interest therein shall not
revert or in any way be impaired by reason of the Merger, but shall pass and be
owned by the Surviving Corporation without further act or deed; all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired; and the Surviving Corporation shall
be liable for all the obligations of the Constituent Corporations and any claim
existing, or action or proceeding pending, by or against either of the
-2-
<PAGE> 29
Constituent Corporations may be prosecuted to judgment with right of appeal, as
if the Merger had not taken place.
6.2 FURTHER ASSURANCES. If at any time after the Effective Time of the
Merger the Surviving Corporation shall consider it to be advisable that any
further conveyances, agreements, documents, instruments and assurances of law or
any other things are necessary or desirable to vest, perfect, confirm or record
in the Surviving Corporation the title to any property, rights, privileges,
powers and franchises of the Constituent Corporations or otherwise to carry out
the provisions of this Agreement, the proper directors and officers of the
Constituent Corporations last in office shall execute and deliver, upon the
Surviving Corporation's request, any and all proper conveyances, agreements,
documents, instruments and assurances of law, and do all things necessary or
proper to vest, perfect or confirm title to such property, rights, privileges,
powers and title to such property, rights, privileges, powers and franchises in
the Surviving Corporation, and otherwise to carry out the provisions of this
Agreement.
7. TERMINATION
This Agreement may be terminated and the Merger abandoned by direction
of an officer of Wall Data at any time prior to the Effective Time of the
Merger.
8. NO THIRD-PARTY BENEFICIARIES
Except as otherwise specifically provided herein, nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person, firm or corporation, other than the Constituent Corporations
and their respective shareholders, any rights or remedies under or by reason of
this Agreement.
-3-
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have caused this Plan and
Agreement of Merger to be executed as of the date first above written.
WALL DATA INCORPORATED,
a Washington corporation
By: /s/ Alexandra A. Brookshire
--------------------------------
Alexandra A. Brookshire
Vice President, General Counsel
and Secretary
CONCENTRIC DATA SYSTEMS, INC.,
a Massachusetts corporation
By: /s/ Alexandra A. Brookshire
--------------------------------
Alexandra A. Brookshire
Clerk
-4-
<PAGE> 1
EXHIBIT 3.2
RESTATED
BYLAWS
OF
WALL DATA INCORPORATED
<PAGE> 2
AMENDMENTS
(AMENDMENTS ADOPTED AFTER EFFECTIVE DATE OF
MARCH 15, 1993 AND INCORPORATED HEREIN)
<TABLE>
<CAPTION>
SECTION EFFECT OF AMENDMENT DATE OF AMENDMENT
- ------- ------------------- -----------------
<S> <C> <C>
3.2 Deleted requirement that directors adopted by the Board on
in excess of a number divisable by 3/16/94
three be assigned to Class 3 or
Class 2
</TABLE>
- --------------------------------------------------------------------------------
BYLAWS Page i
<PAGE> 3
<TABLE>
<CAPTION>
CONTENTS
--------
<S> <C>
SECTION 1. OFFICES......................................................... 1
SECTION 2. SHAREHOLDERS.................................................... 1
2.1 Annual Meeting............................................... 1
2.2 Special Meetings............................................. 1
2.3 Meetings by Communication Equipment.......................... 2
2.4 Date, Time and Place of Meeting.............................. 2
2.5 Notice of Meeting............................................ 2
2.6 Business for Shareholders' Meetings.......................... 3
2.6.1 Business at Annual Meetings........................... 3
2.6.2 Business at Special Meetings.......................... 3
2.6.3 Notice to Corporation................................. 4
2.7 Waiver of Notice............................................. 4
2.8 Fixing of Record Date for Determining Shareholders........... 4
2.9 Voting Record................................................ 5
2.10 Quorum....................................................... 5
2.11 Manner of Acting............................................. 5
2.12 Proxies...................................................... 6
2.13 Voting of Shares............................................. 6
2.14 Voting for Directors......................................... 6
2.15 Action by Shareholders Without a Meeting..................... 6
SECTION 3. BOARD OF DIRECTORS.............................................. 7
3.1 General Powers............................................... 7
3.2 Number and Tenure............................................ 7
3.3 Nomination and Election...................................... 7
3.3.1 Nomination............................................ 7
3.3.2 Election.............................................. 9
3.4 Annual and Regular Meetings.................................. 9
3.5 Special Meetings............................................. 9
3.6 Meetings by Communications Equipment......................... 9
3.7 Notice of Special Meetings................................... 9
3.7.1 Personal Delivery..................................... 9
3.7.2 Delivery by Mail...................................... 10
</TABLE>
- --------------------------------------------------------------------------------
BYLAWS Page ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
3.7.3 Delivery by Private Carrier........................... 10
3.7.4 Facsimile Notice...................................... 10
3.7.5 Delivery by Telegraph................................. 10
3.7.6 Oral Notice........................................... 10
3.8 Waiver of Notice............................................. 10
3.8.1 In Writing............................................ 10
3.8.2 By Attendance......................................... 11
3.9 Quorum....................................................... 11
3.10 Manner of Acting............................................. 11
3.11 Presumption of Assent........................................ 11
3.12 Action by Board or Committees Without a Meeting.............. 11
3.13 Resignation.................................................. 12
3.14 Removal...................................................... 12
3.15 Vacancies.................................................... 13
3.16 Executive and Other Committees............................... 13
3.16.1 Creation of Committees............................... 13
3.16.2 Authority of Committees.............................. 13
3.16.3 Audit Committee....................................... 14
3.16.4 Quorum and Manner of Acting.......................... 14
3.16.5 Minutes of Meetings.................................. 14
3.16.6 Resignation.......................................... 14
3.16.7 Removal.............................................. 15
3.17 Compensation................................................. 15
SECTION 4. OFFICERS........................................................ 15
4.1 Appointment and Term......................................... 15
4.2 Resignation.................................................. 15
4.3 Removal...................................................... 16
4.4 Contract Rights of Officers.................................. 16
4.5 Chairman of the Board........................................ 16
4.6 President.................................................... 16
4.7 Vice President............................................... 16
4.8 Secretary.................................................... 17
4.9 Treasurer.................................................... 17
</TABLE>
- --------------------------------------------------------------------------------
BYLAWS Page iii
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
4.10 Salaries..................................................... 17
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS........................... 17
5.1 Contracts.................................................... 17
5.2 Loans to the Corporation..................................... 18
5.3 Checks, Drafts, Etc. ........................................ 18
5.4 Deposits..................................................... 18
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER...................... 18
6.1 Issuance of Shares........................................... 18
6.2 Certificates for Shares...................................... 18
6.3 Stock Records................................................ 18
6.4 Restriction on Transfer...................................... 19
6.5 Transfer of Shares........................................... 19
6.6 Lost or Destroyed Certificates............................... 20
SECTION 7. BOOKS AND RECORDS............................................... 20
SECTION 8. ACCOUNTING YEAR................................................. 21
SECTION 9. SEAL............................................................ 21
SECTION 10. INDEMNIFICATION................................................ 21
10.1 Right to Indemnification..................................... 21
10.2 Restrictions on Indemnification.............................. 22
10.3 Advancement of Expenses...................................... 22
10.4 Right of Indemnitee to Bring Suit............................ 22
10.5 Procedures Exclusive......................................... 23
10.6 Nonexclusivity of Rights..................................... 23
10.7 Insurance, Contracts and Funding............................. 23
10.8 Indemnification of Employees and Agents of the Corporation... 23
10.9 Persons Serving Other Entities............................... 24
SECTION 11. AMENDMENTS..................................................... 24
</TABLE>
- --------------------------------------------------------------------------------
BYLAWS Page iv
<PAGE> 6
RESTATED
BYLAWS
OF
WALL DATA INCORPORATED
SECTION 1. OFFICES
The principal office of the corporation shall be located at the
principal place of business or such other place as the Board of Directors
("Board") may designate. The corporation may have such other offices, either
within or without the State of Washington, as the Board may designate or as the
business of the corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held the first Tuesday
of May in each year at 10:00 a.m. for the purpose of electing Directors and
transacting such other business as may properly come before the meeting. If the
day fixed for the annual meeting is a legal holiday at the place of the meeting,
the meeting shall be held on the next succeeding business day. If the annual
meeting is not held on the date designated therefor, the Board shall cause the
meeting to be held as soon thereafter as may be convenient.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than 25% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held; provided, however, that upon qualification of the corporation as a
"public company" under Title 23B RCW the percentage of votes required to call a
special meeting shall be 30%.
- --------------------------------------------------------------------------------
BYLAWS Page 1
<PAGE> 7
2.3 MEETINGS BY COMMUNICATION EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such time and place, within or without the
State of Washington, designated by or at the direction of the Board.
2.5 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice of
or to vote at the meeting not less than 30 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the Articles
of Incorporation, a plan of merger or share exchange, the sale, lease, exchange
or other disposition of all or substantially all of the corporation's assets
other than in the regular course of business or the dissolution of the
corporation shall be given not less than 30 nor more than 60 days before such
meeting. Such notice may be transmitted by mail, private carrier, personal
delivery, telegraph, teletype or communications equipment which transmits a
facsimile of the notice to like equipment which receives and reproduces such
notice. If these forms of written notice are impractical in the view of the
Board, the Chairman of the Board, the President or the Secretary, written notice
may be transmitted by an advertisement in a newspaper of general circulation in
the area of the corporation's principal office. If such notice is mailed, it
shall be deemed effective when deposited in the official government mail,
first-class postage prepaid, properly addressed to the shareholder at such
shareholder's address as it appears in the corporation's current record of
shareholders. Notice given in any other manner shall be deemed effective when
dispatched to the shareholder's address, telephone number or other number
appearing on the records of the corporation. Any notice given by publication as
herein provided shall be deemed effective five days after first publication.
- --------------------------------------------------------------------------------
BYLAWS Page 2
<PAGE> 8
2.6 BUSINESS FOR SHAREHOLDERS' MEETINGS
2.6.1 BUSINESS AT ANNUAL MEETINGS
In addition to the election of directors, other proper business may be
transacted at an annual meeting of shareholders, provided that such business is
properly brought before such meeting. To be properly brought before an annual
meeting, business must be (a) brought by or at the direction of the Board or (b)
brought before the meeting by a shareholder pursuant to written notice thereof,
in accordance with subsection 2.6.3 hereof, and received by the Secretary not
fewer than sixty nor more than ninety days prior to the date specified in
subsection 2.1 hereof for such annual meeting (or if less than sixty days'
notice or prior public disclosure of the date of the annual meeting is given or
made to the shareholders, not later than the tenth day following the day on
which the notice of the date of the annual meeting was mailed or such public
disclosure was made). Any such shareholder notice shall set forth (i) the name
and address of the shareholder proposing such business; (ii) a representation
that the shareholder is entitled to vote at such meeting and a statement of the
number of shares of the corporation which are beneficially owned by the
shareholder; (iii) a representation that the shareholder intends to appear in
person or by proxy at the meeting to propose such business; and (iv) as to each
matter the shareholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting, the language of the proposal (if
appropriate), and any material interest of the shareholder in such business. No
business shall be conducted at any annual meeting of shareholders except in
accordance with this subsection 2.6.1. If the facts warrant, the Board, or the
chairman of an annual meeting of shareholders, may determine and declare (a)
that a proposal does not constitute proper business to be transacted at the
meeting or (b) that business was not properly brought before the meeting in
accordance with the provisions of this subsection 2.6.1 and, if, in either case,
it is so determined, any such business shall not be transacted. The procedures
set forth in this subsection 2.6.1 for business to be properly brought before an
annual meeting by a shareholder are in addition to, and not in lieu of, the
requirements set forth in Rule 14a-8 under Section 14 of the Securities Exchange
Act of 1934, as amended, or any successor provision.
2.6.2 BUSINESS AT SPECIAL MEETINGS
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling
- --------------------------------------------------------------------------------
BYLAWS Page 3
<PAGE> 9
such meeting, in accordance with subsection 2.5 hereof, shall come before such
meeting.
2.6.3 NOTICE TO CORPORATION
Any written notice required to be delivered by a shareholder to the
corporation pursuant to subsection 2.5, subsection 2.6.1 or subsection 2.6.2
hereof must be given, either by personal delivery or by registered or certified
mail, postage prepaid, to the Secretary at the corporation's executive offices
in the City of Redmond, State of Washington.
2.7 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether before
or after the date and time of the meeting, shall be deemed equivalent to the
giving of such notice. Further, notice of the time, place and purpose of any
meeting will be deemed to be waived by any shareholder by attendance thereat in
person or by proxy, unless such shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting.
2.8 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of or
to vote at any meeting of shareholders or any adjournment thereof, (b) to demand
a special meeting, or (c) to receive payment of any dividend, or in order to
make a determination of shareholders for any other purpose, the Board may fix a
future date as the record date for any such determination. Such record date
shall be not more than 70 days, and in case of a meeting of shareholders not
less than 10 days prior to the date on which the particular action requiring
such determination is to be taken.
2.9 VOTING RECORD
At least ten days before each meeting of shareholders, an alphabetical
list of the shareholders entitled to notice of such meeting shall be made,
arranged by voting group and by each class or series of shares therein, with the
address of and number of shares held by each shareholder. This record shall be
kept at the principal office of the corporation for ten days prior to such
meeting, and shall be kept open at such
- --------------------------------------------------------------------------------
BYLAWS Page 4
<PAGE> 10
meeting, for the inspection of any shareholder or any shareholder's agent.
2.10 QUORUM
A majority of the votes entitled to be cast on a matter by the holders
of shares that, pursuant to the Articles of Incorporation or the Washington
Business Corporation Act, are entitled to vote and be counted collectively upon
such matter, represented in person or by proxy, shall constitute a quorum of
such shares at a meeting of shareholders. If less than a majority of such votes
are represented at a meeting, a majority of the votes so represented may adjourn
the meeting from time to time without further notice if the new date, time or
place is announced at the meeting before adjournment. Any business may be
transacted at a reconvened meeting that might have been transacted at the
meeting as originally called, provided a quorum is present or represented
thereat. Once a share is represented for any purpose at a meeting other than
solely to object to holding the meeting or transacting business thereat, it is
deemed present for quorum purposes for the remainder of the meeting and any
adjournment thereof (unless a new record date is or must be set for the
adjourned meeting) notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
2.11 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Articles of Incorporation or the Washington
Business Corporation Act requires a greater number of affirmative votes.
2.12 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder
or by his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle the holder thereof to vote at any reconvened meeting
following adjournment of such meeting but shall not be valid after the final
adjournment thereof.
- --------------------------------------------------------------------------------
BYLAWS Page 5
<PAGE> 11
2.13 VOTING OF SHARES
Except as provided in the Articles of Incorporation or in Section 2.14
hereof, each outstanding share entitled to vote with respect to a matter
submitted to a meeting of shareholders shall be entitled to one vote upon such
matter.
2.14 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may vote,
in person or by proxy, the number of shares owned by such shareholder for as
many persons as there are Directors to be elected and for whose election such
shareholder has a right to vote. Unless otherwise provided in the Articles of
Incorporation or in Section 3.14 hereof, the candidates elected shall be those
receiving the largest number of votes cast, up to the number of Directors to be
elected.
2.15 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if one or more written consents setting forth the action
so taken are signed by all shareholders entitled to vote on the action and are
delivered to the corporation. If not otherwise fixed by the Board, the record
date for determining shareholders entitled to take action without a meeting is
the date the first shareholder signs the consent. A shareholder may withdraw a
consent only by delivering a written notice of withdrawal to the corporation
prior to the time that all consents are in the possession of the corporation.
Action taken by written consent of shareholders without a meeting is effective
when all consents are in the possession of the corporation, unless the consent
specifies a later effective date. Any such consent shall be inserted in the
minute book as if it were the minutes of a meeting of the shareholders.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of,
and the business and affairs of the corporation shall be managed under the
direction of, the Board, except as may be otherwise provided in these Bylaws,
the Articles of Incorporation or the Washington Business Corporation Act.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three nor more than nine
Directors, the specific number to be set by
- --------------------------------------------------------------------------------
BYLAWS Page 6
<PAGE> 12
resolution of the Board. The number of Directors may be changed from time to
time by amendment to these Bylaws, but no decrease in the number of Directors
shall have the effect of shortening the term of any incumbent Director.
Directors need not be shareholders of the corporation or residents of the State
of Washington and need not meet any other qualifications.
The Board of Directors shall be divided into three classes, with said
classes to be as equal in number as may be possible. At the first election of
Directors to such classified Board of Directors, each Class 1 Director shall be
elected to serve until the next ensuing annual meeting of shareholders, each
Class 2 Director shall be elected to serve until the second ensuing annual
meeting of shareholders and each Class 3 Director shall be elected to serve
until the third ensuing annual meeting of shareholders. At each annual meeting
of shareholders following the meeting at which the Board of Directors is
initially classified, the number of Directors equal to the number of Directors
in the class whose term expires at the time of such meeting shall be elected to
serve until the third ensuing annual meeting of shareholders. Notwithstanding
any of the foregoing provisions of this Section 3.2, Directors shall serve until
their successors are elected and qualified or until their earlier death,
resignation or removal from office or until there is a decrease in the number of
Directors.
3.3 NOMINATION AND ELECTION.
3.3.1 NOMINATION
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nominations for the
election of Directors may be made (a) by or at the direction of the Board or (b)
by any shareholder of record entitled to vote for the election of Directors at
such meeting; provided, however, that a shareholder may nominate persons for
election as Directors only if written notice (in accordance with subsection
2.6.3 hereof) of such shareholder's intention to make such nominations is
received by the Secretary not later than (i) with respect to an election to be
held at an annual meeting of the shareholders, not fewer than sixty nor more
than ninety days prior to the date specified in subsection 2.1 hereof for such
annual meeting (or if less than sixty days' notice or prior public disclosure of
the date of the annual meeting is given or made to the shareholders, not later
than the tenth day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made) and (ii) with
respect to an election to
- --------------------------------------------------------------------------------
BYLAWS Page 7
<PAGE> 13
be held at a special meeting of the shareholders for the election of Directors,
the close of business on the seventh business day following the date on which
notice of such meeting is first given to shareholders. Any such shareholder's
notice shall set forth (a) the name and address of the shareholder who intends
to make a nomination; (b) a representation that the shareholder is entitled to
vote at such meeting and a statement of the number of shares of the corporation
which are beneficially owned by the shareholder; (c) a representation that the
shareholder intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (d) as to each person the
shareholder proposes to nominate for election or re-election as a Director, the
name and address of such person and such other information regarding such
nominee as would be required in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had such nominee been nominated
by the Board, and a description of any arrangements or understandings, between
the shareholder and such nominee and any other persons (including their names),
pursuant to which the nomination is to be made; and (e) the consent of each such
nominee to serve as a Director if elected. If the facts warrant, the Board, or
the chairman of a shareholders' meeting at which Directors are to be elected,
shall determine and declare that a nomination was not made in accordance with
the foregoing procedure and, if it is so determined, the defective nomination
shall be disregarded. The right of shareholders to make nominations pursuant to
the foregoing procedure is subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation. The procedures set forth in this subsection 3.3 for nomination
for the election of Directors by shareholders are in addition to, and not in
limitation of, any procedures now in effect or hereafter adopted by or at the
direction of the Board or any committee thereof.
