<PAGE>
UNITED STATES
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-19872
WALKER INTERACTIVE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2862954
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
303 SECOND STREET, SAN FRANCISCO, CALIFORNIA 94107
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (415) 495-8811
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g)of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $174,566,000 based on the closing sale price as
reported by The Nasdaq National Market on March 12, 1997.
Number of shares of Common Stock outstanding as of March 12, 1997: 13,175,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement to be used in conjunction with its
1997 Annual Meeting of Stockholders.
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
INDEX
PART I
<TABLE>
<S> <C>
ITEM 1. BUSINESS.........................................................................3
ITEM 2. PROPERTIES.......................................................................7
ITEM 3. LEGAL PROCEEDINGS................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.........8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.............................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...............................................................10
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...............................................................31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................31
ITEM 11. EXECUTIVE COMPENSATION..........................................................31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................32
SIGNATURES...............................................................................35
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
The report on this Form 10-K contains forward-looking statements, including
statements related to industry trends and demand for mainframe products,
expected resolution of legal proceedings, cash commitments, working capital
requirements and possible expansion in international markets. Discussions
containing such forward-looking statements may be found in the material set
forth under "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", generally, and specifically
therein under the captions "Liquidity and Capital Resources" and "Future
Performance and Additional Risk Factors" as well as elsewhere in this Annual
Report on Form 10-K. Actual events or results may differ materially from those
discussed herein. The risk factors on pages 13 through 15, among others, should
be considered in evaluating the Company's prospects and future financial
performance.
OVERVIEW
- --------
Walker Interactive Systems, Inc. (hereinafter "Walker" or the "Company") was
incorporated in California in 1973 and reincorporated in Delaware in March 1992.
Walker Interactive Systems, Inc. and its subsidiaries (collectively, the
"Company") designs, develops and markets software products for the mainframe and
client/server platforms. Of these products, the Tamaris product line represents
the Company's core suite of business and financial solutions utilizing the power
of the mainframe server, while the Aptos suite of financial applications
provides a multi-tier client/server architecture that runs on UNIX and Windows
NT servers. Along with the Tamaris and Aptos product lines, the Company develops
and markets financial solutions which focus on the high-end corporate market
with the ability to serve mid-sized stand-alone organizations and divisions of
large corporations. The Company's Tamaris software products include productivity
tools that allow the Company's applications to be extensively customized to fit
the customer's particular requirements.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's Tamaris software
line is licensed primarily to Fortune 1000 companies and similarly-sized
business and governmental organizations worldwide. The Company's Aptos products
are marketed primarily in the United Kingdom and are licensed to mid-sized
organizations. The Company's products and services are marketed primarily
through its sales forces located in the United States, United Kingdom and Asia
Pacific. The Company licenses software products directly to customers and
occasionally to distributors for resale.
MARKET
- ------
Corporations, government agencies, universities and other large organizations
depend on computer information systems in their operations. Financial and
business information systems are strategic resources that are critical to the
efficiency, productivity and competitiveness of such organizations. Within
enterprises, the modern finance organization has become a proactive participant
in business operations instead of acting in the narrower record keeping and
reporting role. To support this transition, re-engineering of business processes
has emerged as a top priority for many financial executives. At the same time,
the shared services model, which combines centralized administrative functions
with distributed operational processes, has become the logical choice for many
large corporations.
Within the past year, a new technology model has begun to emerge that supports a
shared services configuration and leverages corporate intranets--namely,
"network computing". The network computing environment implements a more
centralized approach around an enterprise server configuration. Incorporating
the latest Web technology, this environment allows enterprises to expand the
reach of business applications to directly serve employees, vendors and
customers. The network computing model has created new competitive advantages
for its users through a combination of enhanced customer service and savings in
transaction processing costs. Many companies which have adopted this model have
seen a significant increase in the average number of users and business
transactions, thus increasing the scalability requirements of the enterprise
server running core applications such as general ledgers, purchasing and
accounts receivable. This shift has contributed to renewed demand for mainframe
systems and, for certain types of applications and customer profiles, the
mainframe has once again become the preferred computing environment.
3
<PAGE>
IBM's introduction of second-generation CMOS mainframe server computing hardware
and the growing acceptance of its S/390 Parallel Sysplex technology provide new
alternatives to the large corporation that desires network computing benefits
and the capacity and performance of a mainframe. Using an integrated network
computing model, customers can take advantage of the mainframe as a corporate
enterprise server participating in a network with various types of local servers
and desktop environments. The economic model has also changed. Currently, the
cost of S/390 CMOS platform and software may be significantly less than earlier
generation products.
The Company believes that its commitment to providing leading-edge applications
for the mainframe server, combined with the abandonment of the mainframe market
by many other application vendors, has created exciting opportunities for the
Company.
WALKER STRATEGY AND PRODUCTS
- ----------------------------
Historically, Walker has been one of the leading suppliers of mainframe
financial applications for the high-end corporate market. Walker's strategy has
provided high-end financial solutions to meet the unique needs of that market
segment, including full support of the network computing model. While other
vendors focused their technology efforts on supporting a distributed
client/server model, Walker continued to invest in the mainframe as an
enterprise network computing server. As a result, the Walker Enterprise Series
financial applications support a high-volume network computing environment
which, with the growth of Internet functionality, has expanded beyond the
corporation itself.
The Walker Enterprise Series is comprised of various product and service
offerings, including Tamaris, Aptos, WalkerClient tools and Information Access,
WalkerWeb components and the Business Framework Series financial solutions.
TAMARIS C/S. The core of Walker's Enterprise Series offering is the Tamaris
suite of business applications. Tamaris is a set of business and financial
solutions designed for organizations with high transaction volumes that employ a
centralized processing or network computing model using a powerful, back-end
processing engine--a mainframe server. Tamaris consists of core financial
applications, which are designed to be the industry's leading high-volume
solution for large enterprise computing. The Tamaris architecture is designed to
provide maximum flexibility, scalability and performance combined with
client/server benefits. Applications include General Ledger, Credit and Accounts
Receivable, Accounts Payable, Asset Management, Purchase Order Management,
Inventory Management and Project Cost Management. These applications exploit the
mainframe server environments, including the latest IBM S/390 CMOS and Sysplex
configurations.
APTOS. Aptos is a suite of financial applications for UNIX and Windows NT
environments targeted for mid-sized, stand-alone organizations and divisions of
large companies. Aptos provides a multi-tier client/server architecture that
supports multiple platforms and databases. Primarily marketed in the United
Kingdom, the Aptos suite includes General Ledger, Purchasing, Accounts Payable,
Accounts Receivable and Asset Management together with multi-company and
multi-currency processing.
WINDOWS DESKTOP PRODUCTS. WalkerClient products allow the end user to take full
advantage of the power of a Windows desktop through a set of easy-to-use
applications and tools. By giving the user a personal view into an application,
WalkerClient enables the rapid delivery of information and provides PC-based
access to Tamaris C/S applications. It also delivers the tools to make
adjustments and build customized applications and extensions. Users are provided
with an interface that is intuitive, easy-to-use and which keeps prerequisite
knowledge of the system to a minimum. WalkerClient business processes can be
customized by customers to suit their own business requirements and operating
procedures. WalkerClient desktop is designed to operate in a Microsoft Windows
environment which supports integration with popular desktop packages such as
Microsoft Word, Microsoft Excel, Lotus 123, Lotus cc:Mail and Lotus Notes.
WEB-ENABLED TRANSACTIONS -- WALKERWEB BPS (BUSINESS PROCESSES). During 1996,
Walker introduced its Web browser-based transactions interface, WalkerWeb BPs.
Like WalkerClient, this offering leverages Internet technology to provide an
alternative user interface to Tamaris applications. Using WalkerWeb BPs, Walker
4
<PAGE>
customers can exploit an Internet model to provide self-service capabilities to
their financial applications. WalkerWeb BPs provide application business
transaction access to employees, vendors and customers to perform such functions
as payment status, purchase requisitioning and customer information queries.
INFORMATION ACCESS PRODUCTS. Organizations implement new technology to improve
end-user access to data and decision-making capabilities. This is not limited to
query and reporting, but also encompasses broad scope functions such as data
warehouses, data marts and data mining, plus narrower scope functions such as
analysis and reporting. It requires open solutions with accessibility to both
Walker and non-Walker data. Walker provides information access and reporting
solutions utilizing high-end applications and tools from vendors such as Focus
for Windows from Information Builders, Inc. and Essbase from Arbor Software
Corporation ("Arbor").
WORKGROUP APPLICATIONS -- BUSINESS FRAMEWORK SERIES. Workgroup applications
provide high-end operational applications that run in LAN environments and
integrate with core financial applications on the mainframe server for
additional desktop functionality. Integrated solutions commonly include the
Business Framework Series (BFS) product line, including budgeting, financial
consolidation, off-line purchase requisitioning and other workgroup-related
business processes.
During 1996, Walker acquired the Financial Consolidation and Budgeting products
and technology from Hunt Systems Group, Inc. These products were further
developed and repackaged as the Walker Business Framework Series. The
applications include BFS Financial Consolidation and BFS Budgeting and Planning.
During the year, Business Framework Series applications were integrated with
Tamaris and Aptos to complete Walker's comprehensive financial management and
reporting solution set.
BFS Financial Consolidation allows the customer to combine financial and
operational data from various sources into a consistent, easily maintained
repository of consolidated financial data. Once all source financial data is
collected and reconciled, BFS Financial Consolidation controls the adjustments
and eliminations required for consolidated reporting and analysis. BFS Budgeting
and Planning automates the entire budgeting and forecasting process and
workflow, while allowing each organization within the enterprise to define its
own policy and rules.
PRODUCT DEVELOPMENT
- -------------------
The Company continually works to enhance its existing products and develop new
products. Total expenditures for internal product development, including
capitalized software costs, were $16.6 million, $16.9 million and $21.8 million
in 1996, 1995 and 1994, respectively. Product development activities are
conducted in California, Georgia, and the United Kingdom. Additionally, the
Company utilizes third party contractors to augment its internal development
efforts. The Company works closely with its existing and prospective customers
in order to define the functionality of the Company's new products and
enhancements to its existing products. The architecture of the Company's
products is layered to facilitate modification and enhancement.
SERVICES
- --------
PROFESSIONAL SERVICES. The Company's professional services organization offers
training, implementation, customization, migration and related services to its
customers. Walker has suites of reusable tools and utilities that enable
customers to complete customizations quickly and cost effectively. Some of the
areas addressed by Walker professional services include:
* Performance tuning to increase computer throughput, reduce batch
processing time and otherwise improve performance;
* Migration assistance to cost effectively migrate to new releases or
from one platform to another; and
* Conversion assistance to integrate third-party applications.
CUSTOMER SUPPORT AND MAINTENANCE. The Company's customer support and maintenance
program includes 24-hour hotline telephone support for problem determination and
resolution, account management, ongoing functional and technical enhancements
for installed products and membership in the Company's user groups. Maintenance
is included in a customer's initial license fee for a period generally ranging
from 3 to 12 months. Thereafter, customers may renew their maintenance
contracts.
5
<PAGE>
INDUSTRY SEGMENTS
- -----------------
All of the Company's products and services are considered part of a single
industry segment. Information regarding domestic and international revenues and
assets are contained in Note 10 to the Consolidated Financial Statements. The
Company derives a percentage of its total revenues from foreign operations and
export sales. In 1996, such revenues were 29% of total revenue. Transactions
associated with the Company's foreign operations are generally denominated in
local currencies.
SALES AND MARKETING
- -------------------
Walker sells its products primarily through its direct sales force in North
America, the United Kingdom and Asia Pacific. In support of its sales force, the
Company conducts marketing programs which include telemarketing, seminars,
direct mail, promotional materials, customer communication programs and other
promotional activities.
Walker markets its products primarily to large or complex organizations with
intensive data processing and information management requirements. The Company
regards its professional services and product development organizations as
integral parts of its marketing strategy because of the long length and
technical nature of the sales process.
COMPETITION
- -----------
The financial applications and business software market is intensely competitive
and rapidly changing. A number of competitors offer products similar to the
Company's products and target the same customers. The Company believes that its
ability to compete depends upon many factors within and outside its control,
including the timing and market acceptance of new products and enhancements
developed by the Company and its competitors, product functionality,
performance, price, reliability, customer service and support, sales and
marketing efforts and product distribution. The primary competition for the
Company's products is the financial applications software offered by Geac
Computer Corporation Limited (formerly Dun & Bradstreet Software Services,
Inc.), Oracle Software Corporation, PeopleSoft, Inc. and SAP AG. In addition,
the Company's products compete with the software offered by Coda Group plc,
Quality Software Products Holding plc, Lawson Software, Systems Union Group Ltd,
Agresso AS and SquareSum Ltd. The Company's products also compete with products
offered by other vendors, with systems integrators and with consulting companies
that offer custom software development services. In addition, the Company
competes with in-house management information services and programming resources
of its potential customers. Many of the Company's competitors have substantially
greater financial, technical marketing and sales resources than the Company.
Some of these competitors also offer business application products not offered
by the Company.
The Company encounters competition from a broader range of firms in the market
for professional services. These competitors include the consulting divisions of
the major accounting firms which possess greater resources than the Company and
small independent firms which compete primarily on the basis of price of
services provided.
The principal competitive factors in the market for business and financial
applications software and services include product functionality, flexibility,
portability, integration, reliability, performance, product availability, speed
of implementation, quality of customer support and user documentation, vendor
reputation, experience, financial stability, cost effectiveness and price.
PROPRIETARY RIGHTS
- ------------------
The Company typically provides its products to users under non-exclusive,
non-transferable perpetual licenses. Under the general terms and conditions of
the Company's standard product license agreement, the licensed software may be
used only for internal operations on designated computers at specific sites. The
Company makes source code for some of its products available to its customers
under agreements which restrict use of the source code.
The Company seeks to protect its software, documentation and other written
materials under copyright laws, which afford only limited protection. It also
asserts trademark rights in its product names. The Company has not sought to
protect its
6
<PAGE>
products under patent laws. The Company believes that the rapid pace
of technological change in the computer industry makes patent or copyright
protection of less significance than such factors as the knowledge and
experience of management and personnel, name recognition, maintenance and
support of software products and the Company's ability to develop, enhance,
market and acquire software products and services.