3.3.2 ELECTION
At each election of Directors, the persons receiving the greatest number
of votes shall be the Directors.
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after
and at the same place as the annual meeting of shareholders. By resolution the
Board, or any committee thereof, may specify the time and place either within or
without the State of Washington for holding regular meetings thereof without
notice other than such resolution.
- --------------------------------------------------------------------------------
BYLAWS Page 8
<PAGE> 14
3.5 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board
may be called by or at the request of the Chairman of the Board, the President,
the Secretary or, in the case of special Board meetings, any two Directors and,
in the case of any special meeting of any committee designated by the Board, by
the Chairman thereof. The person or persons authorized to call special meetings
may fix any place either within or without the State of Washington as the place
for holding any special Board or committee meeting called by them.
3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day
and hour of the meeting shall be given to a Director in writing or orally.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in the notice of such meeting.
3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective
if delivered to a Director at least two days before the meeting.
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the meeting,
properly addressed to a Director at his or her address shown on the records of
the corporation, with postage thereon prepaid.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
- --------------------------------------------------------------------------------
BYLAWS Page 9
<PAGE> 15
3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company for
delivery to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be deemed effective if personally given to the Director at least two days
before the meeting.
3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether before
or after the date and time of the meeting, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board or any committee designated by
the Board need be specified in the waiver of notice of such meeting.
3.8.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee
meeting shall constitute a waiver of notice of such meeting, unless the Director
at the beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action taken at the meeting.
3.9 QUORUM
A majority of the number of Directors fixed by or in the manner provided
in these Bylaws shall constitute a quorum for
- --------------------------------------------------------------------------------
BYLAWS Page 10
<PAGE> 16
the transaction of business at any Board meeting but, if less than a majority
are present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.10 MANNER OF ACTING
If a quorum is present when the vote is taken, the act of the majority
of the Directors present at a Board meeting shall be the act of the Board,
unless the vote of a greater number is required by these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
3.11 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting any
business thereat, (b) the Director's dissent or abstention from the action taken
is entered in the minutes of the meeting, or (c) the Director delivers written
notice of the Director's dissent or abstention to the presiding officer of the
meeting before its adjournment or to the corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a Director who votes in favor of the action taken.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is taken
and delivered to the corporation. Action taken by written consent of Directors
without a meeting is effective when the last Director signs the consent, unless
the consent specifies a later effective date. Any such written consent shall be
inserted in the minute book as if it were the minutes of a Board or a committee
meeting.
3.13 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board. Any such
resignation is effective upon delivery thereof unless the notice of resignation
specifies a later effective date and, unless otherwise
- --------------------------------------------------------------------------------
BYLAWS Page 11
<PAGE> 17
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
3.14 REMOVAL
Any Director or the entire Board may be removed for cause by the holders
of not less than two-thirds of the shares entitled to elect the Director or
Directors whose removal is sought. Such action may only be taken at a special
meeting of the shareholders called expressly for that purpose, providing that
notice of the proposed removal, which shall include a statement of the charges
alleged against the Director, shall have been duly given to the shareholders
together with or as a part of the notice of the meeting.
Where a question of the removal of a Director for cause is to be
presented for shareholder consideration, an opportunity must be provided to such
Director to present his or her defense to the shareholders by a statement which
must accompany or precede the notice of the special meeting of shareholders or,
if provided to shareholders prior to the notice of the special meeting, the
initial solicitation of proxies seeking authority to vote for the removal of
such Director for cause. If not provided, then such proxies may not be voted for
removal. The Director involved shall be served with notice of the meeting at
which such action is proposed to be taken together with a statement of the
specific charges and shall be given an opportunity to be present and to be heard
at the meeting at which his or her removal is considered.
The vacancy created by the removal of a Director under this Section 3.14
shall be filled only by a vote of the holders of two-thirds of the shares then
entitled to elect the Director removed. Such vote may be taken at the same
meeting at which the removal of such Director was accomplished, or at such later
meeting, regular or special, as the shareholders may decide.
3.15 VACANCIES
Subject to the provisions of Section 3.14 hereof and unless the Articles
of Incorporation provide otherwise, any vacancy occurring on the Board may be
filled by the shareholders, the Board or, if the Directors in office constitute
fewer than a quorum, by the affirmative vote of a majority of the remaining
Directors. Any vacant office held by a Director elected by the holders of one or
more classes or series of shares entitled to vote and be counted collectively
thereon shall be filled only by the vote of the holders of such class or series
of shares. A Director elected to fill a
- --------------------------------------------------------------------------------
BYLAWS Page 12
<PAGE> 18
vacancy shall serve only until the next election of Directors by the
shareholders.
3.16 EXECUTIVE AND OTHER COMMITTEES
3.16.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Bylaws, may create standing or temporary committees,
including an Executive Committee, and appoint members thereto from its own
number and invest such committees with such powers as it may see fit, subject to
such conditions as may be prescribed by the Board, these Bylaws and applicable
law. Each committee must have two or more members, who shall serve at the
pleasure of the Board.
3.16.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (1) authorize
or approve a distribution except according to a general formula or method
prescribed by the Board, (2) approve or propose to shareholders actions or
proposals required by the Washington Business Corporation Act to be approved by
shareholders, (3) fill vacancies on the Board or any committee thereof, (4)
adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation pursuant
to RCW 23B.10.020, (6) approve a plan of merger not requiring shareholder
approval, or (7) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares except that the Board may authorize a
committee or a senior executive officer of the corporation to do so within
limits specifically prescribed by the Board.
3.16.3 AUDIT COMMITTEE
In addition to any committees appointed pursuant to this Section 3.16,
there shall be an Audit Committee, appointed annually by the Board, consisting
of at least two Directors who are not members of management. It shall be the
responsibility of the Audit Committee to review the scope and results of the
annual independent audit of books and records of the corporation, to review
compliance with all corporate policies which have been approved by the Board and
to
- --------------------------------------------------------------------------------
BYLAWS Page 13
<PAGE> 19
discharge such other responsibilities as may from time to time be assigned to it
by the Board. The Audit Committee shall meet at such times and places as the
members deem advisable, and shall make such recommendations to the Board as they
consider appropriate.
3.16.4 QUORUM AND MANNER OF ACTING
A majority of the number of Directors composing any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee but, if
less than a majority are present at a meeting, a majority of such Directors
present may adjourn the meeting from time to time without further notice. Except
as may be otherwise provided in the Washington Business Corporation Act, if a
quorum is present when the vote is taken the act of a majority of the members
present shall be the act of the committee.
3.16.5 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall
cause them to be recorded in books kept for that purpose.
3.16.6 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice thereof to the Chairman of the Board, the President, the Secretary or the
Board. Any such resignation is effective upon delivery thereof, unless the
notice of resignation specifies a later effective date, and the acceptance of
such resignation shall not be necessary to make it effective.
3.16.7 REMOVAL
The Board may remove any member of any committee elected or appointed by
it but only by the affirmative vote of the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from
- --------------------------------------------------------------------------------
BYLAWS Page 14
<PAGE> 20
serving the corporation in any other capacity and receiving compensation
therefor.
SECTION 4. OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed from
time to time by the Board or by any other officer empowered to do so. The Board
shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall mean the President, any Vice
President in charge of a principal business unit, division or function or any
other officer who performs a policy-making function. The Board or the President
may appoint such other officers and assistant officers to hold office for such
period, have such authority and perform such duties as may be prescribed. The
Board may delegate to any other officer the power to appoint any subordinate
officers and to prescribe their respective terms of office, authority and
duties. Any two or more offices may be held by the same person. Unless an
officer dies, resigns or is removed from office, he or she shall hold office
until his or her successor is appointed.
4.2 RESIGNATION
Any officer may resign at any time by delivering written notice thereof
to the corporation. Any such resignation is effective upon delivery thereof,
unless the notice of resignation specifies a later effective date, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without
cause. An officer or assistant officer, if appointed by another officer, may be
removed by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
If appointed, the Chairman of the Board shall perform such duties as
shall be assigned to him or her by the Board from time to time and shall preside
over meetings of the Board
- --------------------------------------------------------------------------------
BYLAWS Page 15
<PAGE> 21
and shareholders unless another officer is appointed or designated by the Board
as Chairman of such meetings.
4.6 PRESIDENT
If appointed, the President shall be the chief executive officer of the
corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a Chairman
of the Board, and, subject to the Board's control, shall supervise and control
all of the assets, business and affairs of the corporation. In general, the
President shall perform all duties incident to the office of President and such
other duties as are prescribed by the Board from time to time. If no Secretary
has been appointed, the President shall have responsibility for the preparation
of minutes of meetings of the Board and shareholders and for authentication of
the records of the corporation.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall perform such other duties
as from time to time may be assigned to them by the President or by or at the
direction of the Board.
4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of
minutes of the meetings of the Board and shareholders, maintenance of the
corporation records and stock registers, and authentication of the corporation's
records and shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President or by or at the direction of the Board. In the absence of
the Secretary, an Assistant Secretary may perform the duties of the Secretary.
4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and
- --------------------------------------------------------------------------------
BYLAWS Page 16
<PAGE> 22
deposit all such moneys in the name of the corporation in banks, trust companies
or other depositories selected in accordance with the provisions of these
Bylaws, and in general perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him or
her by the President or by or at the direction of the Board. In the absence of
the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer.
If required by the Board, the Treasurer or any Assistant Treasurer shall give a
bond for the faithful discharge of his or her duties in such amount and with
such surety or sureties as the Board shall determine.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No officer shall be prevented from receiving such salary by reason of
the fact that he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the
- --------------------------------------------------------------------------------
BYLAWS Page 17
<PAGE> 23
corporation in such banks, trust companies or other depositories as the Board
may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, or by a committee designated by the Board to the extent such committee is
empowered to do so.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed,
either manually or in facsimile, by the President or any Vice President and by
the Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary and shall include on their face written notice of any restrictions
which may be imposed on the transferability of such shares. All certificates
shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate, or
on the reverse of the certificate if a reference to the legend is contained on
the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended, or any
applicable
- --------------------------------------------------------------------------------
BYLAWS Page 18
<PAGE> 24
state law, and no interest therein may be sold, distributed,
assigned, offered, pledged or otherwise transferred unless (a)
there is an effective registration statement under such Act and
applicable state securities laws covering any such transaction
involving said securities or (b) this corporation receives an
opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this corporation) stating that
such transaction is exempt from registration or this corporation
otherwise satisfies itself that such transaction is exempt from
registration. Neither the offering of the securities nor any
offering materials have been reviewed by any administrator under
the Securities Act of 1933, as amended, or any applicable state
law."
6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the
stock transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its
shareholders and the Board, a record of all actions taken by the shareholders or
the Board without a meeting, and a record of all actions taken by a committee of
the Board exercising the authority of the Board on behalf of the corporation.
(b) Maintain appropriate accounting records.
- --------------------------------------------------------------------------------
BYLAWS Page 19
<PAGE> 25
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation.
(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Articles of Incorporation and all amendments thereto as
currently in effect;
2. the Bylaws and all amendments thereto as currently in effect;
3. the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past three years;
4. the financial statements described in Section 23B.16.200(1) of
the Washington Business Corporation Act, for the past three years;
5. all written communications to shareholders generally within
the past three years;
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected by the
Board for purposes of federal income taxes, or any other purpose, the accounting
year shall be the year so selected.
SECTION 9. SEAL
The Board may provide for a corporate seal which shall consist of the
name of the corporation, the state of its incorporation and the year of its
incorporation.
- --------------------------------------------------------------------------------
BYLAWS Page 20
<PAGE> 26
SECTION 10. INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a named party to or
is otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, partner,
trustee, employee or agent of another corporation or of a partnership, joint
venture, trust, employee benefit plan or other enterprise (hereinafter an
"indemnitee"), whether the basis of a proceeding is alleged action in an
official capacity as such a Director, officer, partner, trustee, employee or
agent or in any other capacity while serving as such a Director, officer,
partner, trustee, employee or agent, shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including counsel fees,
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith, and such indemnification shall continue as to an
indemnitee who has ceased to be a Director, officer, partner, trustee, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators. Except as provided in subsection 10.2 of this Section with
respect to proceedings seeking to enforce rights to indemnification, the
corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if a proceeding (or part
thereof) was authorized or ratified by the Board. The right to indemnification
conferred in this Section shall be a contract right.
10.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such
- --------------------------------------------------------------------------------
BYLAWS Page 21
<PAGE> 27
indemnification, except that if Section 23B.08.560 or any successor provision of
the Washington Business Corporation Act is hereafter amended, the restrictions
on indemnification set forth in this subsection 10.2 shall be as set forth in
such amended statutory provision.
10.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section shall include the
right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.3.
10.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 or 10.3 of this Section is not paid in
full by the corporation within 60 days after a written claim has been received
by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking has been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled.
10.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
- --------------------------------------------------------------------------------
BYLAWS Page 22
<PAGE> 28
10.6 NONEXCLUSIVITY OF RIGHTS
The right to indemnification and the advancement of expenses conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation or Bylaws of the corporation, general or specific action of the
Board, contract or otherwise.
10.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect
itself and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act. The corporation
may enter into contracts with any Director, officer, partner, trustee, employee
or agent of the corporation in furtherance of the provisions of this Section and
may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in this
Section.
10.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any class
or group of employees and agents of the corporation (i) with the same scope and
effect as the provisions of this Section with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; (ii)
pursuant to rights granted pursuant to, or provided by, the Washington Business
Corporation Act; or (iii) as are otherwise consistent with law.
10.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the
corporation, is or was serving as a Director or officer of another foreign or
domestic corporation of which a majority of the shares entitled to vote in the
election of its Directors is held by the corporation shall be deemed to be so
serving at the request of the corporation and entitled to indemnification and
advancement of expenses under subsections 10.1 and 10.3 of this Section.
- --------------------------------------------------------------------------------
BYLAWS Page 23
<PAGE> 29
SECTION 11. AMENDMENTS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws of this corporation subject to approval by a majority of the
Continuing Directors as defined in the Articles of Incorporation; provided,
however, the Board of Directors may not repeal or amend any bylaw that the
shareholders have expressly provided may not be amended or repealed by the Board
of Directors. The shareholders shall also have the power to adopt, amend or
repeal the Bylaws of this corporation by the affirmative vote of the holders of
not less than two-thirds of the outstanding shares and, to the extent, if any,
provided by resolution or resolutions of the Board of Directors providing for
the issue of a series of Common or Preferred Stock, not less than two-thirds of
the outstanding shares entitled to vote thereon, voting as a class.
* * * * *
The foregoing Bylaws were adopted by the Board on January 7, 1993 and
are effective as of March 15, 1993, the effective date of the Articles of
Amendment approved by the shareholders on January 28, 1993.
Amended Section 3.2 and restated on March 16, 1994 by the Board.
- --------------------------------------------------------------------------------
BYLAWS Page 24
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO
WALL DATA INCORPORATED
1993 STOCK OPTION PLAN
AS AMENDED AND RESTATED ON OCTOBER 15, 1996
The Wall Data Incorporated 1993 Stock Option Plan (the "Plan") is
amended as follows:
1. Section 3 of the Plan is amended to read as follows:
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 7,
the aggregate amount of Common Stock to be delivered upon the exercise of
all options granted under this Plan shall not exceed 1,366,789 shares of
Common Stock. If any option granted under this Plan shall expire or be
surrendered, exchanged for another option, cancelled or terminated for
any reason without having been exercised in full, the unpurchased shares
subject thereto shall thereupon again be available for purposes of this
Plan, including for replacement options which may be granted in exchange
for such expired, surrendered, exchanged, cancelled or terminated
options.
The date of the adoption of this Amendment No. 1 by the Board of
Directors of the Company is March 11, 1998. The effective date of this Amendment
No. 1 shall be March 11, 1998, the date of adoption by the Board of Directors,
unless the Company's shareholders fail to approve this Amendment No. 1 at or
prior to the next annual meeting of the Company's shareholders.
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1 TO
WALL DATA INCORPORATED
1993 STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS
AS AMENDED AND RESTATED ON OCTOBER 15, 1996
The Wall Data Incorporated 1993 Stock Option Plan For Non-Employee
Directors (the "Plan") is amended as follows:
1. Section 4 of the Plan is amended to add a new third paragraph as
follows:
In addition to the options set forth in the preceding paragraph
and effective October 28, 1997, Robert Frankenberg shall
automatically receive the grant of an option (the "Frankenberg
Option") to purchase 30,000 shares. The Frankenberg Option shall
vest and become exercisable over 3 years, one-third at each
anniversary date, except that vesting shall be based on Mr.
Frankenberg's period of continuous service as the Company's
outside Chairman of the Board rather than on his service as a
director. The Frankenberg Option shall terminate six (6) years
from the date of grant and otherwise in accordance with Section
5.5 of the Plan, 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.
The date of the adoption of this Amendment No. 1 by the Board of
Directors of the corporation is October 28, 1997. The effective date of this
Amendment No. 1 shall be October 28, 1997, the date of adoption by the Board of
Directors.
<PAGE> 1
EXHIBIT 10.5
SEPARATION AGREEMENT AND GENERAL RELEASE
THIS SEPARATION AGREEMENT AND GENERAL RELEASE (the "Agreement") is
entered into as of June 30, 1997, by James Simpson (hereinafter referred to as
"Simpson") and Wall Data Incorporated (hereinafter referred to as "Wall Data").
RECITALS
A. Simpson has served as Chairman of the Board ("Chairman") and Chief
Executive Officer ("CEO") of Wall Data. Effective July 31, 1997, Simpson will
resign as Chairman and CEO of Wall Data, and, effective October 31, 1997,
Simpson's employment relationship with Wall Data will terminate.