EMPLOYEES
- ---------
As of December 31, 1996, the Company employed 419 employees, of which 290 were
based in the United States and 129 were based internationally. Of the total, 73
of such employees were engaged in sales and marketing, 44 were in customer
support, 125 were in professional services, 113 were in product development and
64 were in data processing, administration and finance positions.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in San Francisco, California,
in a leased facility consisting of approximately 99,000 square feet of office
space. The lease and sublease on this space expire in February 1999, but are
renewable for an additional five-year term. Additionally, the Company leases
office space aggregating approximately 80,000 square feet in the metropolitan
areas of Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; London,
England; Sydney, Australia; and Singapore, Republic of Singapore. The Company
believes that it has adequate facilities to accommodate the Company's operations
in the near term and that additional space will be available at commercially
reasonable terms as needed.
Approximately 65,000 square feet of office space in California, Illinois and
England is considered excess capacity. Of the excess, approximately 36,000
square feet are sublet and the Company is actively pursuing additional sublease
arrangements for the remaining space. The difference of approximately $1.4
million between the Company's total lease commitments for its excess capacity
and the total expected sublease income is included in accrued liabilities at
December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than ordinary routine
litigation incidental to the Company's business. The following sentence is a
forward looking statement. The Company believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1996.
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Walker Interactive Systems common stock is traded on The Nasdaq National Stock
Market under the symbol "WALK." As of March 12, 1997, there were approximately
174 stockholders of record of the Company's common stock. The Company has not
paid any cash dividends and does not anticipate paying any cash dividends in the
foreseeable future. Furthermore, the Company has a line of credit with a
financial institution which restricts the Company's ability to pay dividends
while borrowings are outstanding under the line of credit.
The high and low closing prices per share, for the periods set forth below, are
as reported by The Nasdaq National Stock Market System.
<TABLE>
<CAPTION>
PRICE RANGE PER COMMON MARCH JUNE SEPTEMBER DECEMBER
SHARE 31, 1996 30, 1996 30, 1996 31, 1996
----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Price range per common share:
High $11 $12 5/8 $12 $15 1/2
Low 7 9 7/8 9 5/8 12 3/8
MARCH JUNE SEPTEMBER DECEMBER
31, 1995 30, 1995 30, 1995 31, 1995
-------- -------- -------- --------
Price range per common share:
High $8 1/8 $7 1/8 $9 1/5 $8 1/2
Low 6 5/8 5 5 2/3 6 3/8
</TABLE>
8
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
WALKER INTERACTIVE SYSTEMS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 (1) 1995 1994 (2) 1993 1992
-------- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $62,834 $58,566 $69,180 $64,483 $62,299
Income (loss) before income taxes 86 (10,198) (15,033) 4,890 11,936
Net income (loss) (116) (9,357) (12,928) 3,912 7,903
Net income (loss) per share (0.01) (0.72) (1.01) 0.30 0.64
Weighted average shares outstanding 13,223 12,998 12,750 12,991 12,424
Cash, cash equivalents and investments $38,170 $42,318 $44,036 $59,341 $51,727
Total assets 82,319 82,498 89,834 102,948 94,521
Stockholders' equity 46,772 48,734 57,521 69,305 64,305
</TABLE>
(1) Includes a $2.8 million charge for the write-off of in-process
research and development from the acquisition of Hunt Systems,
Inc.
(2) Includes $23.2 million of charges, of which $12.8 million was
the write-off of in-process research and development from the
acquisition of The Solutions Group Limited and $10.4 million
was for severance and related costs and for the write-off of
capitalized software development costs.
<TABLE>
<CAPTION>
QUARTERLY INFORMATION MARCH JUNE SEPTEMBER DECEMBER
(Unaudited) 31, 1996 30, 1996 30, 1996 31, 1996
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues $14,332 $15,376 $15,969 $17,157
Operating income (loss) (295) (2,741) 461 591
Income (loss) before income taxes 188 (2,242) 963 1,177
Net income (loss) 135 (2,292) 914 1,127
Net income (loss) per share 0.01 (0.17) 0.07 0.08
Weighted average shares outstanding 13,961 13,250 14,046 14,298
<CAPTION>
QUARTERLY INFORMATION MARCH JUNE SEPTEMBER DECEMBER
(Unaudited) 31, 1995 30, 1995 30, 1995 31, 1995
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues $17,154 $13,621 $13,236 $14,555
Operating income (loss) 1,313 (4,758) (8,220) (359)
Income (loss) before income taxes 1,730 (4,279) (7,740) 91
Net income (loss) 1,159 (2,867) (7,740) 91
Net income (loss) per share 0.09 (0.22) (0.59) 0.01
Weighted average shares outstanding 13,269 12,946 13,056 13,548
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The report on this Form 10-K contains forward-looking statements, including
statements related to industry trends and demand for mainframe products,
expected resolution of legal proceedings, cash commitments, working capital
requirements and possible expansion in international markets. Discussions
containing such forward-looking statements may be found in the material set
forth under "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", generally, and specifically
therein under the captions "Liquidity and Capital Resources" and "Future
Performance and Additional Risk Factors" as well as elsewhere in this Annual
Report on Form 10-K. Actual events or results may differ materially from those
discussed herein. The risk factors on pages 13 through 15, among others, should
be considered in evaluating the Company's prospects and future financial
performance.
Walker Interactive Systems, Inc. and its subsidiaries (collectively, the
"Company") designs, develops and markets software products for the mainframe and
client/server platforms. Of these products, the Tamaris product line represents
the Company's core suite of business and financial solutions utilizing the power
of the mainframe server, while the Aptos suite of financial applications
provides a multi-tier client/server architecture that runs on UNIX and Windows
NT servers. Along with the Tamaris and Aptos product lines, the Company develops
and markets financial solutions which focus on the high-end corporate market
with the ability to serve mid-sized stand-alone organizations and divisions of
large corporations. The Company's Tamaris software products include productivity
tools that allow the Company's applications to be extensively customized to fit
the customer's particular requirements. The Company compliments its software
products by providing consulting and training services to assist in
customization and implementation.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's Tamaris software
line is licensed primarily to Fortune 1000 companies and similarly-sized
business and governmental organizations worldwide. The Company's Aptos products
are marketed primarily in the United Kingdom and are licensed to mid-sized
organizations. The Company's products and services are marketed primarily
through its sales forces located in the United States, United Kingdom and Asia
Pacific. The Company licenses software products directly to customers and
occasionally to distributors for resale.
Software license revenues are recognized when software revenue recognition
criteria have been met. The portion of revenues from new license agreements
which relate to the Company's obligations to provide customer support are
deferred and recognized ratably over the contract support period, which is
generally three to twelve months. Software maintenance contracts are usually
renewable on an annual basis, although the Company may negotiate long-term
contracts. Revenues from maintenance contract renewals are deferred and
recognized ratably over the terms of the agreements. Revenues from consulting
and other services are recognized as the related services are provided or as the
milestones are completed.
ACQUISITIONS
- ------------
On May 17, 1996, the Company acquired the business and net assets of Hunt
Systems Group, Inc. ("Hunt") for a total acquisition price of $3.8 million
comprised of a $2.1 million cash payment, $1.6 million payable based on
achievement of certain performance targets during the four year period following
closing and $0.1 million in transaction costs. Additional amounts will be paid
if further performance targets are reached during the same four year period. The
acquisition was accounted for as a purchase transaction. Of the purchase price,
$0.2 million was allocated to identifiable net tangible assets, $0.8 million was
allocated to capitalized software and $2.8 million was allocated to in-process
research and development. The amount of the purchase price allocated to
in-process research and development was charged to the Company's operations,
because technological feasibility had not been established and no alternative
future uses existed at the acquisition date. The results of operations of Hunt,
from the date of acquisition, are included in the 1996 Consolidated Statement of
Operations and were not material to the results of operations of the Company.
10
<PAGE>
On June 30, 1994, the Company purchased all of the outstanding share capital of
The Solutions Group Limited ("TSGL") and its wholly-owned subsidiary, Financial
Solutions Limited, a client/server financial applications software company. The
total acquisition cost was $13.6 million, comprised of $12.3 million paid to
stockholders of TSGL and $1.3 million of direct and other costs related to the
acquisition. The acquisition was accounted for as a purchase transaction. In
connection with the acquisition, the Company wrote off $12.8 million of
purchased in-process research and development.
SIGNIFICANT CHARGES
- -------------------
In 1995, operating expenses included $9.7 million for office consolidations,
sales and use taxes, senior management changes, doubtful accounts receivable and
other miscellaneous matters. The Company also wrote-off $1.1 million of
capitalized software development costs which were considered unrealizable based
on anticipated future revenues. Of the total 1995 charges, $8.4 million was
general and administrative expense, $1.1 million was amortization of capitalized
software costs, $0.6 million was sales and marketing expense, $0.4 million was
product development expense and $0.3 million was costs of maintenance,
consulting and other services.
In 1994, the Company discontinued a client/server software development project
and wrote-off $7.9 million of capitalized software development costs. In
connection with the discontinuance of the software development project, the
Company reduced its total employment by approximately 15% and expensed $2.5
million, primarily for severance and related costs.
RESULTS OF OPERATIONS FOR 1996, 1995 AND 1994
- ---------------------------------------------
REVENUES. Revenues increased 7% from 1995 to 1996 and decreased 15% from 1994 to
1995 primarily as a result of changes in license revenues. The Company believes
that license revenues were lower in 1995 than in 1994 as a result of technology
trends that reduced the demand for mainframe based products. License revenues
increased $3.5 million in 1996. The Company believes that license revenues
increased because mainframe product demand increased and customers decided their
requirements would be better served by a mainframe solution. The Company's Aptos
product line in the United Kingdom further contributed to the increase in 1996
revenues. The Company believes that stronger sales of the Aptos product line
resulted from product feature and functionality enhancements and promotional
activities. Although the Company experienced license growth during 1996, the
Company's 1995 and 1996 license revenues were significantly below historical
levels.
Maintenance revenues were relatively flat at $27.2 million, $28.4 million and
$26.8 million for 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994,
the Company experienced a maintenance support renewal rate of approximately 85%.
The non-renewals were offset by new customer contracts and rate increases of 10%
during 1995 and 1994.
Consulting revenues were relatively flat at $27.0 million, $25.0 million and
$27.0 million for 1996, 1995 and 1994, respectively. Consulting revenues are
generated from new and existing customers for services related to training,
implementations, customizations, migrations, enhancements and other special
projects. In 1994 and 1995, the Company derived its consulting revenues
primarily from implementations. In 1996, a greater portion of the Company's
consulting revenues related to post-implementation engagements.
Revenues generated in North America remained relatively stable representing 71%,
70% and 73% of total revenues for the fiscal years ended December 31, 1996, 1995
and 1994, respectively. During 1996, the Company experienced an increase in
revenues generated in the United Kingdom and a decrease in revenues generated in
the Asia Pacific region.
COSTS OF MAINTENANCE, CONSULTING AND OTHER SERVICES. Costs of maintenance,
consulting and other services represented 45%, 47% and 47% of the respective
revenues in 1996, 1995 and 1994, respectively. The percentage decrease in 1996
was a result of increased efficiency in service delivery.
SALES AND MARKETING. Sales and marketing expenses increased 12% from 1995 to
1996 while remaining relatively flat in 1994 compared to 1995. The increase in
1996 is attributable to higher commissions and travel expenses associated with
the increase in license revenues and increased costs for the Company's annual
North America users' conference. Sales and marketing expenses as a percentage of
total revenues were 22%, 21% and 18% in 1996, 1995 and 1994,
11
<PAGE>
respectively. The 1995 and 1996 increases as a percentage of revenue
resulted from costs associated with 1995 senior management changes and 1996
marketing promotions. The Company expects sales and marketing expenses to
increase in the future as the Company releases and promotes new products,
increases promotions of existing product lines and continues to build its sales
force.
PRODUCT DEVELOPMENT. Product development related expenses, excluding
amortization of capitalized software, are detailed as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Product development costs including additions to
capitalized software (gross) $16,571 $16,879 $21,783
Less:
Additions to capitalized software 5,201 4,230 7,138
------- ------- -------
Product development expenses $11,370 $12,649 $14,645
======= ======= =======
</TABLE>
The decrease in 1995 and 1996 gross product development expenses from 1994 is
attributable to a reduction in product development personnel which was made in
conjunction with the discontinuance of a client/server software development
project in 1994. As a percentage of gross product development expenses,
additions to capitalized software were 31%, 25% and 32% in 1996, 1995 and 1994,
respectively. During 1995, the Company refocused its product development
efforts. As a result, the Company capitalized a lower percentage of gross
product development expenses in that year. The Company expects product
development expenses to grow in future periods.
AMORTIZATION OF CAPITALIZED SOFTWARE. Excluding a 1995 write-off of $1.1 million
of capitalized software development costs which were considered unrealizable,
amortization of capitalized software decreased 5% from 1995 to 1996 and 2% from
1994 to 1995. The decrease in 1996 is primarily attributable to products
becoming fully amortized in early 1996, partially offset by additional
amortization for recent software releases.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.0
million, $15.4 million and $6.3 million in 1996, 1995 and 1994, respectively.
The increase from 1994 to 1995 was attributable to an $8.4 million provision for
office consolidations, additions to bad debt reserves, costs associated with a
senior management change, sales tax accruals and other reserves. The decrease
from 1995 to 1996 was attributable to the provisions in 1995, partially offset
by 1996 charges for bad debt and increased labor associated with the enhancement
of infrastructure and business processes.
INCOME TAX EXPENSE (BENEFIT). In 1996, the Company provided income taxes of $0.2
million on a pretax income of $0.1 million. The income tax provision reflects
the interaction of taxes incurred in foreign jurisdictions, the proportion of
tax-exempt income to taxable income or loss and the generation and expiration of
tax attributes. The Company's effective income tax rate was 8% and 14% in 1995
and 1994, respectively. The benefit of 8% in 1995 was due to the Company's 1995
pretax loss and a valuation allowance of $2.3 million for deferred tax assets.
The benefit of 14% in 1994 was a result of the Company's 1994 pretax loss,
reduced by the nondeductibility of the $12.8 million write-off of purchased
in-process research and development.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities provided cash of $7.9 million, $4.5 million
and $7.9 million in 1996, 1995 and 1994, respectively. The increase in 1996 cash
flows was due to increased license revenues and certain significant charges in
1995 that used cash.
Net cash used by financing activities was $2.6 million during 1996 compared to
$0.6 million in 1995. In 1994, net cash provided by financing activities was
$0.3 million, primarily from proceeds from stock transactions associated with
employee stock purchase and stock option plans. In 1996, the Company used $5.2
million to repurchase its common stock, partially offset by $2.9 million of
proceeds from stock transactions associated with employee stock purchase and
stock
12
<PAGE>
option plans. As of December 31, 1996, a total of 492,000 shares of common
stock had been repurchased at a total cost of $5.6 million, and the Company had
authorization from its Board of Directors to use cash of $0.4 million for
additional repurchases. The repurchased shares are designated for use in
connection with the Company's employee stock purchase plan and one of its
employee stock option plans. During 1996, the Company reissued 100,000 of
treasury shares for the employee stock purchase plan.