B. Simpson and Wall Data wish to enter into an agreement to clarify and
resolve any disputes that may exist between them arising out of the board
relationship and employment relationship and their termination, and any
continuing obligations of the parties to one another following the end of these
relationships.
C. Wall Data has advised Simpson of Simpson's right to consult an
attorney prior to signing this Agreement and has provided Simpson with up to 21
days to consider its severance offer and to seek legal assistance. Simpson has
consulted an attorney of Simpson's choice and understands that Simpson is
waiving all potential claims against Wall Data.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained below, it is agreed as follows:
<PAGE> 2
1. EMPLOYMENT: ENDING DATE AND RESPONSIBILITIES
Simpson's service as Chairman and CEO of Wall Data will terminate
effective July 31, 1997. Simpson shall remain an employee of Wall Data until
October 31, 1997, at his current salary and benefits. Effective October 31,
1997, Simpson will have no further employment or board duties or
responsibilities to Wall Data, except as may be specifically set forth herein.
2. CHARACTERIZATION OF TERMINATION
Simpson and Wall Data agree that Simpson's termination of employment and
board service is a voluntary resignation and shall be characterized as such for
all future purposes.
3. SEVERANCE AND BENEFITS
On July 31, 1997, Wall Data will pay to Simpson a lump sum payment of
Five Hundred Twenty-Five Thousand Dollars ($525,000.00). Similarly, on July 31,
1997, Wall Data will also pay to Simpson an additional payment of Eighty-Seven
Thousand Five Hundred Dollars ($87,500.00) as the pro rata portion of Simpson's
cash bonus for calendar year 1997, based on the amount of time he was employed
as CEO during the year. Simpson will continue to receive his full salary,
payable on Wall Data's normal payroll schedule, through October 31, 1997. On
that date, Simpson will be paid his final paycheck, which will include any
accrued but unused vacation time. Wall Data will also pay on Simpson's behalf,
Simpson's COBRA payments for the period beginning November 1, 1997 until May 1,
1999, or until Simpson becomes eligible for coverage under another employer's
medical plan, whichever occurs first. All other benefits shall cease effective
the date that Simpson's employment terminates (October 31, 1997).
-2-
<PAGE> 3
4. STOCK OPTIONS
a. Wall Data will recommend to the Compensation Committee that at its
next meeting the Committee consider accelerating the vesting of Simpson's
employee stock options listed on Exhibit A (the "Options"), which represent all
of Simpson's unvested options effective as of October 31, 1997, so that such
options are fully vested at the close of business on July 15, 1997. Wall Data
will also extend the post-termination exercise period for the Options, so that
the Options will remain exercisable until and including October 31, 1999, at
which time they will expire. Simpson understands that these modifications will
disqualify the options listed on Exhibit A as incentive stock options under the
Internal Revenue Code of 1986 (the "IRC"), as amended, and that such options
will become nonqualified stock options.
b. Exhibit A also sets forth Simpson's employee stock options which,
absent the acceleration of vesting provided for in subparagraph (a) above, will
be vested as of October 31, 1997 (taking into account Simpson's continued
employment by Wall Data through that date). In accordance with the applicable
stock option plan, such options will continue to vest until October 31, 1997,
and will remain exercisable for ninety (90) days, at which time they will
expire. Such options are and will qualify as incentive stock options under the
IRC, absent any disqualifying event by Simpson.
c. Wall Data agrees that the following shall apply with respect to any
and all shares of Wall Data issued upon exercise of any of the stock options
referenced in subparagraphs (a) and (b) above:
i. The Company will use its best efforts to undertake all action
to maintain the effectiveness of the registration of such shares under the
Securities Act of 1933, as amended, pursuant to one or more Registration
Statements on Form S-9 (or any successor form).
-3-
<PAGE> 4
ii. Because the stock option plan(s) under which the foregoing
options were issued qualify under Securities and Exchange Commission ("SEC")
Rule 16b-3, and assuming that Simpson did not purchase any Wall Data shares
within the six-month period preceding July 31, 1997, any trading profits on
sales of any of the shares issued upon exercise of the foregoing options will
not be subject to the recapture provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended; and
iii. To the best of the Company's knowledge, Simpson will not be
required to file Form 4's or Form 144's with the SEC in connection with his
sales of such shares.
5. VALID CONSIDERATION
Simpson and Wall Data agree that payments by Wall Data to Simpson
herein, as well as the acceleration of vesting and extension of post-termination
exercise periods offered in Paragraph No. 4 above, are not required by Wall Data
policies or procedures or by any contractual obligation of Wall Data, and are
offered by Wall Data solely as consideration for this Agreement.
6. NONCOMPETITION
Simpson agrees that for a period of one year from the date this
Agreement is executed, he will not be employed by, consult with or otherwise
perform services for any entity who directly competes with Wall Data, wherein
Simpson's employment, consultantship or the provision of his services would
involve or relate to terminal emulation technology, excluding any InterNet
solution to host-to-PC connectivity, other than any product that directly
competes with Arpeggio Live by providing: (a) legacy system connectivity, or (b)
the formatting of data from industry standard data bases. For its part, Wall
Data specifically acknowledges that this noncompetition provision would not bar
Simpson from accepting employment with, consulting for or otherwise
-4-
<PAGE> 5
providing services to any entity so long as he does not engage in the
competitive activity described in this paragraph.
7. NONSOLICITATION
Simpson shall not, for a period of one (1) year from the date this
Agreement is executed, anywhere in the world, directly or indirectly solicit,
influence or entice, or attempt to solicit, influence or entice, any employee or
consultant of Wall Data to cease his or her relationship with Wall Data or
solicit, influence, entice or in any way divert any customer, distributor,
partner, joint venturer or supplier of Wall Data to do business or in any way
become associated with any Competitor.
8. REAFFIRMATION OF CONFIDENTIALITY AGREEMENT AND INDEMNIFICATION AGREEMENT
Simpson agrees to sign, and expressly reaffirms and incorporates herein
as part of this Agreement the Confidential Information and Inventions Agreement,
or other such agreement that Simpson signed as part of his employment with Wall
Data, copies of which are attached as Exhibit B and which shall remain in full
effect. Wall Data agrees that the Indemnification Agreement that Simpson signed
as part of his employment with Wall Data, a copy of which is attached as Exhibit
C, shall remain in full force and effect and shall cover all of Simpson's
activities as an officer, director and/or employee of Wall Data in accordance
with its terms.
9. GENERAL RELEASE OF CLAIMS
Simpson expressly waives any claims against Wall Data and releases Wall
Data (including its officers, directors, shareholders, managers, agents and
representatives) from any claims, known or unknown, that Simpson may have in any
way connected with Simpson's employment or board service with Wall Data and the
termination thereof. It is understood that
-5-
<PAGE> 6
this release includes, but is not limited to, any claims for wages, bonuses,
employment benefits, stock options other than what is provided herein, or
damages of any kind whatsoever, arising out of any contracts, express or
implied, any covenant of good faith and fair dealing, express or implied, any
theory of wrongful discharge, any legal restriction on Wall Data's right to
terminate employees, or any federal, state or other governmental statute or
ordinance, including, without limitation, Title VII of the Civil Rights Act of
1964, the federal Age Discrimination in Employment Act, the Americans with
Disabilities Act, the Washington Law Against Discrimination, or any other legal
limitation on the employment relationship.
It is the intention of the parties in executing this Agreement that this
release shall be effective as a bar to each and every claim, demand, or cause of
action released hereby. Simpson recognizes that he may have some claim, demand,
or cause of action against Wall Data of which he is totally unaware and
unsuspecting, which he is giving up by execution of this Agreement. Simpson's
intention in executing this instrument that it will deprive Simpson of each such
claim, demand or cause of action and prevent him from asserting same against
Wall Data. In furtherance of this intention, Simpson expressly waives any rights
or benefits conferred by the provisions of Section 1542 of the California Civil
Code or any similar statute of any other jurisdiction. California Civil Code
Section 1542, provides as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
-6-
<PAGE> 7
Simpson represents that Simpson has not filed any complaints, charges or
lawsuits against Wall Data with any governmental agency or any court, and agrees
that Simpson will not initiate, assist or encourage any such actions.
This waiver and release shall not preclude Simpson from filing a lawsuit
for the exclusive purpose of enforcing Simpson's rights under this Agreement.
10. REVIEW AND REVOCATION PERIOD; EFFECTIVE DATE
Simpson and Wall Data agree that Simpson had up to 21 days to review
this Agreement and consult legal counsel, during which time the proposed terms
of this Agreement were not amended, modified, or revoked by Wall Data ("Review
Period"). Simpson may revoke this Agreement if Simpson so chooses by providing,
within seven days following the date Simpson signs this Agreement ("Revocation
Period"), written notice of Simpson's decision to revoke the Agreement to Wall
Data. This Agreement shall become effective and enforceable upon expiration of
the Revocation Period.
11. SEVERABILITY
The provisions of this Agreement are severable, and if any part of it is
found to be unlawful or unenforceable, the other provisions of this Agreement
shall remain fully valid and enforceable to the maximum extent consistent with
applicable law.
12. GOVERNING LAW
This Agreement will be governed by the laws of the state of Washington
without regard to its choice of law provisions.
13. KNOWING AND VOLUNTARY AGREEMENT
Simpson represents and agrees that Simpson has read this Agreement,
understands its terms and the fact that it releases any claim he might have
against Wall Data and its agents,
-7-
<PAGE> 8
understands that he has the right to consult counsel of choice and has done so,
and enters into this Agreement without duress or coercion from any source.
14. NONDISPARAGEMENT
Both Wall Data and Simpson agree that Simpson and Wall Data will not
make or publish, either orally or in writing, any disparaging statements
regarding the other.
15. ENTIRE AGREEMENT
This Agreement sets forth the entire understanding between Simpson and
Wall Data and supersedes any prior agreements or understandings, express or
implied, pertaining to the terms of Simpson's employment or board service with
Wall Data and the termination of same, unless expressly reaffirmed and
incorporated herein by reference. Simpson acknowledges that in executing this
Agreement, Simpson does not rely upon any representation or statement by any
representative of Wall Data concerning the subject matter of this Agreement,
except as expressly set forth in the text of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates indicated below.
WALL DATA INCORPORATED
By: /s/ James Simpson
-------------------------------- ------------------------------------
JAMES SIMPSON
Title:
----------------------------
Dated: Dated: 8th July 1997
---------------------------- -----------------------
-8-
<PAGE> 9
EXHIBIT A
STOCK OPTION PERSONNEL SUMMARY
AS OF 10/31/97
<TABLE>
<CAPTION>
GRANT GRANT PLAN/
NUMBER DATE TYPE GRANTED PRICE EXERCISED VESTED CANCELLED UNVESTED OUTSTANDING EXERCISABLE
- ------ ---- ---- ------- ----- --------- ------ --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
000179 05/15/91 83/ISO 340,000 $ 0.200 150,100 340,000 0 0 189,900 189,900
000404 05/15/91 83/ISO 25,000 $ 0.400 25,000 25,000 0 0 0 0
000265 02/27/92 83/ISO 37,500 $ 0.200 0 37,500 0 0 37,500 37,500
000403 10/21/92 83/NQ 37,500 $ 0.200 0 37,500 0 0 37,500 37,500
002392 01/23/96 93/ISO 13,670 $18.750 0 6,835 0 6,835 13,670 6,835
002393 01/23/96 93/NQ 11,330 $18.750 0 3,165 0 8,165 11,330 3,165
002272 04/17/96 93/NQ 68,499 $15.380 0 37,500 0 30,999 68,499 37,500
002275 04/17/96 93/ISO 6,501 $15.380 0 0 0 6,501 6,501 0
002557 01/21/97 93/NQ 30,000 $15.500 0 14,999 0 15,001 30,000 14,999
------- ------- ------- ------ ------ ------ ------- -------
TOTALS 570,000 [$83.825] 175,100 502,499 0 67,501 394,900 327,399
</TABLE>
<PAGE> 10
EXHIBIT B
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT
In consideration of my employment as an employee or independent
contractor with Wall Data Incorporated, a Washington corporation (the
"Company"), the opportunities for advancement that such employment provides me,
the compensation paid to me by the Company, the understandings set forth below,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, I agree as follows:
SECTION 1. DEFINITIONS
Whenever used in this Agreement, the following terms will have the
following specified meanings:
1.1 "CONFIDENTIAL INFORMATION" means any information that (a) directly
relates to the business of the Company, (b) is not generally available to the
public, nor does not become generally available to the public (other than
information made available directly or indirectly through me) and (c) is
conceived, compiled, developed, discovered or received by, or made available to
me during the Term, whether solely or jointly with others, and whether or not
while engaged in performing work for the Company. Without limiting the
generality of the foregoing, Confidential Information includes information
relating to Inventions or the trade secrets, products, services, finances,
business plans, marketing plans, legal affairs, suppliers, clients, potential
clients, prospects, opportunities, contracts or assets of the Company.
Confidential Information also includes any information which has been made
available to the Company by another Person and which the Company is obligated to
keep confidential.
1.2 "INVENTION" means any product, computer program, device, technique,
know-how, algorithm, method, process, procedure, improvement, discovery or
invention, whether or not patentable or copyrightable and whether or not reduced
to practice, that (a) is within the scope of the Company's business, research or
investigations or results from or is suggested by any work performed by me for
the Company and (b) is created, conceived, reduced to practice, developed,
discovered, invented or made by me during the Term, whether solely or jointly
with others, and whether or not while engaged in performing work for the
Company.
1.3 "MATERIAL" means any product, prototype, model, document, diskette,
tape, picture, drawing, design, recording, paper, note, writing or other
tangible item which contains or manifests, whether in printed, handwritten,
coded, magnetic or other form, any Confidential Information or Invention.
1.4 "PERSON" means any corporation, partnership, trust, association,
governmental authority, educational institution, individual or other entity.
<PAGE> 11
1.5 "PROPRIETARY RIGHT" means any patent, copyright, mask work, trade
secret, trade mark, trade name, service mark or other protected intellectual
property right in any Confidential Information, Invention or Material.
1.6 "TERM" means the term of my employment or engagement with the
Company, whether on a full-time, part-time or consulting basis.
SECTION 2. CONFIDENTIAL INFORMATION, INVENTIONS AND MATERIALS
2.1 The Company will be the exclusive owner of all Confidential
Information, Inventions, Materials and Proprietary Rights. To the extent
applicable, all Materials will constitute "works for hire" under applicable
copyright laws.
2.2 I hereby assign and transfer, or will assign and transfer to the
Company all right, title and interest that I may now or hereafter have in the
Confidential Information, Inventions, Materials and Proprietary Rights, subject
to the limitations set forth in the notice below. I will take such action
(including, but not limited to, the execution, acknowledgment, delivery and
assistance in preparation of documents or the giving of testimony) as may be
requested by the Company to evidence, transfer, vest or confirm the Company's
right, title and interest in the Confidential Information, Inventions, Materials
and Proprietary Rights. I will not contest the validity of any Proprietary
Rights.
2.3 Except as required for performance of my work for the Company or as
authorized in writing by the Company, I will not (a) use, disclose, publish or
distribute any Confidential Information, Inventions or Materials or (b) remove
any Materials from the Company's premises. I will hold all Materials in trust
for the Company and I will deliver them to the Company upon request and in any
event at the end of the Term.
2.4 I will promptly disclose to the Company all Confidential
Information, Inventions and Materials, as well as any business opportunity which
comes to my attention during the Term and which relates to the business of the
Company or which arises as a result of my employment with the Company. I will
not take advantage of or divert any such opportunity for the benefit of myself
or anyone else without the prior written consent of the Company.
NOTICE: Notwithstanding any other provision of this Agreement to the
contrary, this Agreement does not obligate me to assign or offer to assign to
the Company any of my rights in an invention for which no equipment, supplies,
facilities or trade secret information of the Company was used and which was
developed entirely on my own time, unless (a) the invention relates (i) directly
to the business of the Company or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the invention results from any work
performed by me for the Company. This satisfies the written notice and other
requirements of RCW 49.44.140.
<PAGE> 12
SECTION 3. NO CONFLICTING OBLIGATIONS
3.1 My execution, delivery and performance of this Agreement and the
performance of my other obligations and duties to the Company will not violate
any other employment, nondisclosure, confidentiality, consulting or other
agreement to which I am a party or by which I may be bound.
3.2 I will not use in performance of my work for the Company or disclose
to the Company any trade secret, confidential or proprietary information of any
prior employer or other Person if and to the extent that such use or disclosure
may violate any obligation or duty that I owe to such other Person (e.g., under
any agreement or applicable law). My compliance with this paragraph will not
prohibit, restrict or impair the performance of my work, obligations and duties
to the Company.
SECTION 4. DEDUCTIONS FROM WAGES
4.1 I hereby authorize and specifically agree to allow the Company to
deduct from my wages the value of any equipment, goods, or other items provided
to me by the Company during my employment which I fail to return when requested
to do so by the Company, provided that such deduction (1) does not exceed the
cost of the item, (2) does not reduce my wages below minimum wage or overtime
compensation below time and a half, (3) is not made for normal wear and tear on
the provided item(s), and (4) is accompanied with a list of all items for which
deductions are being made.
4.2 I hereby authorize and specifically agree to allow the Company to
deduct from my wages amounts equivalent to any cash shortages, breakage, or loss
of equipment due to my dishonesty, willful act, or gross negligence.
SECTION 5. EMPLOYMENT AT WILL
5.1 I agree that my employment is "at will" which means that it can be
terminated at any time by Wall Data, with or without cause and with or without
notice. I agree that any promise or obligation that my employment be on any
other basis than "at will" is invalid unless in writing signed by the Chief
Executive Officer of Wall Data. I agree to abide by the Company's rules,
regulations, policies and practices as revised from time to time.
SECTION 6. MISCELLANEOUS
6.1 This Agreement is not a contract of employment for a specified term
or for any length, and no rights of employment are hereby created. My
obligations under this Agreement will survive any termination of my employment.
6.2 I acknowledge that my obligations under this Agreement are important
to the Company, and that the Company would not employ me without my agreement to
such obligations. I also acknowledge that if I do not abide by my obligations in
this
<PAGE> 13
Agreement in any way, the Company will suffer immediate and irreparable harm,
and that the damage to the Company will be difficult to measure and financial
relief will be incomplete. Accordingly, I agree that in the event of any breach
or default under this Agreement by me, the Company will be entitled to
injunctive relief, specific performance, and other equitable relief. I expressly
waive any defenses to such relief based on whether irreparable harm has occurred
and whether there is an adequate remedy at law. The rights and remedies of the
Company under this paragraph are in addition to, and not in lieu of, any other
right or remedy afforded to the Company under any other provision of this
Agreement, by law or otherwise. Further, if the Company brings an action against
me to enforce its rights under this Agreement or to seek damages for my breach,
and if the Company obtains any relief in such action, I will pay the Company's
attorneys' fees and costs in such action.