As of December 31, 1996, the Company had cash and cash equivalents and short-
and long-term investments totaling $38.2 million compared to $42.3 million at
December 31, 1995. The decrease is primarily attributable to the Company's
acquisition of Hunt Systems Group, Inc., which resulted in a $2.0 million net
reduction of cash, and the use of $2.5 million cash for financing activities.
The decrease in cash and cash equivalents of $11.9 million is a result of funds
being invested in short- and long-term financial investments.
The Company has a line of credit with a financial institution in the amount of
$3.0 million, secured by marketable securities. The line of credit expires on
June 30, 1997. The Company did not borrow against this line of credit during
1996. The credit agreement provides that the Company shall maintain certain
financial ratios, and contains restrictions related to various matters,
including the Company's ability to effect mergers or acquisitions without the
bank's approval and the Company's ability to pay dividends while borrowings are
outstanding under the line of credit.
As of December 31, 1996, the Company's principal sources of liquidity included
cash, cash equivalents and short- and long-term investments aggregating $38.2
million. The following two sentences contain forward looking statements. The
Company expects to utilize approximately $4.0 million in cash over the next five
years for excess capacity lease commitments and sales and use tax liabilities.
The Company believes that its principal sources of liquidity, together with
funds expected to be generated from operations, will satisfy the Company's
currently anticipated working capital and capital expenditure requirements for
at least the next twelve months.
FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS
- ----------------------------------------------
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and may in the
future experience significant quarterly and annual fluctuations in revenues and
results of operations. The Company's revenues and results of operations
fluctuate as a result of a variety of factors which include the lengthy sales
cycle of the Company's products, the amount of revenue generated from products
which require third party royalty payments, changes in product mix, demand for
the Company's products, competitive conditions in the industry and general
economic conditions. Furthermore, the revenue growth rates experienced during
1996 may not continue into 1997 and beyond. Shortfalls in revenues or earnings
from levels expected by the financial market could have an immediate and
significant adverse effect on the trading price of the Company's common stock.
Future operating results will continue to heavily depend on the level of license
sales. Although the Company experienced license growth during 1996, the
Company's 1995 and 1996 license revenues were significantly below historical
levels. Due to the lengthy sales cycle associated with the Company's software
products, revenues are difficult to forecast and may fluctuate dramatically
between reporting periods. Future prices the Company will be able to obtain for
its software products may decrease from historical levels depending on
competitive factors. Maintenance revenues are derived from new and existing
customers. Lower than expected maintenance revenues may result if cancellations
or non-renewals of maintenance agreements are not replaced by new maintenance
agreements equal to or greater than those lost. Consulting revenues are derived
from new and existing customers for services related to training,
implementations, customizations, migrations, enhancements and other special
projects. In order to maintain or increase existing levels of consulting
revenues, the Company depends on consulting engagements from new license
customers. However, revenues from consulting engagements may be generated for an
extended period of time beyond the customers' software implementations. There
can be no assurances that the Company will continue the license revenue growth
trend experienced in 1996 or that the Company will achieve historical levels of
license revenue. If the Company does not sustain its license revenue levels or
growth trend, there can be no assurances that the Company will be able to
sustain current levels of maintenance and consulting and other services
revenues.
The following sentence is a forward looking statement. The Company plans to
increase its presence in international markets. Risks associated with such
pursuits include, but are not limited to, the following: changing market
demands, economic and political conditions in foreign markets, foreign
13
<PAGE>
exchange fluctuations, longer collections cycles and changes in
international tax laws. During 1996, the Company experienced an increase in
revenues generated in the United Kingdom and a decrease in revenues generated in
the Asia Pacific region. There can be no assurances that the Company will
continue to experience increased revenues in the United Kingdom or that the
Company will be able to reverse the decreases in revenues generated in Asia
Pacific. Furthermore, there can be no assurances that the Company's sales and
marketing efforts in other international markets will result in future revenue.
During 1996, the Company entered into fixed price services agreements with some
customers and the Company expects to enter into additional fixed priced
agreements in 1997 and thereafter. The Company cannot ensure that such
arrangements can or will provide profit margins comparable to non-fixed price
agreements. Such fixed price arrangements may become a greater proportion of the
Company's revenues in the future.
Company generates revenue from internally developed software products, some of
which utilize technology licensed from third parties. The Company expects to
continue utilizing third party technology and may enter into agreements with
additional business partners. If sales of software utilizing third party
technology increase disproportionately, operating income as a percent of revenue
may be below historical levels due to third party royalty obligations. There can
be no assurances that the third parties will renew existing agreements with the
Company or require financial conditions which are unfavorable to the Company.
The Company expects product development expenses to grow in future periods.
However, there can be no assurances that revenues will be sufficient to support
the future product development which is required for the Company to be
competitive. Although the Company may be able to release new products in
addition to enhancements to existing products, there can be no assurances that
the Company's new or upgraded products will be accepted, will not be delayed or
canceled, or will not contain errors or "bugs" that could affect the performance
of the product or cause damage to users' data.
The Company expects sales and marketing expenses to increase in the future as
the Company releases and promotes new products, increases promotions of existing
product lines and continues to build its sales force. However, because of the
lengthy sales cycle associated with software applications, the Company believes
that the impact of these activities, if any, on future license revenues will not
be immediate and there can be no assurances that increased sales and marketing
expenditures will result in increased revenues.
COMPETITION. The financial applications and business software market is
intensely competitive and rapidly changing. A number of competitors offer
products similar to the Company's products and target the same customers. The
Company believes that its ability to compete depends upon many factors within
and outside its control, including the timing and market acceptance of new
products and enhancements developed by the Company and its competitors, product
functionality, performance, price, reliability, customer service and support,
sales and marketing efforts and product distribution. The primary competition
for the Company's products is the financial applications software offered by
Geac Computer Corporation Limited (formerly Dun & Bradstreet Software Services,
Inc.), Oracle Software Corporation, PeopleSoft, Inc. and SAP AG. In addition,
the Company's products compete with the software offered by Coda Group plc,
Quality Software Products Holding plc, Lawson Software, Systems Union Group Ltd,
Agresso AS and SquareSum Ltd. The Company's products also compete with products
offered by other vendors, with systems integrators and with consulting companies
that offer custom software development services. In addition, the Company
competes with in-house management information services and programming resources
of its potential customers. Many of the Company's competitors have substantially
greater financial, technical marketing and sales resources than the Company.
Some of these competitors also offer business application products not offered
by the Company. There can be no assurances that the Company will be able to
compete successfully in the future.
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid
technological change. The pace of change has accelerated due to advances in
mainframe and client/server technology and the growth in internet, intranet and
extranet utilization. The Company expects to evaluate potential opportunities
and may invest in those which are compatible with the Company's strategic
direction. However, there can be no assurances that any such investments will be
profitable. Furthermore, the Company's products are designed primarily for use
with certain mainframe and client/server systems. The introduction of products
embodying new technologies and the emergence of new industry standards can
14
<PAGE>
render existing products obsolete. Accordingly, the Company's future success
will depend in part upon its ability to continue to enhance its current products
and to develop and introduce new products that respond to evolving customer
requirements and keep pace with technological development and emerging industry
standards, such as new operating systems, hardware platforms, interfaces and
third party applications software. There can be no assurances that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change, changes in customer requirements
or emerging industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of such products and enhancements, or that any new
products or enhancements that it may introduce will achieve market acceptance.
PROPRIETARY RIGHTS. The Company regards its products as proprietary. Through its
license agreements with customers and its internal security systems,
confidentiality procedures and employee agreements, the Company has taken steps
to maintain the trade secrecy of its products. However, there can be no
assurances that misappropriation will not occur. In addition, the laws of some
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
The Company is not aware of any claims that its products infringe on the
proprietary rights of third parties, however, there can be no assurances that
third parties will not assert infringement claims against the Company in the
future with respect to current or future products or that any such assertions
may not require the Company to enter into royalty arrangements or result in
costly litigation.
EMPLOYEES. The Company's success depends on a number of its key employees. The
loss of the services of the Company's key employees could have a material
adverse effect on the Company. The Company believes that its future success will
also depend in large part on its ability to attract and retain highly-skilled
technical and managerial personnel. Competition for such personnel in the
software industry is intense and the supply is limited. There can be no
assurances that the Company will be successful in attracting and retaining such
personnel.
15
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report........................................................17
Consolidated Balance Sheets as of December 31, 1996 and December
31, 1995........................................................................18
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................................19
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................20
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994.........................................................21
Notes to Consolidated Financial Statements..........................................22
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Walker Interactive Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Walker
Interactive Systems, Inc. and its subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audit also included the consolidated financial statement schedule on page
37. These financial statements and the consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Walker Interactive Systems, Inc.
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements take as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
February 4, 1997
17
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,475 $25,412
Short-term investments 17,615 10,976
Accounts receivable, net of allowance for doubtful
accounts of $1,584 in 1996 and $1,290 in 1995 11,316 9,719
Prepaid expenses 1,010 1,241
Other receivables 929 693
------- -------
Total current assets 44,345 48,041
Long-term investments 7,080 5,930
Property and equipment, net 4,332 5,039
Capitalized software, net of accumulated amortization
of $25,114 in 1996 and $21,451 in 1995 11,858 9,635
Deferred tax assets, net 14,060 13,181
Other assets 644 672
------- -------
TOTAL ASSETS $82,319 $82,498
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,160 $ 1,770
Accrued liabilities 9,992 10,672
Deferred revenue 14,855 14,060
------- -------
Total current liabilities 28,007 26,502
Deferred revenue 2,441 2,709
Accrued rent 960 1,282
Other long-term obligations 4,139 3,271
------- -------
Total liabilities 35,547 33,764
------- -------
Stockholders' equity:
Common stock, $.001 par value: 50,000,000 shares
authorized; issued 13,494,487 shares - December
31, 1996; 13,120,105 shares - December 31, 1995 13 13
Additional paid-in capital 70,008 67,532
Currency translation adjustments 253 123
Unrealized gain (loss) on investments (39) 43
Accumulated deficit (18,710) (18,594)
Treasury stock at cost (397,194 shares - December 31,
1996; 55,143 shares - December 31, 1995) (4,753) (383)
------- -------
Total stockholders' equity 46,772 48,734
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $82,319 $82,498
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
REVENUES:
License $ 8,647 $ 5,129 $15,384
Maintenance 27,231 28,440 26,820
Consulting and other services 26,956 24,997 26,976
------- ------- --------
Total revenues 62,834 58,566 69,180
OPERATING EXPENSES:
Costs of revenues:
Costs of maintenance, consulting and other services 24,167 25,326 25,028
Amortization of capitalized software 3,662 4,959 3,952
Sales and marketing 13,803 12,293 12,493
Product development 11,370 12,649 14,645
General and administrative 9,032 15,363 6,267
Write-off of purchased in-process
research and development 2,784 - 12,848
Write-off of capitalized software and
related severance and other costs - - 10,405
------- ------- --------
Total operating expenses 64,818 70,590 85,638
Operating loss (1,984) (12,024) (16,458)
Interest income, net 2,070 1,826 1,425
------- ------- --------
Income (loss) before income taxes 86 (10,198) (15,033)
Income tax expense (benefit) 202 (841) (2,105)
------- ------- --------
NET LOSS ($116) ($9,357) ($12,928)
======= ======= ========
NET LOSS PER SHARE ($0.01) ($0.72) ($1.01)
======= ======= ========
Shares used in computing net loss per share 13,223 12,998 12,750
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained Total
Additional Currency Unrealized Earnings Stock-
Common Stock Treasury Stock Paid-in Translation Gain(Loss) (Accumulated holders'
Shares Amount Shares Amount Capital Adjustments on Investments Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 12,633,538 $13 - $ - $65,733 ($132) $- $3,691 $69,305
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued by
exercise of stock options 157,643 - 233 233
Common stock issued under
employee stock purchase plan 91,055 - 627 627
Tax benefit from exercise
of stock options 375 375
Currency translation adjustment 96 96
Unrealized loss on investments (187) (187)
Net loss (12,928) (12,928)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 12,882,236 13 - - 66,968 (36) (187) (9,237) 57,521
Common stock issued by
exercise of stock options 197,702 - 126 126
Common stock issued under
employee stock purchase plan 40,167 - 195 195
Treasury stock acquired (55,143) (383) (383)
Tax benefit from exercise
of stock options 243 243
Currency translation adjustment 159 159
Unrealized gain on investments 230 230
Net loss (9,357) (9,357)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 13,120,105 13 (55,143) (383) 67,532 123 43 (18,594) 48,734
Common stock issued by
exercise of stock options 342,628 - 2,078 2,078
Common stock issued under
employee stock purchase plan 31,754 - 197 197
Treasury stock acquired (442,000) (5,245) (5,245)
Treasury stock reissued under
employee stock purchase plan 99,949 875 (258) 617
Tax benefit from exercise
of stock options 459 459
Currency translation adjustment 130 130
Unrealized loss on investments (82) (82)
Net loss (116) (116)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,494,487 $13 (397,194) ($4,753) $70,008 $253 ($39) ($18,710) $46,772
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($116) ($9,357) ($12,928)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,851 9,130 7,657
Tax benefit of nonqualified stock options 459 243 75
Write-off of capitalized software costs - - 7,878
Write-off of purchased in-process research and development 2,784 - 12,848
(Gain) loss on property retirements and fixed asset write-downs (11) 1,366 219
Changes in operating assets and liabilities:
Accounts receivable, net (1,716) 2,568 (2,607)
Prepaid expenses 231 (190) (144)
Accounts payable (1,390) 50 (387)
Accrued liabilities 1,271 3,373 2,570
Deferred tax assets (879) (1,643) (3,284)
Deferred revenue 467 (1,467) (2,917)
Other (88) 448 (1,110)
------- ------- --------
Net cash provided by operations 7,863 4,521 7,870
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised 2,892 321 860
Capital lease and loan payments (236) (505) (596)
Treasury stock acquired (5,245) (383) -
------- ------- --------
Net cash provided (used) by financing activities (2,589) (567) 264
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments (36,984) (28,518) (59,950)
Maturities of short-term investments 7,400 27,791 55,461
Sales of short-term investments 21,713 13,500 22,648
Acquisition of Hunt Systems Group, Inc. (2,034) - -
Acquisition of The Solutions Group Limited - - (12,348)
Purchases of property and equipment (2,105) (1,442) (4,043)
Additions to capitalized software (5,201) (4,230) (7,138)
------- ------- --------
Net cash provided (used) by investing activities (17,211) 7,101 (5,370)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,937) 11,055 2,764
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 25,412 14,357 11,593
------- ------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $13,475 $25,412 $ 14,357
======= ======= ========
Supplemental Disclosure:
Short- and long-term obligations incurred related to business acquired $ 1,444 $ - $ -
Cash paid for income taxes 5 619 358
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
- -- -------------------------------
DESCRIPTION OF THE COMPANY. Walker Interactive Systems, Inc. and its
subsidiaries (the "Company") designs, develops and markets software
products for the mainframe and client/server platforms. The Company
derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's
mainframe software line is licensed primarily to Fortune 1000 companies
and similarly-sized businesses and governmental organizations
worldwide. The Company's client/server software products are marketed
primarily in the United Kingdom and are licensed to mid-sized
organizations. The Company's products and services are marketed
primarily through its sales forces located in the United States, the
United Kingdom and Asia Pacific.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Walker Interactive Systems, Inc. and its
wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from those estimates.