6.3 This Agreement will be enforced to the fullest extent permitted by
applicable law. If for any reason any provision of this Agreement is held to be
invalid or unenforceable to any extent then (a) such provision will be
interpreted, construed or reformed to the extent reasonably required to render
the same valid, enforceable and consistent with the original intent underlying
such provision, and (b) such invalidity or unenforceability will not affect any
other provision of this Agreement or any other agreement between the Company and
me. If the invalidity or unenforceability is due to the unreasonableness of the
scope or duration of the provision, the provision will remain effective for such
scope and duration as may be determined to be reasonable.
6.4 The failure of the Company to insist upon or enforce strict
performance of any other provisions of this Agreement or to exercise any of its
rights or remedies under this Agreement will not be construed as a waiver or a
relinquishment to any extent of the Company's rights to assert or rely on any
such provision, right or remedy in that or any instance; rather, the same will
be and remain in full force and effect.
6.5 This Agreement sets forth the entire Agreement, and supersedes any
and all prior agreements, between me and the Company with regard to the
Confidential Information, Inventions, Materials, Proprietary Rights and other
matters of the Company. This Agreement may not be amended, except by writing
signed by the party against whom such amendment is sought to be enforced.
6.6 The waiver by the Company of any breach of this Agreement by me
shall not be effective unless in writing, and no such waiver shall operate or be
construed as a waiver of the same or another breach on a subsequent occasion.
6.7 This Agreement will be governed by the laws of the State of
Washington without regard to its choice of law provisions. I irrevocably consent
to the jurisdiction of the courts of the State of Washington, King County, the
United States District Court for the Western District of Washington at Seattle,
and all applicable appellate courts, in connection with any action relating to
this Agreement. Further, I will not bring any action relating to this Agreement
other than in the court specified in this paragraph.
<PAGE> 14
6.8 I have carefully read all of the provisions of this Agreement and
agree that (a) the same are necessary for the reasonable and proper protection
of the Company's business, (b) the Company has been induced to enter into and
continue its relationship with me in reliance upon my compliance with the
provision of this Agreement, (c) every provision of this Agreement is reasonable
with respect to its scope and duration, and (d) I have received a copy of this
Agreement.
/s/ James Simpson
------------------------------------
Signature
James Simpson
------------------------------------
FULL NAME (print or type)
Soc. Sec. No
------------------------
ACCEPTED:
Wall Data Incorporated
By
------------------------------
Its
--------------------------
<PAGE> 1
REDACTED VERSION
AGREEMENT
FOR
INFORMATION TECHNOLOGY SERVICES
BETWEEN
WALL DATA INCORPORATED
AND
ELECTRONIC DATA SYSTEMS CORPORATION
[*] - Confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE> 2
AGREEMENT
FOR
INFORMATION TECHNOLOGY SERVICES
THIS AGREEMENT, dated effective as of May 13, 1997 (the "Effective
Date") is by and between Wall Data Incorporated, a Washington corporation ("Wall
Data"), and Electronic Data Systems Corporation, a Delaware corporation ("EDS").
AGREEMENT, TERM AND DEFINITIONS
1.1 Agreement. During the Term, EDS will supply to Wall Data, and Wall
Data will purchase from EDS, the information technology services
described in this Agreement, all upon and subject to the terms and
conditions specified in this Agreement.
1.2 Term of Agreement. The term of this Agreement (the "Term") will begin
on the Effective Date and will end on the tenth anniversary of the
Effective Date. The date on which the Term expires due to passage of
time is referred to in this Agreement as the "Expiration Date". This
Agreement may be terminated prior to the Expiration Date in
accordance with Article IX.
1.3 Defined Terms. As used in this Agreement, the following terms have
the meanings set forth below.
(a) Access. The term "Access" means the enjoyment of physical
and legal use and operation of Software, equipment,
hardware or any other item or facility which EDS needs in
order for EDS to provide the Services in the manner
provided herein.
(b) EDS Software. The term "EDS Software" means any Software
which is owned by EDS (and not proprietary to any other
party) and operated by EDS in connection with the
performance of the Services. Although no EDS Software is to
initially be used in the performance of the Base Services,
in the event any EDS Software is so used, Schedule 1.3(b)
will be completed and attached to and added to this
Agreement.
(c) EDS-Vendor Software. The term "EDS-Vendor Software" means
any Software which is licensed to EDS and operated by EDS
in connection with the performance of the Services.
Although no EDS-Vendor Software is to initially be used in
the performance of the Base Services, in the event any
EDS-Vendor Software is so used, Schedule 1.3(c) will be
completed and attached to and added to this Agreement.
(d) Wall Data Software. The term "Wall Data Software" means any
Software which is owned by Wall Data (and not proprietary
to any other party) and which is to be operated by or on
behalf of Wall Data. Wall Data Software is identified on
Schedule 1.3(d), which Schedule may be amended from time to
time by mutual written agreement of the parties.
1
<PAGE> 3
(e) Wall Data-Vendor Software. The term "Wall Data-Vendor
Software" means any Software which is proprietary to any
other party other than Wall Data or EDS and which is to be
operated by or on behalf of Wall Data. Wall Data-Vendor
Software is identified on Schedule 1.3(e), which Schedule
may be amended from time to time by mutual written
agreement of the parties.
(f) Services. The term "Services" means the Base Services and
the Additional Services, if any, that may be provided by
EDS under this Agreement.
(g) Software. The term "Software" means computer programs
together with input and output formats, program listings,
narrative descriptions, operating instructions, and
supporting documentation and shall include the tangible
media upon which such programs and documentation are
recorded. Except as otherwise provided in this Agreement,
Software includes any enhancements, translations,
modifications, updates, new releases, and other changes.
Other capitalized terms used in this Agreement are defined
herein from time to time.
ARTICLE II. INFORMATION TECHNOLOGY SERVICES
TO BE PERFORMED BY EDS
2.1 EDS Personnel and Management.
(a) EDS Account Director. During the Term, EDS will provide an
EDS Account Director (the "EDS Account Director") who has
the responsibility for the provision of information
technology services to be provided by EDS under this
Agreement. The EDS Account Director will maintain
appropriate work space in the Wall Data facility located at
11332 N.E. 122nd Way, Kirkland, Washington 98034-6931, will
have overall responsibility for managing and coordinating
the delivery of the Services and for the performance of the
EDS personnel comprising the EDS/Wall Data account team and
will coordinate and consult with the Wall Data
Representative (as defined in Section 3.1(a)). The
EDS Account Director will meet regularly with the Wall Data
Representative as well as other Wall Data designated
personnel in order to review the information technology
priorities established by Wall Data and the status of EDS'
performance under this Agreement. If either Wall Data or
EDS desires to replace the EDS Account Director, Wall Data
shall have the right (i) to participate in the interview
process for the replacement and (ii) to accept or reject
the replacement; provided, however, that Wall Data's
acceptance must not be unreasonably withheld and any
rejection must be for reasonable cause.
(b) Steering Committee. On or before the Effective Date, Wall
Data and EDS will each give the other written notice of the
names of the three members of their respective management
staff (inclusive of the EDS Account Director and the Wall
Data Representative) who will serve on an executive
steering committee (the "Executive Steering Committee").
Wall Data will designate one of its members on the
2
<PAGE> 4
Executive Steering Committee to act as the chairman of the
Executive Steering Committee. The Executive Steering
Committee will be responsible for making strategic
decisions for Wall Data with respect to linking Wall Data's
business objectives to Wall Data's existing and future
plans for information technology. Wall Data and EDS each
may from time-to-time replace the members of its management
staff serving on the Executive Steering Committee with
other members of its management staff, except that the EDS
Account Director and the Wall Data Representative will be
members of the Executive Steering Committee throughout the
Term of this Agreement. Although the EDS Account Director
will remain a member of the Executive Steering Committee,
EDS will remove and replace either of the other two EDS
members, which Wall Data, in good faith, requests to have
removed for reasonable cause. Wall Data shall have the
right (i) to participate in the selection process for the
replacement(s) and (ii) to accept the replacement(s),
provided, that Wall Data's acceptance is not unreasonably
withheld. Wall Data and EDS may mutually agree to increase
or decrease the size of the Executive Steering Committee or
to change the qualifications of who may serve on the
Executive Steering Committee. The Executive Steering
Committee will meet at least quarterly unless otherwise
agreed by Wall Data and EDS.
(c) Transition of Personnel; Notification of Change in
Employment Status. On or prior to the Effective Date, EDS
will offer employment, effective the start of business on
the Effective Date, to the data processing employees of
Wall Data identified in Schedule 2.1(c) (the "Transitioned
Employees") in accordance with EDS' normal employment
policies. In preparation for the transition of employment,
EDS and Wall Data will take the necessary measures so that
the representatives of the affected personnel departments
of the parties will meet and work together to accomplish a
smooth and orderly transition for such employees. Neither
party will make any representation, promise, or other
communication, whether written or oral, to the Transitioned
Employees regarding employment with EDS, or the employment
benefits, plans, or practices of EDS without obtaining the
prior written consent of the other. EDS will notify Wall
Data any changes in the employment status of the
Transitioned Employees while employed by EDS, including the
placement of a Transitioned Employee to an EDS account
other than Wall Data.
(d) Financial Responsibility for EDS Personnel. Except for
out-of-pocket expenses, which shall be paid in accordance
with Section 7.1(c), EDS will pay for all personnel
expenses, including wages and benefits of its employees
performing the Services.
3
<PAGE> 5
2.2 EDS Information Technology Services.
(a) Description of Services. During the Term, and in accordance
with the provisions of this Agreement, EDS will provide to
Wall Data (a) the services described in the statement of
work attached as Schedule 2.2 to this Agreement (the
"Statement of Work") and (b) the Networking and
Telecommunication Services (defined below). The services
described in the Statement of Work and the Networking and
Telecommunication Services will be collectively referred to
herein as the "Base Services." The Base Services will be
performed at the Wall Data facility located at 11332 N.E.
122nd Way, Kirkland, Washington 98034-6931, and the Wall
Data facilities specifically listed in Schedule 2.2, as
such facilities exist as of the Effective Date
(collectively, the "Wall Data Locations"). At Wall Data's
request, EDS will provide the Base Services at sites other
than the Wall Data Locations as an Additional Service in
accordance with Section 2.4. The Networking and
Telecommunication Services are more particularly described
in Section 2.3 below.
(b) Service Levels. Wall Data agrees that, during a one hundred
eighty (180) day period commencing on the Effective Date
and ending on the one hundred eightieth (180th) day
thereafter (the "Due Diligence Period"), it will work with
EDS to define and determine (i) as of the Effective Date,
the existence, use and capacity of the Wall Data Software,
the Wall Data-Vendor Software, the Wall Data-Owned
Equipment and the Wall Data Leased Equipment that will be
used and operated by EDS in the performance of the Base
Services, (ii) the manner of measurement, and (iii) the
actual respective levels of service pursuant to which the
Base Services will be provided by EDS pursuant to this
Agreement, which service levels will based on industry
standards and the existence, use and capacity of the Wall
Data Software, the Wall Data-Vendor Software, the Wall
Data-Owned Equipment, the Wall Data Leased Equipment and
the Wall Data network as of the Effective Date. After the
determination of such service levels, Wall Data will
confirm the accuracy of each and, upon such confirmation,
approve each such level in writing and deliver such written
approval to EDS (the "Service Level Agreement"). The
measurements contained in the Service Level Agreement (as
may be amended from time to time in accordance with this
Section) will be used in each and every instance in which
the terms of this Agreement call for, use or refer to, the
levels of service for the Base Services to be performed and
provided by EDS pursuant to this Agreement.
At least annually, the Executive Steering Committee will
review the Service Level Agreement and focus on, if
applicable, Wall Data's reasonable business requirements,
including its desire for any increase in service levels and
related capacity requirements, for the subsequent year, and
any EDS recommendations stemming from the technology
refresh programs described in the Statement of Work. If
such review indicates (i) that the service levels contained
in the Service Level Agreement need to be adjusted to meet
such business requirements, and EDS determines in its
reasonable business judgment that, in order to meet such
4
<PAGE> 6
adjusted service levels, additional hardware, Software,
data/telecommunications services or other items are needed
(either as additions to, or replacements of, certain items
within Wall Data's then existing information technology
environment), or (ii) that technology refreshes in the form
of upgrades or otherwise in hardware, Software or other
items would be appropriate or desirable, then Wall Data
will determine whether it desires to acquire such
additional items at its expense as provided below. To the
extent that such additional items are so acquired, the
parties will mutually determine and agree on appropriate
adjustments to the applicable service levels, and such
adjustments will be documented in an amendment to the then
current Service Level Agreement.
In addition, if and to the extent that EDS can demonstrate
to the reasonable satisfaction of Wall Data that the then
current service levels will, within a period of time
reasonably estimated by EDS, no longer be achievable due to
the fact that certain hardware, Software or other items
material to the operation of Wall Data's then existing
information technology environment are (i) obsolete, (ii)
worn out, (iii) incompatible with any upgraded technology
in use at Wall Data, (iv) no longer commercially supported
by the applicable vendor, or (v) not reasonably sufficient
to support Wall Data's increased business requirements,
then Wall Data will determine whether it desires to replace
such items at its expense as provided below. If Wall Data
decides not to replace such items, EDS will not be in
default of the applicable service level obligations under
this Agreement to the extent that such decision adversely
affects EDS' ability to properly perform such obligations.
Wall Data will be financially responsible for (i) all
hardware, Software, equipment, supplies and
data/telecommunications services determined to be necessary
or desirable in accordance with this Section, and (ii) any
service requirements resulting therefrom beyond the scope
of services set forth in the Statement of Work, which will
be provided by EDS as an Additional Service.
The parties agree and acknowledge that, during the period
of time in which the measurement activities are to be
undertaken pursuant to this Section 2.2(b), EDS will be
providing the Base Services pursuant to the terms of this
Agreement in a manner so that the delivery of such Base
Services reasonably approaches service levels generally
recognized within the industry and Wall Data will be
obligated to pay EDS for such Base Services during that
period.
(c) Global Services. The parties acknowledge and agree that
this Agreement is intended to be a global agreement and
that, for any Services to be performed by EDS for Wall Data
outside of the United States, such Services will be
performed pursuant to local country agreements or Task
Orders, as defined in Section 2.4 below, which will be job
specific and country specific for those Services in the
country or region in which they are to be performed. In
performing Services in countries other than the United
States, Wall Data acknowledges and agrees that EDS may
perform such Services by or through subsidiaries or
affiliates of EDS which are situated in that country or
region;
5
<PAGE> 7
provided, however, that EDS and Wall Data will be and
remain liable and responsible for their respective
obligations under this Agreement and any local country
agreements or Task Orders, including the Services being
performed and for the payment therefor. Any local country
agreement or Task Order, the subject of which is the
performance of Services outside of the United States, must
be approved in writing by the joint executions of the EDS
Account Director and the Wall Data Representative.
(d) Export Compliance. This Agreement is expressly made subject
to any United States of America government laws,
regulations, orders or other restrictions regarding export
from the United States of computer hardware, software,
technical data or derivatives of such software, hardware or
technical data. Notwithstanding anything else in this
Agreement to the contrary, neither Wall Data nor EDS shall
directly or indirectly export (or re-export) any computer
hardware, software, or technical data related to the
Services provided pursuant to this Agreement or derivatives
of such software, hardware or technical data, or permit
shipment of same (i) into (or to a national or resident of)
Cuba, North Korea, Iran, Iraq, Libya, Syria, or any other
country to which the United States has embargoed goods, or
(ii) to anyone on the U.S. Treasury Department's List of
Specially Designated Nationals, List of Specially
Designated Terrorists and List of Specially Designated
Narcotics Traffickers, or the U.S. Commerce Department's
Denied Parties List, or (iii) to any country or destination
for which the United States government or a United States
governmental agency requires as export license or other
approval for export without first having obtained such
license or other approval. This obligation shall survive
the expiration or early termination of this Agreement.
(e) Year 2000 Issues. Wall Data acknowledges and agrees that
the Base Services do not include any changes,
modifications, updates or enhancements to Wall Data
Software or any third-party Software which may be necessary
so that all of such Software will (i) operate and produce
data on and after January 1, 2000 (including taking into
effect that such year is a leap year), accurately and
without delay, interruption or error relating to the fact
that the time at which and the date on which such product
is operating is on or after 12:00 a.m. on January 1, 2000
(including taking into effect that such year is a leap
year) or (ii) accept, calculate, process, maintain, store
and output, accurately and without delay, interruption or
error, all times or dates, or both, whether before, on or
after 12:00 a.m. January 1, 2000 (including taking into
effect that such year is a leap year), and any time periods
determined or to be determined based on any such times or
dates, or both. However, EDS would be willing to provide as
an Additional Service for an additional charge all such
changes, modifications, updates or enhancements to such
Software.
2.3 Networking and Telecommunications Services. During the Term, EDS will
provide to Wall Data the following services in accordance with the
responsibilities and assumptions set forth in this Agreement:
6
<PAGE> 8
(a) Networking and Telecommunications Services. EDS will
acquire, implement and administratively support, on Wall
Data's behalf and at Wall Data's expense and with Wall
Data's prior written consent to any and all specific
services, outbound long distance calling services, 800
inbound services and calling card services and any other
telecommunications services in place for Wall Data as of
the Effective Date to the extent such services are more
particularly described in Sections IV and V of the
Statement of Work (the "Networking and Telecommunication
Services"). EDS may acquire such services from a
telecommunications vendor or vendors as EDS deems
appropriate (collectively, the "Vendor") and pass those
services on to Wall Data as Services under this Agreement.
EDS will provide Wall Data with prior notice of its intent
to change Wall Data's existing or future Vendor and will
not effect a change in Wall Data's existing or future
Vendor that would cause Wall Data to incur increased
telecommunication rates or charges for the Networking and
Telecommunication Services (excluding increased rates and
charges based on Wall Data's usage or business
requirements) without Wall Data's prior written consent.
EDS will provide such Networking and Telecommunication
Services to the Wall Data sites identified in Sections IV
and V of the Statement of Work. Section IV (Network
Management) and Section V (Telecommunications) of the
Statement of Work define the scope of the Networking and
Telecommunications Services to be provided by EDS as Base
Services under this Agreement. In the event there are
substantial technological advances in telecommunications or
other related media and, as a result of such advances,
complexities are introduced that impact or modify the
service levels or functions from those in effect as of the
Effective Date with regard to the telecommunications
responsibilities of EDS, the parties will negotiate in good
faith as to any modifications that should be made in this
Agreement as a result thereof.
(b) Billing Administration. EDS will provide to Wall Data on a
monthly basis, a consolidated bill of rated call detail
containing the following information: date and time of
call, duration, destination (both number and location), and
total per Wall Data Location.
(c) Implementation Plan. EDS will develop and coordinate with
Wall Data and Vendor(s) an implementation plan so as to
commence the Networking and Telecommunication Services by
July 1, 1997.
(d) Quality, Performance and Remedies. EDS makes no
representation or warranty respecting the quality of the
Networking and Telecommunication Services made available to
it by the Vendor or LEC (as defined in Section 7.1(b)(i) of
this Agreement) and provided or made available to Wall Data
pursuant to this Agreement. Wall Data's remedies for any
service problems with respect to the Networking and
Telecommunication Services will be the remedies set forth
in the tariff, regulations or agreement applicable to such
Vendor or LEC. EDS' responsibility will be to coordinate
with Wall Data and communicate with the Vendor or LEC and
assist Wall
7
<PAGE> 9
Data in the proper reporting of the service problem on Wall
Data's behalf and passing through to Wall Data any credits
received from such Vendor for such service problem.
2.4 Additional Services. Upon the reasonable written request of Wall
Data, EDS will, subject to the other terms and conditions of this
Section 2.4, provide Wall Data with such additional services which
are beyond the scope, level or capacity of the Base Services
described in this Agreement as Wall Data and EDS agree in accordance
with this Section (collectively, the "Additional Services"). The
specific request for Additional Services to be supplied by EDS to
Wall Data, the compensation to be paid and other related matters
shall be expressed in written task orders ("Task Orders") prepared
from time to time by EDS in response to a request by Wall Data for
Additional Services. Each Task Order will incorporate by reference,
and shall be subject to, the terms and conditions of this Agreement.
EDS acknowledges and agrees that no billable Additional Services
shall begin unless and until a Task Order is executed and delivered
by the EDS Account Director and the Wall Data Representative. Each
Task Order shall be in such form as the parties mutually agree and
shall contain the following information, as applicable:
(a) The incorporation, by reference, of this Agreement.
(b) The designation of a unique identifying number.
(c) A description of the services or deliverables to be
provided by each party, including any documentation or
training to be provided by each party.
(d) A description of any standards or constraints to be applied
to the services performed by EDS.
(e) A description of the consideration and terms of payment for
services or deliverables.
(f) A description of any items of expense authorized for
reimbursement to EDS and the basis for such reimbursement.
(g) A description of requirements for the delivery and
frequency of status reports.
(h) The name and telephone number of the Wall Data
Representative and the EDS Account Director.
(i) A description of the respective Wall Data responsibilities
and EDS responsibilities.
(j) The term of the Task Order.
ARTICLE III. WALL DATA OBLIGATIONS
3.1 Wall Data Personnel and Management.
8
<PAGE> 10
(a) Wall Data Representative. During the Term, Wall Data will
maintain a designated representative (the "Wall Data
Representative") who will be a senior executive of Wall
Data and who will be authorized to act as the primary point
of contact for EDS in dealing with Wall Data with respect
to each party's obligations under this Agreement.
(b) Transitioned Employees. Wall Data will cooperate with EDS
in the performance by EDS of its obligations to offer
employment to and hire the Transitioned Employees. Wall
Data has not and will not make any representation, promise,
or other communication, whether written or oral, to the
Transitioned Employees regarding employment with EDS, or
the employment benefits, plans, or practices of EDS without
obtaining the prior written consent of EDS. Wall Data will
direct any such questions to the EDS Account Director.
Should EDS request that Wall Data continue to make payments
to such employees after they are hired by EDS, Wall Data
will do so as an administrative convenience until such
personnel can be integrated into the EDS payroll system. In
such event, Wall Data will be acting solely as an
accommodation to EDS and EDS will reimburse Wall Data for
all wages paid and employer's contributions made by Wall
Data in connection therewith.
(c) Bonus. EDS will pay each Transitioned Employee employed by
EDS on July 4, 1997 a bonus of $2,000 within thirty (30)
days after such date. Prior to EDS' obligation to pay such
bonuses, Wall Data will pay EDS a lump sum aggregate amount
equal to $2,000 per Transitioned Employee employed by EDS
on July 4, 1997.
3.2 Wall Data Operational Obligations. During the Term, Wall Data will,
on a timely basis and at no charge to EDS, perform the support
services and discharge the obligations described in Schedule 3.2.
3.3 Wall Data Financial Obligations. In addition to the payment of
certain out-of-pocket expenses provided in Section 7.1(c), Wall Data
shall pay all costs for the acquisition of, or costs associated with,
any and all Software (including, without limitation, the Wall Data
Software and the Wall Data-Vendor Software), and hardware (including,
without limitation, the Wall Data-Owned Equipment and the Wall Data
Leased Equipment) related to or which may be necessary (as determined
by the Executive Steering Committee and approved by Wall Data in
accordance with Section 2.2(b)) for the performance of the Services
by EDS pursuant to this Agreement, it being hereby acknowledged by
the parties that such items are not being assigned to, or being
assumed by, EDS, but shall remain or be the financial
responsibilities of Wall Data. In addition to any other financial
responsibilities of Wall Data expressly provided herein, Wall Data
will pay all costs and expenses related to each item which is to be
provided by Wall Data pursuant hereto and for which the financial
responsibility has not been expressly assumed by EDS under this
Agreement, including, without limitation, the items set forth in
Sections 3.1 and 3.2.
ARTICLE IV. EQUIPMENT AND RELATED AGREEMENTS
9
<PAGE> 11
4.1 Wall Data-Owned Equipment. During the Term, Wall Data will furnish to
EDS for EDS' use in providing the Services at no charge, the
equipment owned by Wall Data that is either listed on the attached
Schedule 4.1 or which is purchased by Wall Data subsequent to the
Effective Date for information technology purposes (and which is
added to Schedule 4.1 by mutual consent of the parties)
(collectively, the "Wall Data-Owned Equipment"). The Wall Data-Owned
Equipment will remain the property of Wall Data and, as such, Wall
Data will have and retain all ownership and control of the Wall Data
Owned Equipment. Wall Data will pay all costs and expenses with
respect to the Wall Data-Owned Equipment, including, without
limitation, depreciation, insurance and taxes.
4.2 Wall Data Leased Equipment. During the Term, Wall Data will furnish
to EDS for EDS' use in providing the Services, at no charge to EDS,
complete use and Access to the equipment leased by Wall Data that is
listed on the attached Schedule 4.2 or which is leased by Wall Data
subsequent to the Effective Date for information technology purposes
(and which is added to Schedule 4.2 by mutual consent of the parties)
(collectively, the "Wall Data Leased Equipment"). Wall Data will pay
all costs and expenses with respect to the Wall Data Leased
Equipment, including, without limitation, all lease payments,
insurance and taxes, and Wall Data will also pay all costs necessary
to obtain Access for EDS to the Wall Data Leased Equipment.
4.3 Third Party Approvals. Wall Data and EDS will work together to take
all actions necessary to obtain any consents, approvals, or
authorizations from third parties necessary for EDS to lawfully
access, operate, and use (at or from any location where the Services
are to be provided) the Wall Data-Owned Equipment and the Wall Data
Leased Equipment. The payment of any costs and expenses incurred will
be borne solely by Wall Data.
4.4 Service Agreements. Subject to the terms and conditions set forth in
this Section 4.4 and subject to Wall Data obtaining any required
consents, Wall Data will assign to EDS all of Wall Data's right,
title and interest in and to the agreements listed in Schedule 4.4
(collectively, the "Maintenance Agreements") relating to the
maintenance of the Wall Data Software, the Wall Data Vendor Software,
the Wall Data Owned Equipment and the Wall Data Leased Equipment, and
EDS agrees to assume all of Wall Data's obligations arising under the
Maintenance Agreements subsequent to the Effective Date. If a
required consent is not obtained, then (a) EDS will determine and
adopt, subject to Wall Data's prior approval, such alternative
approaches as are necessary and sufficient to perform the Services
without such required consent, and (b) the parties will mutually
agree on any appropriate adjustments to this Agreement, including the
scope of Services, Service Levels, and the Monthly Base Charges.
Wall Data represents and warrants to EDS that, as of the Effective
Date, (a) it is not (and, to its knowledge, the provider of the
maintenance services is not) in default in any material respect under
any of the Maintenance Agreements, and (b) it has delivered to EDS
full and complete copies of the Maintenance Agreements (including any
amendments thereto) prior to the Effective Date. Wall Data agrees
that the representations and warranties contained in this Section 4.4
will be true and correct as of the Effective Date. Wall Data agrees
that it will not amend any of the Maintenance Agreements prior to the
Effective Date without the prior
10
<PAGE> 12
written consent of EDS. Wall Data and EDS agree to execute and
deliver an assignment and assumption agreement in a form that is
mutually agreed to by the parties evidencing the assignment and
assumption of the Maintenance Agreements contemplated by this
Section 4.4.
4.5 Further Assurances. Wall Data and EDS agree to execute and deliver
such other instruments and documents as either party reasonably
requests to evidence or effect the transactions contemplated by this
Article.
4.6 Agency Appointment. Wall Data hereby appoints EDS as its sole agent
for all matters pertaining to the operation of the Wall Data-Owned
Equipment and the Wall Data Leased Equipment and will promptly notify
all appropriate third parties of such appointment. Notwithstanding
the foregoing, EDS will have no authority to (a) cause Wall Data to
incur any material cost or expense with regard to the Wall Data-Owned
Equipment or the Wall Data Leased Equipment, or (b) amend, modify or
waive any rights or interests contained in any Wall Data agreement
relating to the Wall Data-Owned Equipment or the Wall Data Leased
Equipment, without Wall Data's prior approval.
ARTICLE V. SOFTWARE
5.1 Wall Data Software. Wall Data Software will remain Wall Data's
property and EDS will have no ownership interests or other rights in
the Wall Data Software, except as provided in this Section. Wall Data
grants to EDS the right to Access Wall Data Software, without charge
to EDS, to provide the Services. The Wall Data Software will be made
available to EDS on such media as may be reasonably requested by EDS,
together with existing documentation and other materials.
5.2 Wall Data-Vendor Software. On or before the date EDS will begin to
access such Software, Wall Data and EDS will work together to obtain
all consents necessary to permit EDS to Access or operate the Wall
Data-Vendor Software and Wall Data will pay all costs and expenses
associated therewith. Wall Data will provide written evidence of such
consents to EDS upon EDS' request. The Wall Data-Vendor Software will
be made available to EDS, together with documentation and other
materials related to the Wall Data-Vendor Software that were
originally delivered to Wall Data by the applicable vendor. During
the term of this Agreement, Wall Data will pay all required (as
determined by the Executive Steering Committee and approved by Wall
Data in accordance with Section 2.2(b)) license, installation and
upgrade fees with respect to the Wall Data-Vendor Software. Nothing
contained in this Agreement will require either party to violate the
proprietary rights of any third party in any Software.
5.3 EDS Software. EDS Software will remain EDS' property and Wall Data
will have no rights or interests therein except that, upon the
expiration or early termination of this Agreement (except for
termination due to non-payment by Wall Data) and subject to the other
terms and conditions of this Agreement, EDS shall grant to Wall Data
a perpetual, nontransferable, nonexclusive, royalty-free license to
use, after the Expiration Date, any application software programs
(including existing documentation) of any EDS Software then being
used by EDS in
11
<PAGE> 13
rendering services to Wall Data (the "Licensed Programs"), subject
to Wall Data and EDS entering into an agreement, in form and
substance reasonably satisfactory to EDS and Wall Data, containing
such terms and conditions as may be appropriate.
5.4 EDS-Vendor Software. EDS will obtain all consents necessary to permit
EDS to Access or operate the EDS-Vendor Software and will pay all
costs and expenses associated therewith. During the term of this
Agreement, EDS will pay all required license, installation,
maintenance and upgrade fees with respect to the EDS-Vendor Software.
5.5 EDS Development Tools. EDS retains all right, title and interest in
and to any and all Software (excluding the Wall Data Software),
software development tools, know how, methodologies, processes,
technologies or algorithms used in providing any Services which are
based upon trade secrets or proprietary information of EDS or
otherwise owned or licensed by EDS (collectively, the "EDS
Development Tools"), and Wall Data shall have no right, title or
interest in and to the EDS Development Tools except as provided in
the following sentence. Upon the expiration or termination of this
Agreement, and subject to the other terms and conditions of this
Agreement, EDS shall grant to Wall Data a perpetual, nontransferable,
nonexclusive, royalty-free license to use, after the Expiration Date,
any EDS Development Tools then being used by EDS in rendering the
Services to Wall Data to be used solely for the internal business use
of Wall Data, subject to Wall Data and EDS entering into an
agreement, in form and substance reasonably satisfactory to EDS and
Wall Data, containing such terms and conditions as may be
appropriate.
ARTICLE VI. CONFIDENTIALITY, SECURITY AND AUDIT RIGHTS
6.1 Wall Data's Data. Information relating to Wall Data or its customers,
OEMs, licensors or other third parties contained in Wall Data's data
files ("Wall Data's Data") is the exclusive property of Wall Data.
EDS is authorized to have access to and make use of Wall Data's Data
as appropriate for the performance by EDS of its obligations under
this Agreement. Upon the termination or expiration of this Agreement,
EDS will return to Wall Data all of Wall Data's Data in EDS' then
existing machine-readable format and media or in any other then
existing format and media. EDS will not use Wall Data's Data for any
purpose other than providing the Services.
12
<PAGE> 14
6.2 Confidentiality. Except as otherwise provided in this Agreement, EDS
and Wall Data each agree that all information communicated to it
(through its employees, agents, consultants or subcontractors) by the
other or the other's affiliates, or otherwise obtained through the
performance of the Services or by reason of physical presence at the
respective party's facilities (with respect to information the
recipient should reasonably have known was confidential) whether
before or after the Effective Date, including, without limitation,
Wall Data Software, Wall Data's Data, EDS Software, trade secrets,
proprietary process, and the terms of this Agreement, will be
received in strict confidence, will be used only for purposes of this
Agreement, and will not be disclosed by the recipient party, its
agents, subcontractors or employees without the prior written consent
of the other party. Each party agrees to use the same means it uses
to protect its own confidential information, but in any event not
less than reasonable means, to prevent the disclosure of such
information to outside parties. However, neither party shall be
prevented from disclosing information which belongs to such party or
is (a) already known by the recipient party without an obligation of
confidentiality other than pursuant to this Agreement; (b) publicly
known or becomes publicly known through no unauthorized act of the
recipient party; (c) rightfully received from a third party; (d)
independently developed without use of the other party's confidential
information; (e) disclosed without similar restrictions to a third
party by the party owning the confidential information; (f) approved
by the other party for disclosure in writing; or (g) required to be
disclosed pursuant to a requirement of a governmental agency or law
if the disclosing party provides the other party with notice of this
requirement prior to disclosure. The provisions of this Section will
survive the expiration or termination of this Agreement for any
reason.
6.3 Security. EDS will comply with the security procedures that are in
effect at the Wall Data Locations as of the Effective Date as made
known to EDS. EDS will also institute such additional security
procedures at the Wall Data Locations that Wall Data reasonably
requests as an Additional Service. Wall Data will provide all
necessary security personnel and related equipment at the Wall Data
Locations. Except as to (a) Wall Data's need to access certain
information including Wall Data's Data for the purposes of Sections
6.2 and 6.4, and (b) a mutually agreed list of Wall Data employees,
agents, contractors or invitees, without the prior written consent of
EDS (such consent not to be unreasonably withheld), no employee,
agent, contractor or invitee of Wall Data will operate or assist in
operating equipment or Software to be used by EDS under this
Agreement in any data center located at the Wall Data Locations or
any shared EDS data center.
6.4 Audit Rights. EDS will provide auditors and inspectors that Wall Data
designates in writing with reasonable access for the limited purpose
of performing audits or inspections of Wall Data's business. EDS will
provide reasonable assistance of a routine nature to such auditors
and inspectors, and EDS will provide additional assistance as an
Additional Service. EDS will not be required to provide such auditors
and inspectors access to data of EDS customers, other than Wall Data,
or proprietary data of EDS.
13
<PAGE> 15
ARTICLE VII. PAYMENTS TO EDS
7.1 Charges for Services
(a) Monthly Base Charges.
(i) In consideration for the performance by EDS of
the Base Services, for each month following the
Effective Date, Wall Data will pay EDS the
Monthly Base Charges set forth in Schedule 7.1
(the "Monthly Base Charges"), as may be adjusted
in accordance with this Article. EDS will invoice
each such Monthly Base Charges on the first
business day of the month to which it relates and
such Monthly Base Charges will be due and payable
thirty (30) days after the date of the invoice.
The Monthly Base Charges for any partial month
will be prorated on a per diem basis. In addition
to the payment of the Monthly Base Charges, Wall
Data will also make payments for any Additional
Services which EDS may be providing to Wall Data
pursuant to the terms and conditions of this
Agreement.
(ii) The parties agree and acknowledge that, for any
of the Services provided by EDS outside of the
United States, EDS may invoice and collect such
payments in the local currency of the country or
region in which such Services were provided.
(iii) In addition to the above, the parties agree that,
during each November during the Term (the "Annual
Review Meeting"), the parties will meet and
jointly review the amount of the Monthly Base
Charges (including the Networking and
Telecommunication Services charges) for the
upcoming year of the Term in comparison to the
business plan (as it relates to information
technology), the information technology budget of
Wall Data, and Wall Data's planned revenue growth
rate (as determined by Wall Data's board of
directors) for the upcoming year. If such a
review reflects that there is a significant
disparity between the amount of the Monthly Base
Charges for such upcoming year of the Term and
the business plan, budgets and planned revenue
growth rate of Wall Data, the parties will
negotiate in good faith as to the amounts of the
Monthly Base Charges for the upcoming year (which
may include a proposed change in the usage rates
to be charged for the Networking and
Telecommunication Services); provided, however,
that, if the parties can not agree on such
amounts within thirty (30) days after such
meeting, the amounts for the Monthly Base Charges
will be adjusted in accordance with the
calculation set forth in Schedule 7.1.