Significant estimates used in the consolidated financial statements
include the estimates of (i) anticipated future gross revenues from the
estimated economic life of the products for which development costs
have been capitalized, (ii) expense accruals associated with office
consolidations and sales and use tax, (iii) the life of identifiable
intangible assets from acquisitions and (iv) realizability of deferred
tax assets. The amounts that the Company will ultimately incur or
recover could differ materially from the Company's current estimates.
The underlying assumptions and facts supporting these estimates could
change in 1997 and thereafter.
CAPITALIZED SOFTWARE. Capitalized software include certain costs of
purchased and internally developed software, and are stated at the
lower of cost or net realizable value. Capitalization of internally
developed software begins upon the establishment of technological
feasibility. Amortization of capitalized development costs begins when
the products are available for general release to customers, and is
computed as the greater of (a) the ratio of current gross revenues for
a product to the total of current and anticipated future gross revenues
for the product, or (b) the straight-line method over the remaining
estimated economic life of the product (not exceeding five years). It
is possible that these estimates of anticipated future gross revenues,
the remaining estimated economic life of the products, or both, could
be reduced significantly due to either competitive factors or the rate
of technological change.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is computed primarily utilizing the straight-line method
over the estimated useful lives which range from three to ten years.
Leasehold improvements are amortized utilizing the straight-line method
over the lesser of the estimated useful lives or remaining lease terms.
REVENUE RECOGNITION. Software license revenues are recognized when
software revenue recognition criteria have been met. The portion of
revenues from new license agreements which relate to the Company's
obligations to provide customer support are deferred and recognized
ratably over the contract support period, which is generally three to
twelve months. Software maintenance contracts are usually renewable on
an annual basis, although the Company may negotiate long-term
contracts. Revenues from maintenance contract renewals are deferred and
recognized ratably over the terms of the agreements. Revenues from
consulting and other services are recognized as the related services
are provided or as the milestones are completed.
22
<PAGE>
CONCENTRATION OF CREDIT RISK. The Company's investment portfolio is
diversified and consists of short- and long-term investment grade
securities. The Company's accounts receivable are derived from sales to
customers located in the United States, United Kingdom and Asia
Pacific. The Company performs ongoing credit evaluations of its
customers' financial condition and maintains reserves for potential
credit losses.
TRANSLATION OF FOREIGN CURRENCIES. Gains and losses from translation of
foreign subsidiaries' financial statements are reported as a separate
component of stockholders' equity. Net gains and losses from foreign
currency transactions are included in the determination of net income
(loss).
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is calculated
based upon the weighted average number of common and common equivalent
shares, when dilutive, outstanding at the end of each year.
SFAS NO. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, in 1996. SFAS No. 123
establishes accounting and disclosure requirements using a fair value
based method of accounting for stock-based employee compensation plans.
Under SFAS No. 123, the Company may either utilize the new fair value
based accounting method or continue to utilize the intrinsic value
based method and provide pro forma disclosures of net income and
earnings per share as if the accounting provisions of SFAS No. 123 had
been adopted. The Company adopted the disclosure requirements of SFAS
No. 123; therefore such adoption had no effect on the Company's
consolidated net earnings or cash flows.
RECLASSIFICATIONS. Certain reclassifications have been made to prior
years' amounts in order to conform to the 1996 consolidated financial
statement presentation.
2. ACQUISITIONS
- -- ------------
On May 17, 1996, the Company acquired the business and net assets of
Hunt Systems Group, Inc. ("Hunt") for a total acquisition price of
$3,759,000 comprised of a $2,109,000 cash payment, $1,550,000 payable
based on achievement of certain performance targets during the four
year period following closing and $100,000 in transaction costs.
Additional amounts will be paid if further performance targets are
reached during the same four year period. The acquisition was accounted
for as a purchase transaction. Of the purchase price, $190,000 was
allocated to identifiable net tangible assets, $785,000 was allocated
to capitalized software and $2,784,000 was allocated to in-process
research and development. The amount of the purchase price allocated to
in-process research and development was charged to the Company's
operations, because technological feasibility had not been established
and no alternative future uses existed at the acquisition date. The
results of operations of Hunt, from the date of acquisition, are
included in the 1996 Consolidated Statement of Operations and were not
material to the results of operations of the Company.
On June 30, 1994, the Company purchased all of the outstanding share
capital of The Solutions Group Limited ("TSGL") and its wholly-owned
subsidiary, Financial Solutions Limited, a client/server financial
applications software company. The total acquisition cost was
$13,648,000, comprised of $12,348,000 paid to stockholders of TSGL and
$1,300,000 of direct and other costs related to the acquisition. The
acquisition was accounted for as a purchase transaction. In connection
with the acquisition, the Company wrote off $12,848,000 of purchased
in-process research and development.
3. CASH AND CASH EQUIVALENTS AND SHORT- AND LONG-TERM INVESTMENTS
- -- --------------------------------------------------------------
All liquid investments with original maturities of three months or less
are considered cash and cash equivalents. Cash equivalents are stated
at cost, which approximates fair value. The Company classifies those
investments which mature in less than one year as short-term
investments. The Company's short- and long-term investments are
classified as available-for-sale and reported at fair value. Net
unrealized gains and losses are excluded from earnings and reported net
of income taxes as a separate component of stockholders' equity.
23
<PAGE>
Short- and long-term investments available-for-sale are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
December 31, 1996 Costs Gains Losses Fair Value
----------------- ----- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government securities $8,678 $4 ($18) $8,664
Corporate debt 16,056 5 (30) 16,031
------- ---- ---- -------
Total investments 24,734 9 (48) 24,695
Long-term investments 7,101 2 (23) 7,080
------- ---- ---- -------
Short-term investments $17,633 $7 ($25) $17,615
======= ==== ==== =======
December 31, 1995
-----------------
State and agency securities $14,342 $42 $ - $14,384
Corporate debt 2,521 1 - 2,522
------- ---- ---- -------
Total investments 16,863 43 - 16,906
Long-term investments 5,904 26 - 5,930
------- ---- ---- -------
Short-term investments $10,959 $17 $ - $10,976
======= ==== ==== =======
</TABLE>
4. PROPERTY AND EQUIPMENT
- -- ----------------------
Property and equipment at December 31, 1996 and 1995 includes the
following (in thousands):
DECEMBER 31,
1996 1995
---- ----
Equipment $14,498 $12,776
Furniture and fixtures 2,461 2,234
Leasehold improvements 1,489 1,050
Property under capital leases:
Equipment 1,465 1,475
Furniture 1,760 1,917
-------- -------
21,673 19,452
Less:
Accumulated depreciation (17,341) (14,413)
--------- -------
Property and equipment, net $4,332 $5,039
========= =======
Depreciation expense totaled $2,992,000, $4,007,000 and $3,705,000 for
1996, 1995 and 1994, respectively.