The parties further agree that, during each May
during the Term (or at such later date as either
party may request), the parties will meet again
and jointly review the impact of a Material
Growth Change (as defined below), if any, to
14
<PAGE> 16
the Wall Data planned revenue growth rate
presented to EDS at the applicable Annual Review
Meeting and negotiate in good faith the
appropriate adjustments to the Monthly Base
Charges based on the Material Growth Change;
provided, however, that, if the parties can not
agree on such adjustments within thirty (30)
days after such meeting, the parties will adjust
the Monthly Base Charges in accordance with the
calculation set forth in Schedule 7.1. For
purposes of this Section 7.1(a)(iii), a
"Material Growth Change" shall mean a revision
in Wall Data's planned revenue growth rate as
adopted in good faith by Wall Data's board of
directors.
(b) Networking and Telecommunications Services Charges.
(i) Wall Data will pay, in the manner reflected in
this Section 7.1(b), to EDS all charges billed
pursuant to the billing administration section of
the Networking and Telecommunication Services in
Section 2.3(b), which shall consist of recurring,
non-recurring and usage charges (including
applicable billings to the Vendor (as defined in
Section 2.3(a)) from the applicable Local
Exchange Carriers ("LEC's") but excluding
applicable billings to Wall Data from the
applicable LECs) and applicable taxes with
respect to the services provided or made
available to Wall Data under this Agreement. Such
charges shall be based upon and subject to EDS'
agreement with the Vendor providing such
services, including all tariffs, rates, volume
commitments, discounts, restrictions, covenants,
regulations and other conditions contained
therein and applicable thereto from time to time.
In addition to any such agreement between EDS and
the Vendor and potential changes thereto, as
permitted by the Federal Communications
Commission and the state utility commissions, the
LECs may, from time to time, effect tariff
revisions which will change the recurring
(access) and intrastate usage charges to EDS.
When this occurs, EDS will adjust its charges to
Wall Data to reflect such changes and will notify
Wall Data as promptly as possible of any such
change. In addition, the parties acknowledge that
charges to Wall Data for any given month will be
based upon Wall Data calling patterns for such
month, including originating locations, locations
called, frequency of calls, length and time of
calls and other such factors, and that such
charges may therefore fluctuate accordingly from
month to month. The usage rates that will be
charged by EDS to Wall Data for the Networking
and Telecommunication Services are reflected in
Schedule 7.1(b), attached hereto and made part
hereof.
As to the manner of payment for the Networking
and Telecommunication Services provided by EDS,
the parties will establish for Wall Data a dollar
amount which shall be a baseline (the "Baseline")
on Networking and Telecommunication Services
usage which shall be based on the average
recurring, non-recurring and usage charges
incurred by Wall Data in the three (3) months
immediately preceding the Effective Date. The
Monthly Base Charges paid to EDS will include the
Networking and Telecommunications
15
<PAGE> 17
Services Baseline amount. Each calendar quarter
during the Term, EDS and Wall Data will have a
reconciliation of the Networking and
Telecommunication Services payments as to the
amounts paid to EDS (based on the Baseline
amounts) as compared to the actual usage amounts
(both as to actual usage greater than and less
than the Baseline). Due to the information that
will be available at the time of the
reconciliation, such reconciliation will be for
the last month of the immediately prior calendar
quarter and the first two (2) months of the
calendar quarter which would have just concluded
prior to the reconciliation. The parties agree
and acknowledge that Wall Data shall ultimately
be responsible and liable to pay only for its
actual usage of the Networking and
Telecommunication Services. On an annual basis,
the parties will negotiate in good faith to
adjust the amount of the Baseline as it compares
to the charges then in effect.
(ii) Certain LEC Charges. The LECs providing
Networking and Telecommunication Services to Wall
Data under this Agreement may require
non-recurring installation charges for
implementation of such Services. Such charges, if
billed to EDS, will be passed directly through to
Wall Data at the amount charged to EDS by the
LECs. Should Wall Data choose to provide access
to the Networking and Telecommunication Services
through its LEC rather than through the Vendor,
Wall Data shall be responsible for coordinating
with such LEC and assuring such LEC's
coordination with the Vendor for implementation
and support of such access, and for any recurring
or non-recurring charges associated with such
access, whether such charges are billed to Wall
Data or EDS.
(iii) Pre-Service Conversion Date Charges. For
any conversions that may need to occur for EDS to
provide the Networking and Telecommunication
Services, if any, for each Wall Data Location,
Wall Data will retain all financial
responsibility for voice telecommunications
services for the period prior to the date that
the Vendor or LEC converts the Networking and
Telecommunication Services (the "Service
Conversion Date"), whether the charges for such
services are received by Wall Data or EDS either
prior to or following the Service Conversion
Date.
(iv) Taxes. There will be added to any charges
hereunder, if applicable, and Wall Data shall pay
to EDS, amounts equal to any taxes, however
designated or levied, based upon such charges, or
upon this Agreement and Networking and
Telecommunication Services or Telecommunications
Equipment provided hereunder, or their use,
including state and local sales, use, privilege
or excise taxes based on gross revenue, and any
taxes or amounts in lieu thereof paid or payable
by EDS in respect of the foregoing, exclusive,
however, of franchise taxes, taxes based on net
income of EDS and taxes incurred by EDS pursuant
to the Washington business and occupations tax
law.
16
<PAGE> 18
Should Additional Services be required by Wall
Data which change the scope of the Networking and
Telecommunication Services offered pursuant to
this Agreement, Section 2.4 of the Agreement will
apply. Unless otherwise stated in this Section
7.1(b), all payments shall be made in accordance
with Article VII of this Agreement.
(c) Out-of-Pocket Expenses. In addition to the payment of the
Monthly Base Charges or the fees for any Additional
Services, Wall Data will pay for all reasonable
out-of-pocket expenses that Wall Data has given prior
written authorization. Such out-of-pocket expenses include,
without limitation, travel and travel-related expenses that
are directly related to the provision by EDS of the
Services.
(d) Adjustment for Significant Business Changes. If, during the
Term, Wall Data, (i) is merged into another entity or
another entity is merged into Wall Data, (ii) is sold to or
purchased by another entity or Wall Data buys or purchases
another entity, (iii) experiences a change from its
operations which results in a substantial change in its
financial standing or net worth as of the Effective Date,
or (iv) experiences any other type of business modification
which results in a substantial change in Wall Data's need
for the quantity or quality of the Services to be provided
by EDS pursuant to the terms of this Agreement, then, in
any of such events, upon written request of either party to
this Agreement, the parties will negotiate in good faith to
reach a mutually agreeable adjustment in the amount of the
payments to made by Wall Data to EDS and any other related
provisions to this Agreement as may be necessary or desired
as a result of the events stated above. Except as provided
in Section 9.5, in no event will this Section 7.1(d) be
grounds for termination of this Agreement unless the
parties mutually agree to so terminate this Agreement for
such a significant business change.
7.2 Cost of Living Adjustment.
(a) Adjustment. Except with respect to the period commencing on
the Effective Date and ending on November 1, 1997, if the
Consumer Price Index for all Urban Consumers, U.S. City
Average, for All Items (1982-84 = 100), as published in the
Bureau of Labor Statistics of the Department of Labor (the
"CPI"), shall on November 1st of each year during the Term,
commencing with November 1, 1998, (the "Current Index") be
higher or lower than the CPI at the previous November 1st
(such CPI, the "Base Index"), then, effective as of the
following January 1st, all charges for Services under this
Agreement attributable to the period following such January
1st (other than charges based upon then current EDS rates
and the rates for the Networking and Telecommunication
Services), as previously adjusted pursuant to this Section,
shall be increased by [*] of the percentage that the
Current Index increased from the Base Index. With respect
to the period commencing on the Effective Date and ending
on November 1, 1997, if the CPI shall on November 1, 1997
(the "November Index") be higher or lower than the CPI as
of the Effective Date (the "May Index"), then, effective as
of January 1, 1998, all charges for Services under this
Agreement attributable to the period following such January
1st (other than charges based upon then current EDS
- -----------------
* Confidential treatment requested.
17
<PAGE> 19
rates and the rates for the Networking and
Telecommunication Services), shall be increased by [*] of
the percentage that the November Index increased from the
May Index.
(b) Change of Index. In the event that the Bureau of Labor
Statistics should stop publishing the CPI or should
substantially change the content or format thereof, the
parties hereto shall substitute therefor another comparable
measure published by a mutually acceptable source;
provided, however, that if such change is merely to
redefine the base year for the CPI from 1982-84 to some
other year, the parties shall continue to use the CPI, but
shall, if necessary, convert either the Base Index or the
Current Index to the same basis as the other by multiplying
such index by the appropriate conversion factor.
(c) Foreign Countries. The parties agree that for any
Additional Services performed in countries other than the
United States, if the compensation for such Additional
Services is paid in the local currency, the payments for
such Additional Services will be subject to adjustment for
the cost of living in such countries using the index in
that country that is the most similar to the CPI.
7.3 Time of Payment. Any sum due EDS hereunder for which a time for
payment is not otherwise specified will be due and payable thirty
(30) days from the date of the invoice. Any sum due EDS hereunder
that is not paid when due will thereafter be subject to and bear
interest until paid at the lesser of (a) the prime rate established
from time to time by Citibank, New York N.A. plus two percent per
annum, or (b) the maximum rate of interest allowed by applicable law.
7.4 Taxes. There will be added to any charges for Services hereunder, and
Wall Data shall pay to EDS, amounts equal to any taxes or
assessments, however designated or levied, based upon such charges,
or upon this Agreement or the Software, services or items provided
hereunder by EDS, or their use, including state and local sales, use,
privilege or excise taxes based on gross revenue (or any similar
taxes or assessments in countries other than the United States), and
any taxes or amounts in lieu thereof paid or payable by EDS in
respect of the foregoing, exclusive, however, of franchise taxes,
taxes based on net income of EDS and taxes incurred by EDS pursuant
to the Washington business and occupations tax law.
7.5 Verification of Costs. The terms set forth in this Agreement are
based upon information furnished by each of the parties to the other.
Both parties believe that such information is accurate and complete.
However, if any such information should prove to be inaccurate or
incomplete in any material respect, the two parties will negotiate in
good faith to make appropriate adjustments to the provisions hereof,
including, without limitation, the charges for Services provided by
EDS.
7.6 Supporting Documentation. Upon the reasonable request of Wall Data,
EDS shall make available to Wall Data for review documentation
appropriate thereto which supports EDS' time and material charges and
out-of-pocket expenses hereunder.
--------
* Confidential treatment requested.
18
<PAGE> 20
ARTICLE VIII. DISPUTE RESOLUTION
8.1 Annual Quality Review. At least annually, EDS and Wall Data will meet
to review the performance of their obligations under this Agreement,
including providing Wall Data with a customer satisfaction survey and
conducting interviews with Wall Data management personnel by EDS
personnel. EDS and Wall Data will meet to review the results of each
quality review and measure continuous service improvement. In
addition, plans for future information technology activities and work
schedules will be reviewed by the parties.
8.2 Performance Review. During the course of the long-term relationship
provided for in this Agreement, disputes, controversies or claims may
arise between the parties. To minimize the expense to and impact on
each party of formally resolving such disputes, controversies and
claims, the EDS Account Director and the Wall Data Representative
will meet regularly to review the performance of each party of its
obligations under this Agreement. If the parties are unable to
resolve a dispute, controversy or claim through this performance
review process, upon the written request of either party, each party
will appoint a representative whose task it will be to meet for the
purpose of resolving the dispute, controversy or claim. Such
representatives will discuss the dispute, controversy or claim and
negotiate a resolution in good faith, without the necessity of any
formal proceeding relating thereto. No formal proceedings for the
resolution of such dispute, controversy or claim may be commenced
until either or both of the appointed representatives conclude in
good faith that amicable resolution through continued negotiation of
the matter is not likely. Except where clearly prevented by the area
in dispute, both parties agree to continue performing their
respective obligations under this Agreement while the dispute is
being resolved unless and until such obligations are terminated or
expire in accordance with the provisions hereof.
8.3 Arbitration.
(a) Procedures. Any dispute, controversy or claim arising out
of or related to this Agreement, or the creation, validity,
interpretation, breach or termination of this Agreement,
that the parties are unable to resolve through informal
discussions or negotiations pursuant to Section 8.2, will
be submitted to binding arbitration using the following
procedure:
(i) The arbitration will be held in Seattle,
Washington, or wherever both parties may
mutually agree, before a panel of three
arbitrators. Either party may demand
arbitration in writing, by serving on the other
party a statement of the dispute, controversy
or claim, and the facts relating or giving rise
thereto, in reasonable detail, and the name of
the arbitrator selected by it.
(ii) Within 30 days after such demand, the other
party will name its arbitrator, and the two
arbitrators named by the parties will, within
30 days after such demand, select the third
arbitrator.
19
<PAGE> 21
(iii) The arbitration will be governed by the
Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"), except as
expressly provided in this Section. However,
the arbitration will be administered by any
organization mutually agreed upon by the
parties. If the parties are unable to agree
upon the organization to administer the
arbitration, it will be administered by the
AAA. The arbitrators may not amend or disregard
any provision of this Agreement or applicable
law.
(iv) The arbitrators will allow such discovery as is
appropriate to the purposes of arbitration in
accomplishing fair, speedy and cost effective
resolution of disputes. The arbitrators will
reference the rules of evidence of the Federal
Rules of Civil Procedure then in effect in
setting the scope and direction of such
discovery. The arbitrators will not be required
to make findings of fact or render opinions of
law.
(v) The decision of and award rendered by the
arbitrators will be final and binding on the
parties. Judgment on the award may be entered
in and enforced by any court of competent
jurisdiction.
(b) Enforcement. Other than those matters involving injunctive
relief as a remedy, or any action necessary to enforce the
award of the arbitrators, the provisions of this Section
are a complete defense to any suit, action or other
proceeding instituted in any court or before any
administrative tribunal with respect to any dispute,
controversy or claim arising out of or related to this
Agreement or the creation, validity, interpretation, breach
or termination of this Agreement. The provisions of this
Section will survive the expiration or termination of this
Agreement for any reason. Nothing in this Section prevents
the parties from exercising the termination rights set
forth in this Agreement.
(c) Services during Arbitration. Unless EDS is bringing an
action under this Section for nonpayment of undisputed
amounts by Wall Data or if Wall Data has failed to place a
disputed amount into escrow pursuant to Section 9.2, EDS
will continue to provide the Services, and Wall Data shall
continue to make payments to EDS in accordance with this
Agreement during the arbitration proceedings.
8.4 Sole and Exclusive Venue. SUBJECT TO THE PROVISIONS OF SECTION
8.3(b), EACH PARTY IRREVOCABLY AGREES THAT ANY LEGAL ACTION, SUIT OR
PROCEEDING BROUGHT BY IT IN ANY WAY ARISING OUT OF THIS AGREEMENT
MUST BE BROUGHT SOLELY AND EXCLUSIVELY IN THE UNITED STATES DISTRICT
COURT FOR THE WESTERN DISTRICT OF WASHINGTON AT SEATTLE OR IN THE
STATE COURTS OF THE STATE OF WASHINGTON AND EACH PARTY IRREVOCABLY
ACCEPTS AND SUBMITS TO THE SOLE AND EXCLUSIVE JURISDICTION OF EACH OF
THE AFORESAID COURTS IN PERSONAM, GENERALLY AND UNCONDITIONALLY WITH
RESPECT TO ANY ACTION, SUIT OR PROCEEDING BROUGHT BY OR AGAINST IT BY
THE OTHER PARTY; provided, however that this paragraph shall not
20
<PAGE> 22
prevent a party against whom any legal action, suit or proceeding is
brought by the other party in the state courts of the State of
Washington from seeking to remove such legal action, suit or
proceeding, pursuant to applicable Federal law, to the district court
of the United States for the district and division embracing the
place where the action is pending in the state courts of the State of
Washington and in the event an action is so removed, each party
irrevocably accepts and submits to the jurisdiction of the aforesaid
district court. Each party hereto further irrevocably submits to the
service of process required by the State of Washington. EXCEPT AS
PERMITTED UNDER THE IMMEDIATELY PRECEDING SENTENCE, EACH PARTY HEREBY
IRREVOCABLY COVENANTS AND AGREES NOT TO BRING ANY LEGAL ACTION, SUIT
OR PROCEEDING IN ANY WAY ARISING OUT OF THIS AGREEMENT IN ANY OTHER
COURT OR IN ANY JURISDICTION AND AGREES NOT TO ASSERT ANY CLAIM,
WHETHER AS AN ORIGINAL ACTION OR AS A COUNTERCLAIM OR OTHERWISE,
AGAINST THE OTHER IN ANY OTHER COURT OR JURISDICTION. Each party
hereto hereby irrevocably waives and agrees not to assert, by way of
motion, as a defense or otherwise, any objection which it may now or
hereafter have to the laying of venue of any of the aforesaid
actions, suits or proceedings arising out of or in connection with
this Agreement brought in the courts referred to above and hereby
further irrevocably waives and agrees not to plead or claim in any
such court that any such action or proceeding brought in any such
court has been brought in an inconvenient forum, that the venue of
the suit, action or proceeding is improper, or that this Agreement or
the subject matter hereof or thereof may not be enforced in or by
such court. As the only exception to any of the above, if a party is
entitled to seek injunctive or other equitable relief which is not
available in the venue specified in this Section, this Section shall
not be deemed to be a bar to the party seeking such relief if such
relief is wholly non-monetary injunctive or other equitable relief.
ARTICLE IX. TERMINATION
9.1 Termination for Cause.
(a) Except as provided in Section 9.1(b) and except for a
default by Wall Data in its obligation to pay EDS, if
either party materially defaults in the performance of any
of its obligations under this Agreement, which default
shall not be substantially cured within 30 days after
written notice is given to the defaulting party specifying
the default then, the party not in default, by giving
written notice to the defaulting party, may terminate this
Agreement as of a date specified in the notice of
termination.
(b) With respect to a material default which cannot reasonably
be cured within 30 days, if the defaulting party fails to
immediately (1) proceed to commence curing said default at
the beginning of such thirty-day period, (2) proceed with
all due diligence to substantially cure that default, and
(3) commit the necessary resources as described in Section
9.1(d), or if such default is not substantially cured
within 120 days after the defaulting party's receipt of
written notice specifying the default, then, the party not
in default, by giving written notice to the defaulting
party, may terminate this Agreement as of a date specified
in the notice of termination.
21
<PAGE> 23
(c) If either party has repeatedly committed material defaults
in the performance of any of its obligations under this
Agreement, as described in Sections 9.1(a) and (b), then
the party not in default, by giving thirty (30) days
written notice to the defaulting party, may terminate this
Agreement as of a date specified in the notice of
termination.
(d) With respect to Sections 9.1(a) and (b), each party agrees
that, upon receipt of a default notice under this Section
9.1, it will immediately commence all commercially
reasonable efforts to resolve or cure the specified default
and to commit the resources necessary, at the defaulting
party's expense, to resolve or cure the specified default
as soon as possible. If EDS is the defaulting party, Wall
Data may immediately escalate the alleged default to either
the EDS Hi-Tech Manufacturing SBU President or Vice
President of Operations for resolution.
9.2 Termination for Nonpayment. If Wall Data defaults in the payment when
due of any amount due to EDS and does not cure such default within 15
days after being given written notice of such default, then EDS, by
giving written notice thereof to Wall Data, may terminate this
Agreement as of a date specified in such notice of termination
provided, however, (a) if the nonpayment is [*] or more and is
the result of a good faith dispute regarding EDS' performance under
this Agreement, Wall Data may pay amounts claimed to be due into an
escrow account maintained by a disinterested third party, and in such
event, Wall Data shall not be in default under this Section 9.2, and
(b) if the nonpayment is less than [*] and is the result of a
good faith dispute regarding EDS' performance under this Agreement,
Wall Data and EDS shall promptly negotiate in good faith to reach a
settlement to the dispute.
9.3 Termination for Insolvency. Subject to the provisions of Title 11,
United States Code, if either party becomes or is declared insolvent
or bankrupt, is the subject of any proceedings relating to its
liquidation, insolvency or for the appointment of a receiver or
similar officer for it, makes an assignment for the benefit of all or
substantially all of its creditors, or enters into an agreement for
the composition, extension, or readjustment of all or substantially
all of its obligations, then the other party, by giving written
notice to such party, may terminate this Agreement as of a date
specified in such notice of termination.
9.4 Termination for Convenience. On each of the fourth, sixth and eighth
anniversaries of the Effective Date, Wall Data will have a one-time
option to terminate this Agreement. Wall Data may exercise its option
to terminate this Agreement on either (a) the fourth anniversary of
the Effective Date (the "First Termination Date") by notifying EDS in
writing of Wall Data's intention to terminate this Agreement at least
nine (9) months prior to such fourth anniversary, (b) the sixth
anniversary of the Effective Date (the "Second Termination Date") by
notifying EDS in writing of Wall Data's intention to terminate this
Agreement at least nine (9) months prior to such sixth anniversary;
or (c) the eighth anniversary of the Effective Date (the "Third
Termination Date") by notifying EDS in writing of Wall Data's
intention to terminate this Agreement at least nine (9) months prior
to such eighth anniversary; provided that (i) Wall Data is not then
and does not become in default under any of the terms of this
Agreement prior to the First Termination Date, the
- ------------------
* Confidential treatment requested
22
<PAGE> 24
Second Termination Date, or the Third Termination Date, as
applicable, (and any such default is not timely cured), and (ii) on
or before the First Termination Date, the Second Termination Date, or
the Third Termination Date, as applicable, Wall Data pays to EDS the
termination fee as described in the following table (the "Termination
Fee").
Fourth Year Option The Termination Fee shall be an amount
equal to the sum of (i) the [*] for
[*] rendered [*] immediately preceding the
[*] and (ii) the [*] (as defined below).
Sixth Year Option The Termination Fee shall be an amount
equal to the sum of (i) the [*] for
[*] rendered [*] immediately preceding the
[*], and (ii) the [*].
Eighth Year Option The Termination Fee shall be an amount
equal to the sum of (i) the [*] for
[*] rendered [*] immediately preceding the
[*], and (ii) the [*].
The term "Hardware Charges" shall mean any amounts related to the
purchase or lease by EDS of hardware (with such purchases or leases
being completed with Wall Data's written consent) to be used to
provide the Services to Wall Data pursuant to this Agreement;
provided, however, that such amounts are either the non-depreciated
amounts on EDS' books for purchased hardware or the outstanding
amounts due and payable by EDS under the applicable lease for any of
such hardware. Upon EDS' receipt of payment for such Hardware
Charges, EDS will either, as applicable, convey title to, or assign
the lease of, such hardware to Wall Data.
The parties do not intend that the Termination Fee will be a penalty
or liquidated damages but that it is consideration for EDS'
accommodation of Wall Data's desire to have the ability to terminate
this Agreement prior to the Expiration Date. The parties acknowledge
and agree that, upon EDS' receipt of the Termination Fee, Wall Data
will not thereafter be held in default of this Agreement for
terminating this Agreement prior to the Expiration Date.
9.5 Termination for Change of Control. If at any time after the one year
anniversary of this Agreement, Wall Data sells all or substantially
all its assets to an unaffiliated third party or sells a sufficient
amount of its issued and outstanding stock to an unaffiliated third
party and such sale effects a change in control (for purposes of this
Section 9.5, "control" meaning the right to primarily direct and
manage the operations of Wall Data), then Wall Data may terminate
this Agreement, by, after reaching an agreement in principle to
- ----------------
* Confidential treatment requested.
23
<PAGE> 25
consummate such sale, providing EDS with at least nine (9) months
prior written notice of Wall Data's intention to terminate this
Agreement; provided that (a) Wall Data is not then and does not
become in default under any of the terms of this Agreement prior to
the termination date as specified in Wall Data's notice (the "Change
of Control Termination Date"), and any such default is not timely
cured, and (b) on or before the Change of Control Termination Date,
Wall Data pays to EDS the "Change of Control Termination Fee"
calculated as follows: (i) if the sale occurs during [*] through [*]
of this Agreement (as measured from the Effective Date), the Change
of Control Termination Fee shall be an amount equal to the [*] during
the [*] period immediately preceding the Change of Control
Termination Date, and (2) [*], (ii) if the sale occurs during [*]
through [*] of this Agreement (as measured from the Effective Date),
the Change of Control Termination Fee shall be an amount equal to the
[*] during the [*] period preceding the Change of Control
Termination Date, and (2) [*], or (iii) if the sale occurs during
[*] of this Agreement (as measured from the Effective Date), the
Change of Control Termination Fee shall be an amount equal to the
[*] during the [*] period immediately preceding the Change of Control
Termination Date, and (2) [*]. Upon EDS' receipt of payment for such
Hardware Charges, EDS will either, as applicable, convey title to, or
assign the lease of, such hardware to Wall Data.
The parties do not intend that the Change of Control Termination Fee
will be a penalty or liquidated damages but that it is consideration
for EDS' accommodation of Wall Data's desire to have the ability to
terminate this Agreement prior to the Expiration Date. The parties
acknowledge and agree that, upon EDS' receipt of the Change of
Control Termination Fee, Wall Data will not thereafter be held in
default of this Agreement for terminating this Agreement prior to the
Expiration Date.
- ----------------
* Confidential treatment requested.
24
<PAGE> 26
9.6 Transition Services upon Termination.
(a) Services. In connection with the termination of this
Agreement at the Expiration Date or by Wall Data pursuant
to Sections 9.1, 9.3, 9.4, 9.5, 11.9(b), or 11.9(c), EDS
will contribute, assist and comply with Wall Data's
reasonable directions to cause the orderly transition and
migration to Wall Data or a third party company to whom
Wall Data would be transferring the Services from EDS of
all Services then being performed by EDS (the "Termination
Transition"). Wall Data, its employees, and agents will
cooperate in good faith with EDS in connection with EDS'
obligations under this Section and Wall Data will perform
its obligations under the Transition Plan (as defined in
this Section). EDS will perform the following obligations
(and such other obligations as may be contained in the
Transition Plan) at Wall Data's expense unless otherwise
stated below or as mutually agreed in the Transition Plan.
(i) EDS and Wall Data will work together to develop
a transition plan (the "Transition Plan")
setting forth the respective tasks to be
accomplished by each party in connection with
the orderly transition and a schedule pursuant
to which the tasks are to be completed.
(ii) EDS will provide Wall Data with detailed
specifications for hardware or other equipment
which Wall Data will require to properly
perform the services and procedures previously
performed by EDS.
(iii) Wall Data may purchase from EDS at its net book
value, and subsequently assume the leases
(provided such leases are assumable) for, any
hardware owned or leased by EDS and which is
dedicated to providing the Services to Wall
Data as of the Expiration Date or the effective
date of such termination.
(iv) EDS will deliver to Wall Data and will assist
in the installation on Wall Data's hardware and
equipment the Licensed Programs (as defined in
Section 5.3) which are subject to a mutually
agreeable license agreement
(v) EDS will reasonably assist Wall Data, at Wall
Data's expense, in Wall Data's acquisition of
any necessary rights to access and use any
EDS-Vendor Software and documentation then
being used by EDS in connection with the
processing of Wall Data's information pursuant
to this Agreement.
(vi) EDS will deliver to Wall Data (a) copies of
existing documentation relating to any Wall
Data Software delivered or Licensed Program
licensed to Wall Data pursuant to paragraphs
(iv) and (v) of this Section, and (b) such
documentation for EDS Vendor Software used at
the time of termination of this Agreement by
EDS to provide the Services which is available
to EDS and which EDS is permitted to furnish to
Wall Data.
25
<PAGE> 27
(vii) EDS will provide appropriate training for the
Wall Data employees who will be assuming
responsibility for operation of the Software
following the Transition Termination.
(viii) Notwithstanding Section 11.7, Wall Data may
offer employment to any EDS employee who is
then dedicated to providing the Services to
Wall Data.
9.7 Regulatory Requirements. The parties agree as follows:
(a) EDS and Wall Data specifically acknowledge and agree that
this Agreement and the integrated Networking and
Telecommunication Services provided hereunder have been
negotiated and uniquely customized and tailored to satisfy
the special requirements of Wall Data.
(b) The parties further agree that if any Networking and
Telecommunication Services provided hereunder are required
by a specific decision of applicable regulatory or judicial
authority to be provided under tariff, or if a decision by
a regulatory authority at the federal, state or local level
materially alters or invalidates this Agreement, or any
material provision hereof, or if Vendor and/or LEC, in
their sole discretion, file a tariff for the Networking and
Telecommunication Services provided hereunder, then (i) EDS
will have the option to negotiate modifications to this
Agreement with Wall Data, or (ii) if the parties cannot
reach agreement, after good faith negotiations, as to
appropriate modifications to this Agreement resulting from
such regulatory requirements, then either party may
terminate this Agreement as to the Networking and
Telecommunication Services, in whole or in part, and EDS
will provide to Wall Data a pro-rata refund for any prepaid
charges, subject to any limitations set forth in this
Agreement, and Wall Data will pay to EDS any charges (such
as any Vendor termination fees) that EDS incurs as a result
of the terminated Networking and Telecommunication
Services. If any of the Networking and Telecommunication
Services are required by a specific decision of any
applicable regulatory or judicial authority to be provided
under tariff or Vendor and/or LEC file a tariff for the
Networking and Telecommunication Services provided
hereunder, and either party elects option (ii) above, then
the party electing such option shall provide to the other
written notice at least thirty (30) days prior to
termination.
(c) In no event, however, shall EDS have any liability to Wall
Data as a result of any regulatory requirements imposed by
any agency of the United States government, state or local
governments on a Vendor and/or LEC and any independent
actions which the Vendor and/or LEC may undertake which
alters the terms, conditions and methodology for providing
Networking and Telecommunication Services hereunder or
renders the provision of such Networking and
Telecommunication Services unlawful.
ARTICLE X. WARRANTIES, INDEMNITIES AND LIABILITY
10.1 Warranty and Disclaimer.
26
<PAGE> 28
(a) In all cases where EDS has not committed to a specific
performance standard, EDS will provide the Services in
accordance with industry practices and standards generally
applicable for such Services at the time the Services are
rendered.
(b) While EDS is primarily providing services to Wall Data
under this Agreement, EDS may from time to time provide
certain hardware, Software and other items as an incidental
part of the Services. With the exception of manufacturers'
or licensors' warranties which EDS is able to pass through
for Wall Data's benefit, such hardware, Software and other
items are provided on an "AS IS" basis without warranty. In
all cases where EDS has not committed to a specific
performance standard, EDS will use reasonable care in
providing services.
EDS will assign to Wall Data any rights it obtains under
warranties given by third party suppliers in connection
with any services, hardware, Software or other items
provided by EDS pursuant to this Agreement to the extent
that such rights are assignable. To the extent that any
such warranties are not assignable, EDS agrees that it
will, upon the request of Wall Data, take commercially
reasonable action to enforce any applicable warranty which
is enforceable by EDS in its own name. However, EDS will
have no obligation to resort to litigation or other formal
dispute resolution procedures to enforce such warranties,
unless Wall Data agrees to reimburse EDS for all expense
incurred therewith, including reasonable attorney's fees.
Subject to the foregoing sentence, in the event of a
nonconformance or other performance-related issue with
respect to any third-party Software, hardware or services
provided through EDS, EDS will coordinate and be the point
of contact for resolution of such nonconformance or
performance-related issue with the applicable vendor, and
will use commercially reasonable efforts (a) to manage such
vendor in accordance with the terms and conditions of their
respective agreement, (b) to cause the respective vendor to
promptly repair or replace the nonconforming item in
accordance with the such vendor's warranty or to remedy the
performance-related issue in accordance with the terms of
the respective vendor's agreement, and (c) to replace
nonperforming third party vendors with appropriate vendors
recommended by EDS and reasonably approved by Wall Data.
(c) EXCEPT AS SPECIFICALLY STATED IN THIS AGREEMENT, EDS MAKES
NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
REGARDING ANY MATTER, INCLUDING THE MERCHANTABILITY,
SUITABILITY, ORIGINALITY, FITNESS FOR A PARTICULAR USE OR
PURPOSE, OR RESULTS TO BE DERIVED FROM THE USE OF ANY
SERVICES, HARDWARE, SOFTWARE OR OTHER ITEMS PROVIDED UNDER
THIS AGREEMENT.
(d) Telecommunications Indemnification. Wall Data agrees to
indemnify, defend and hold harmless EDS from any and all
claims, actions, damages, liabilities, costs and expenses,
including reasonable attorneys' fees and expenses, arising
out of any claims related to
27
<PAGE> 29
(i) the abuse or the fraudulent use of the Networking and
Telecommunication Services by Wall Data and not EDS or any
its agents or subcontractors, which services are provided
or made available under this Agreement and (ii) any
information, data or message transmitted over the network
by Wall Data that constitutes libel, slander, infringement
of copyright, invasion of privacy, and/or alteration of
private records and data. Any credits received by EDS from
a Vendor or LEC as set forth in Section 2.3(d) of this
Agreement shall be passed through to Wall Data. EXCEPT AS
SPECIFICALLY STATED IN THIS AGREEMENT, EDS MAKES NO
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
REGARDING THE WARRANTIES OF MERCHANTABILITY, SUITABILITY,
ORIGINALITY, FITNESS FOR A PARTICULAR PURPOSE, OR RESULTS
TO BE DERIVED FROM THE USE OF ANY NETWORKING, VOICE OR DATA
SERVICE, EQUIPMENT OR OTHER MATERIALS PROVIDED UNDER THIS
AGREEMENT.
10.2 Cross Indemnification. EDS and Wall Data each agree to indemnify,
defend and hold harmless the other from any and all damages,
liabilities, costs and expenses, including reasonable attorneys' fees
and expenses, arising out of, under or in connection with any claim,
demand, charge, action, cause of action, or other proceeding:
(a) for rent or utilities at any location where the indemnitor
is financially responsible under this Agreement for such
rent or utilities; or
(b) resulting from an act or omission of the indemnitor in its
capacity as an employer of a person and arising out of or
relating to (i) federal, state or other laws or regulations
for the protection of persons who are members of a
protected class or category of persons, (ii) sexual
discrimination or harassment, (iii) work related injury or
death, (iv) accrued employee benefits not expressly assumed
by the indemnitee, and (v) any other aspect of the
employment relationship or its termination (including
claims for breach of an express or implied contract of
employment) and which, in all such cases, arose when the
person asserting the claim, demand, charge, action, cause
of action or other proceeding was or purported to be an
employee of the indemnitor.
10.3 Intellectual Property Indemnification. EDS and Wall Data each agree
to defend the other against any action to the extent that such action
is based on a claim that Software or confidential information
provided by the indemnitor, or any part thereof, (a) infringes a
copyright perfected under United States statute, (b) infringes a
patent granted under United States law, or (c) constitutes an
unlawful disclosure, use, or misappropriation of another party's
trade secret. The indemnitor will bear the expense of such defense
and pay any damages and attorneys' fees which are attributable to
such claim finally awarded by a court of competent jurisdiction.
Neither EDS nor Wall Data shall be liable to the other for claims of
indirect or contributory infringement or for claims that the software
programs of the Wall Data-Vendor Software or EDS-Vendor Software so
infringes. If the Software or confidential information becomes the
subject of a claim under this Section, or in the indemnitor's opinion
is likely to become the subject of such a claim, then the indemnitor
may, at its option, (a) replace or
28
<PAGE> 30
modify the Software or confidential information to make it
noninfringing or cure any claimed misuse of another's trade secret,
or (b) procure for the indemnitee the right to continue using the
Software or confidential information pursuant to this Agreement, or
(c) replace the Software with reasonably equivalent Software which
is noninfringing or which is free of claimed misuse of another's
trade secret. Any costs associated with implementing any of the
above alternatives shall be borne by the indemnitor.
10.4 Personal Injury and Property Damage.
(a) EDS and Wall Data shall each be responsible for damages to
their respective tangible personal or real property
(whether owned or leased), and each party agrees to look
only to their own insuring arrangements (if any) with
respect to such damages.
(b) EDS and Wall Data each shall be responsible for claims for
the death of or personal injury to any person (including
any employee of either party), and claims for damages to
any third party's tangible personal or real property
(whether owned or leased), in accordance with the common
law of the jurisdiction in which such claim occurred. Each
party shall indemnify, defend and hold harmless the other
party from any and all claims, actions, damages,
liabilities, costs and expenses, including without
limitation, reasonable attorneys' fees and expenses,
arising out of claims for which the indemnitor is
responsible under the preceding sentence.
(c) EDS and Wall Data waive all rights to recover against each
other for any loss or damage to their respective tangible
personal or real property (whether owned or leased) from
any cause covered by insurance maintained by each of them,
including their respective deductibles or self-insured
retentions. EDS and Wall Data will cause their respective
insurers to issue appropriate waivers of subrogation rights
endorsements to all property insurance policies maintained
by each party.
10.5 Indemnification Procedures.
(a) Notice and Control. The indemnification obligations set
forth in this Article shall not apply unless the party
claiming indemnification:
(i) Notifies the other promptly of any matters in
respect of which the indemnity may apply and of
which the notifying party has knowledge, in
order to allow the indemnitor the opportunity
to investigate and defend the matter; provided
that the failure to so notify shall only
relieve the indemnitor of its obligations under
this Article if and to the extent that the
indemnitor is prejudiced thereby; and
(ii) Gives the other party full opportunity to
control the response thereto and the defense
thereof, including, without limitation, any
agreement relating to the settlement thereof;
provided that, the indemnitee will have the
right to participate in any legal proceeding to
contest and defend a claim for
29
<PAGE> 31
indemnification involving a third party and to
be represented by legal counsel of its choosing,
all at the indemnitee's cost and expense.
(b) Settlement. The indemnitor shall not be responsible for any
settlement or compromise made without its consent (provided
the indemnitor is not in material breach of its indemnity
obligations hereunder). The indemnitee agrees to cooperate
in good faith with the indemnitor at the request and
expense of the indemnitor.
10.6 Limitation of Liability.
(a) Direct Damages. Subject to Section 10.6(c), in the event
either party shall be held liable to the other for any
matter arising out of, under, or in connection with this
Agreement, whether based on an action or claim in contract,
equity, negligence, tort or otherwise, the amount of
damages recoverable against such party for all events, acts
or omissions shall not exceed, in the aggregate, the [*] of
the [*] by Wall Data to EDS under this Agreement ([*] for
[*] or [*] [*]) during the [*] immediately preceding the
date that the first such claim or action arose.
(b) Indirect Damages. Subject to Section 10.6(c), for any
matter arising out of, under, or in connection with this
Agreement, whether based on an action or claim in contract,
equity, negligence, tort or otherwise, in no event will the
measure of damages payable by either party include, nor
will either party be liable for, any amounts for loss of
income, profit or savings or indirect, incidental,
consequential, or punitive damages of any party, including
third parties.
(c) Exceptions. The limitations set forth in Sections 10.6(a)
and (b) will not apply with respect to (i) claims that are
covered by the indemnification provisions set forth in
Sections 10.1(d), 10.2, 10.3 and 10.4(b) of this Agreement,
and (ii) Wall Data's obligation to pay charges to EDS for
the Services rendered under this Agreement.
(d) Survival. The provisions of this Section 10.6 will survive
the expiration or termination of this Agreement for any
reason.
10.7 Contractual Statute of Limitations. No claim and demand for
arbitration or cause of action which arose out of an event or events
which occurred more than four years prior to the filing of a demand
for arbitration or suit alleging a claim or cause of action may be
asserted by either party against the other party.
10.8 Acknowledgment. EDS and Wall Data each acknowledge that the
limitations and exclusions contained in this Article have been the
subject of active and complete negotiation between the parties and
represent the parties' agreement based upon the level of risk to EDS
and Wall Data associated with their respective obligations under this
Agreement and the payments to be made to EDS under this Agreement.
- ---------------
* Confidential treatment requested.
30
<PAGE> 32
ARTICLE XI. MISCELLANEOUS
11.1 Right of the Parties to Engage in Other Activities. Nothing in this
Agreement will impair either party's rights to acquire, license,
market, distribute, develop for itself or others or have others
develop for the respective parties similar technology performing the
same or similar functions as the technology and the Services
contemplated by this Agreement.
11.2 Binding Nature and Assignment. This Agreement shall be binding on the
parties hereto and their respective successors and assigns. Except as
provided in Section 9.5, neither party may, nor shall have the power
to, assign this Agreement without the prior written consent of the
other party, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, EDS will have the right to subcontract
all or any portion of the Services; provided, however, that, other
than for temporary or incidental services, Wall Data has given its
written consent for the subcontracting of such services, which
consent will not be unreasonable withheld. Unless Wall Data provides
EDS with a reasonable objection to such subcontracting arrangement
within two weeks after Wall Data's receipt of notice (as provided
herein), EDS will proceed with the implementation of such arrangement
as specified in the notice. In no event shall any such subcontract
relieve EDS of any of its obligations hereunder.
11.3 Notices. Wherever under this Agreement one party is required or
permitted to give written notice to the other, such notice shall be
deemed given the third day after its mailing by one party, postage
prepaid, to the other party addressed as follows:
In the case of EDS:
Electronic Data Systems Corporation
5400 Legacy Drive
H3-5C-45
Plano, Texas 75024-3105
Attention: President Hi-Tech Manufacturing SBU
31
<PAGE> 33
with a copy to:
Electronic Data Systems Corporation
5400 Legacy Drive
H3-3A-05
Plano, Texas 75024-3105
Attention: General Counsel
In case of Wall Data:
Wall Data Incorporated
11332 N.E. 122nd Way
Kirkland, Washington 98034-6931
Attention:Mr. Richard H. Van Hoesen, Vice President Finance
and Chief Financial Officer
with a copies to:
Wall Data Incorporated
11332 N.E. 122nd Way
Kirkland, Washington 98034-6931
Attention:John Wall, President
and
Wall Data Incorporated
11332 N.E. 122nd Way
Kirkland, Washington 98034-6931
Attention:General Counsel
Any writing which may be mailed pursuant to the foregoing may also be
delivered by hand, telex, telegraph or telecopier and shall be
effective when received by the addressee. Either party may from time
to time specify as its address for purposes of this Agreement any
other address upon giving ten days prior written notice thereof to
the other party.
11.4 Counterparts. This Agreement may be executed in several counterparts,
all of which taken together shall constitute one single agreement
between the parties hereto.
11.5 Headings. The Article and Section headings and the table of contents
used herein are for reference and convenience only and shall not
enter into the interpretation hereof.
11.6 Relationship of Parties. EDS, in furnishing the Services to Wall Data
hereunder, is acting only as an independent contractor and under no
circumstances will EDS be deemed to be in any relationship with Wall
Data carrying with it fiduciary or trust responsibilities, whether
through
32
<PAGE> 34
partnership or otherwise. EDS does not undertake by this Agreement
or otherwise to perform any obligation of Wall Data, whether
regulatory or contractual, or to assume any responsibility for Wall
Data's business or operations. EDS has the sole right and obligation
to supervise, manage, contract, direct, procure, perform or cause to
be performed, all work to be performed by EDS hereunder unless
otherwise provided herein.
11.7 Hiring of Employees. During the Term and for a period of 12 months
thereafter, neither party will solicit, directly or indirectly, for
employment or employ any employee of the other without the prior
written consent of the other.
11.8 Approvals and Similar Actions. Where agreement, approval, acceptance,
consent or similar action by either party is required by any
provision of this Agreement, such action shall not be unreasonably
delayed or withheld.
11.9 Force Majeure. Each party shall be excused from performance hereunder
(other than performance of obligations to make payment) for any
period and to the extent that it is prevented from performing
pursuant hereto, in whole or in part, as a result of delays caused by
the other or third parties or an act of God, war, civil disturbance,
court order, labor dispute, or other cause beyond its reasonable
control, including failures or fluctuations in electrical power,
heat, light, air conditioning or telecommunications equipment, and
such nonperformance shall not be a default hereunder or a ground for
termination hereof. The party relieved from performance under this
Section shall use all commercially reasonable efforts and diligence
to overcome the force majeure event and continue performance of its
obligations. Notwithstanding the foregoing, in the event a force
majeure event occurs and such event lasts continuously for a period
of at least three months and, as a result of such force majeure
event, EDS is prevented from providing Services pursuant to this
Agreement, then. In addition, after such three-month period:
(a) If EDS can still perform 80% or more of the Services, then
this Agreement shall remain in effect through its Term even
though the force majeure event may continue; provided,
however, Wall Data may discontinue payments under this
Agreement to EDS related to the affected portion of the
Services which EDS is prevented from performing, and obtain
the same services from a third party.
(b) If EDS can still perform 50% to 79% of the Services, then
Wall Data may elect to either (i) continue the portion of
this Agreement relating to the Services that EDS is still
able to perform, despite the force majeure event, and
terminate the portion of this Agreement relating to the
Services affected by the force majeure event, or (ii)
terminate the entire Agreement, provided that (1) Wall Data
gives EDS prior written notice of such election to
terminate and states in such notice the termination date,
and (2) except as provided below, prior to such termination
date, Wall Data pays EDS a termination fee calculated as
follows: (x) if termination occurs in years one through
four (measured from the Effective Date), the termination
fee shall be [*] of the aggregate invoice amount described
in Section 9.4 for the fourth anniversary termination
option, plus [*] of the Hardware Charges component, (y) if
termination occurs in years five or
- -----------------
* Confidential treatment requested.
33
<PAGE> 35
six (measured from the Effective Date), the termination
fee shall be [*] of the aggregate invoice amount described
in Section 9.4 for the sixth anniversary termination
option, plus [*] of the Hardware Charges component, and
(z) if termination occurs in years eight through Term
(measured from the Effective Date), the termination fee
shall be [*] of the aggregate invoice amount described in
Section 9.4 for the eighth anniversary termination option,
plus [*] of the Hardware Charges component.
If a force majeure event occurs after the adoption and
implementation of a new disaster recovery plan negotiated
in good faith and mutually agreed to by Wall Data and EDS,
and if Wall Data elects to terminate this Agreement under
the circumstances described in this Section 11.9(b), then
Wall Data will not be required to pay EDS the termination
fees described in this Section 11.9(b); provided, however,
that Wall Data will still be required to pay EDS [*] of
the Hardware Charges and any actual and unavoidable third
party fees and charges incurred by EDS as a result of such
termination.
(c) If EDS can still perform less than 50% of the Services,
then Wall Data may elect to either (i) continue the portion
of this Agreement relating to the Services that EDS is
still able to perform, despite the force majeure event, and
terminate the portion of this Agreement relating to the
Services affected by the force majeure event, or (ii)
terminate the entire Agreement, provided that (1) Wall Data
gives EDS prior written notice of such election to
terminate and states in such notice the termination date,
and (2) prior to such termination date, Wall Data pays EDS
the Hardware Charges described in Section 9.4.
During the three-month period and for any period thereafter that EDS
is prevented from providing Services pursuant to this Section, Wall
Data may discontinue payments under this Agreement to EDS related to
the affected portion of the Services (except for actual and
unavoidable third party charges incurred by EDS).
11.10 Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any
extent, be held invalid or unenforceable, the remainder of this
Agreement or the application of such term or provision to persons or
circumstances other than those as to which it is invalid or
unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the
extent permitted by law.
11.11 Waiver. No delay or omission by either party hereto to exercise any
right or power hereunder shall impair such right or power or be
construed to be a waiver thereof. A waiver by either of the parties
hereto of any of the covenants to be performed by the other or any
breach thereof shall not be construed to be a waiver of any
succeeding breach thereof or of any other covenant herein contained.
Subject to the limitations set forth in this Agreement, all remedies
provided for in this Agreement shall be cumulative and in addition to
and not in lieu of any other remedies available to either party at
law, in equity or otherwise.
11.12 Attorneys' Fees. If there is any legal action with regard to the
enforcement of an award granted under Section 8.3, the prevailing
party shall be entitled to recover reasonable attorneys' fees
- ----------------
* Confidential treatment requested
34
<PAGE> 36
and expenses and other costs incurred in that action or proceeding,
in addition to any other relief to which it may be entitled.
11.13 Media Releases. All media releases, public announcements and public
disclosures by Wall Data or EDS relating to this Agreement or its
subject matter, including, without limitation, promotional or
marketing material (but not including any announcement intended
solely for internal distribution at Wall Data or EDS, as the case may
be, or any disclosure required by legal, accounting or regulatory
requirements beyond the reasonable control of Wall Data or EDS, as
the case may be) shall be coordinated with and approved by Wall Data
and EDS prior to the release thereof.
11.14 No Third Party Beneficiary. Nothing in this Agreement may be relied
upon or shall benefit any party other than the parties hereto.
11.15 Entire Agreement. This Agreement, including any Schedules or Exhibits
referred to herein and attached hereto, each of which is incorporated
in this Agreement for all purposes, constitutes the entire agreement
between the parties with respect to the subject matter of this
Agreement and there are no representations, understandings or
agreements relating to this Agreement which are not fully expressed
herein. No amendment, modification, waiver or discharge hereof shall
be valid unless in writing and signed by an authorized representative
of the party against which such amendment, modification, waiver or
discharge is sought to be enforced.
11.16 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington, without giving
effect to principles of conflict of laws.
IN WITNESS WHEREOF, EDS and Wall Data have each caused this Agreement
to be signed and delivered by its duly authorized officer, all as of the
Effective Date.
ELECTRONIC DATA SYSTEMS WALL DATA INCORPORATED
CORPORATION
By: /s/ ROB LOUKS By: /s/ J. SIMPSON
----------------------- ------------------------
Name: Rob Louks Name: J. Simpson
----------------------- ------------------------
Title: Regional Vice President Title: Chief Executive Officer
----------------------- ------------------------
35
<PAGE> 1
EXHIBIT 11.1
WALL DATA INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
BASIC
Total weighted average shares outstanding 9,245,286 9,058,380 9,223,949
========== ========== ===========
Net income $2,251,000 $4,193,000 $ 7,251,000
========== ========== ===========
Net income per share $ 0.24 $ 0.46 $ 0.79
========== ========== ===========
DILUTED
Average shares outstanding 9,245,286 9,058,380 9,223,949
Net effect of dilutive stock options based
on the treasury stock method using the
average market price 640,791 662,244 803,083
---------- ---------- -----------
Total weighted average shares outstanding 9,886,077 9,720,624 10,027,032
========== ========== ===========
Net income $2,251,000 $4,193,000 $ 7,251,000
========== ========== ===========
Net income per share $ 0.23 $ 0.43 $ 0.72
========== ========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WALL DATA INCORPORATED
AS OF DECEMBER 31, 1997
<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
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
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the Wall Data Incorporated Amended and
Restated 1983 Stock Option Plan, Wall Data Incorporated Restated 1993 Stock
Option Plan, Wall Data Incorporated 1993 Stock Option Plan for Non-Employee
Directors, Wall Data Incorporated Employee Stock Purchase Plan, and Wall Data
Incorporated Amended and Restated 1994 Nonofficer Stock Option Plan of our
report dated January 19, 1998, except for Note 14 as to which the date is March
12, 1998, with respect to the consolidated financial statements and schedule
included in this Annual Report (Form 10-K) for the year ended December 31,
1997.
Seattle, Washington /s/ ERNST & YOUNG LLP
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 70,814
<SECURITIES> 0
<RECEIVABLES> 35,113
<ALLOWANCES> 0
<INVENTORY> 738
<CURRENT-ASSETS> 114,538
<PP&E> 31,724
<DEPRECIATION> 21,127
<TOTAL-ASSETS> 136,576
<CURRENT-LIABILITIES> 41,689
<BONDS> 0
0
0
<COMMON> 56,771
<OTHER-SE> 38,116
<TOTAL-LIABILITY-AND-EQUITY> 136,576
<SALES> 140,851
<TOTAL-REVENUES> 140,851
<CGS> 27,295
<TOTAL-COSTS> 27,295
<OTHER-EXPENSES> 113,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,494
<INCOME-TAX> 243
<INCOME-CONTINUING> 2,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,251
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE CONSOLIDATED BALANCE SHEETS AS OF SEP-30-1997 JUN-30-1997 AND
MAR-31-1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 74,447 84,105 75,619
<SECURITIES> 0 0 0
<RECEIVABLES> 25,337 28,260 32,234
<ALLOWANCES> 0 0 0
<INVENTORY> 696 535 830
<CURRENT-ASSETS> 107,398 119,050 115,188
<PP&E> 28,649 29,069 28,258
<DEPRECIATION> 18,095 18,024 16,560
<TOTAL-ASSETS> 124,151 136,527 133,305
<CURRENT-LIABILITIES> 33,663 46,210 39,485
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 55,769 55,529 54,398
<OTHER-SE> 34,719 34,788 39,422
<TOTAL-LIABILITY-AND-EQUITY> 124,151 136,527 133,305
<SALES> 101,187 72,623 37,023
<TOTAL-REVENUES> 101,187 72,623 37,023
<CGS> 20,968 14,453 6,754
<TOTAL-COSTS> 20,968 14,453 6,754
<OTHER-EXPENSES> 84,614 61,449 25,267
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (1,998) (2,028) 5,573
<INCOME-TAX> (821) (832) 2,115
<INCOME-CONTINUING> (1,177) (1,196) 3,458
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,177) (1,196) 3,458
<EPS-PRIMARY> (0.13) (0.13) 0.38
<EPS-DILUTED> (0.13) (0.13) 0.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE CONSOLIDATED BALANCE SHEETS AS OF DEC-31-1996 SEP-30-1996 JUN-30-1996
AND MAR-31-1996 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 62,483 64,248 59,669 56,960
<SECURITIES> 0 0 0 0
<RECEIVABLES> 38,694 21,536 25,692 23,275
<ALLOWANCES> 0 0 0 0
<INVENTORY> 733 860 902 991
<CURRENT-ASSETS> 108,149 92,395 91,650 86,790
<PP&E> 27,519 27,608 26,460 24,395
<DEPRECIATION> 14,784 14,318 12,577 11,090
<TOTAL-ASSETS> 127,154 115,619 116,347 109,803
<CURRENT-LIABILITIES> 36,351 28,547 29,407 25,696
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 54,357 53,861 52,568 52,302
<OTHER-SE> 36,446 33,212 34,372 31,805
<TOTAL-LIABILITY-AND-EQUITY> 127,154 115,619 116,347 109,803
<SALES> 139,364 95,509 64,682 29,856
<TOTAL-REVENUES> 139,364 95,509 64,682 29,856
<CGS> 30,474 21,786 14,674 6,649
<TOTAL-COSTS> 30,474 21,786 14,674 6,649
<OTHER-EXPENSES> 103,829 72,911 47,340 22,723
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 73 68 0
<INCOME-PRETAX> 7,247 2,462 3,503 824
<INCOME-TAX> 3,054 935 1,331 313
<INCOME-CONTINUING> 4,193 1,527 2,172 511
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 4,193 1,527 2,172 511
<EPS-PRIMARY> 0.46 0.17 0.24 0.06
<EPS-DILUTED> 0.43 0.16 0.22 0.05
</TABLE>