5. LIABILITIES
- -- -----------
Deferred revenue (current) is primarily comprised of deferred product
maintenance of $13,701,000 and $13,422,000 at December 31, 1996 and
1995, respectively. Accrued liabilities consists of sales and use tax
accruals of $2,780,000 and $3,045,000 at December 31, 1996 and 1995,
respectively.
24
<PAGE>
6. INCOME TAXES
------------
The Company's deferred tax balances at December 31, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------- --------
<S> <C> <C>
Deferred Tax Assets:
Deferred revenue recognized for tax $ 2,081 $ 3,182
Excess book depreciation over tax
depreciation 1,790 1,294
Accrued liabilities and reserves 3,228 2,981
Research and development credits 3,391 3,186
Alternative minimum tax credits 481 474
carryover
Net operating loss carryover 4,935 3,957
Foreign tax credits carryover 2,556 2,322
Foreign losses 461 1,228
Other 290 406
------- --------
19,213 19,030
Valuation Allowance (2,844) (2,288)
------- --------
Total 16,369 16,742
------- --------
Deferred Tax Liabilities:
Capitalized software development
costs expensed for tax purposes (2,309) (3,561)
------- --------
Deferred Tax Assets - net $14,060 $13,181
======= ========
</TABLE>
In 1995, the Company established a valuation allowance of $2,288,000 for
tax credits expected to expire unused and foreign losses from which the
Company does not expect to derive any benefit. As of December 31, 1996,
the valuation allowance balance was $2,844,000. At December 31, 1996, the
Companys deferred tax assets included approximately $10,882,000 of items
which will expire with the passage of time. Realization is dependent on
generating sufficient taxable income prior to the expiration of such
benefits. Although realization is not assured, management believes it is
more likely than not that the deferred tax assets, net of the valuation
allowance, will be realized. The deferred tax assets considered realizable
could be reduced if estimates of future taxable income during the carry-
forward periods are reduced.
At December 31, 1996, the Company has federal net operating loss
carryforwards of approximately $7,800,000 which expire in varying amounts
from 2007 through 2010, federal research tax credits of $2,054,000 which
expire in varying amounts from 1997 through 2009, California state research
tax credits of $1,337,000 and alternative minimum tax credits of $481,000
which have no expiration date and foreign tax credits of $2,556,000 which
expire in varying amounts from 1997 through 2001.
Income tax expense (benefit) consists of (in thousands):
<TABLE>
<CAPTION>
1996: Current Deferred Total
------- -------- --------
<S> <C> <C> <C>
Federal $ 501 ($357) $ 144
State 45 (354) (309)
Foreign 535 (168) 367
------- -------- --------
Total $1,081 ($879) $ 202
======= ======== ========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
1995: Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal $ - ($70) ($70)
State 170 (745) (575)
Foreign 632 (828) (196)
------- -------- -------
Total $ 802 ($1,643) ($841)
======= ======== =======
1994:
Federal $ - ($3,386) ($3,386)
State 110 102 212
Foreign 1,069 0 1,069
------- -------- -------
Total $1,179 ($3,284) ($2,105)
======= ======== =======
</TABLE>
The effective income tax rate differs from the amount computed by applying
the federal statutory income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
1996 % 1995 % 1994 %
----- ---- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) at statutory rate -
Federal $ 28 34% ($3,473) (34%) ($5,111) (34%)
State income and capital taxes 3 4% (306) (3%) (421) (3%)
Tax-exempt interest (77) (92%) (561) (5%) (430) (3%)
U.K. and other foreign taxes 709 851% 771 8% 1,419 9%
Foreign tax credit (709) (851%) (771) (8%) (1,419) (9%)
Federal research and development credit - - - - (512) (3%)
California research and development (255) (306%) (265) (3%) (315) (2%)
credit
Write-off of purchased in-process
research and development - - - - 4,649 31%
Decrease in tax credits resulting from
the true-up of assessments and changes
in tax accounting methods - - 1,033 10% - -
Valuation allowance 557 668% 2,288 22% - -
Provision at statutory rates of 167
controlled foreign subsidiaries 200% 176 2% - -
Foreign losses not benefited (510) (611%) - - - -
Other, net 289 346% 267 3% 35 -
----- ---- ------ ----- ------ ----
Total income tax expense (benefit) $ 202 243% ($841) (8%) ($2,105) (14%)
===== ==== ====== ===== ====== ====
</TABLE>
7. STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
---------------------------------------------
401(k) Plan
-----------
The Company has a 401(k) tax-deferred savings plan covering all of its
employees. Company matching contributions, which are not required by the
plan, totaled $1,077,000, $1,204,000 and $1,349,000 in 1996, 1995 and 1994,
respectively.
26
<PAGE>
Stock Based Compensation Plans
------------------------------
At December 31, 1996, the Company had stock-based compensation plans, which
are detailed below. Under SFAS No. 123, the fair value based accounting
method would have increased the Company's net loss and net loss per share
on a pro forma basis (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
--------- ----------
<S> <C> <C>
Net loss:
As reported ($116) ($9,357)
Pro forma (1,579) (10,079)
Net loss per share:
As reported (0.01) (0.72)
Pro forma (0.12) (0.78)
</TABLE>
Stock Option Plans
Under the Company's statutory employee stock option plans, shares of common
stock have been made available for grant to certain employees. The
exercise price of each option granted is 100% of market value on the date
of the grant. Options granted under the plans generally vest over a period
of four years and generally expire ten years from the date of grant.
Options may be granted at prices not less than 85% of fair market value at
the date of grant. To date, all options have been granted at fair market
value at the date of grant. At December 31, 1996, 787,000 shares of common
stock were reserved for future option grants.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Volatility 46.8% 46.8%
Risk free interest rate 5.7% 6.6%
Expected term, in years 4.30 4.41
</TABLE>
The weighted average fair value at date of grant for options granted during
1996 and 1995 was $5.25 and $2.96, respectively. The impact of outstanding
unvested stock options granted prior to 1995 has been excluded from the pro
forma calculation. Accordingly, the 1996 and 1995 pro forma adjustments are
not indicative of those in future periods.
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------- ----------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
--------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
period 2,464,814 $ 6.98 1,654,390 $7.49 1,456,507 $7.21
Granted 785,250 11.66 1,400,500 6.27 963,000 7.85
Exercised (342,628) 6.07 (197,702) 2.02 (157,643) 1.49
Canceled or expired (317,343) 11.22 (392,374) 8.98 (607,474) 9.10
--------- --------- --------
Outstanding-end of period 2,590,093 $ 8.00 2,464,814 $6.98 1,654,390 $7.49
========= ========= ========
Exercisable-end of period 802,110 829,850 544,715
</TABLE>
27
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------------
Weighted average
Outstanding at remaining Weighted average Exercisable at Weighted average
Range of exercise price 12/31/96 contractual life exercise price 12/31/96 exercise price
- ------------------------ -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.35 to $5.00 175,183 4.24 $ 1.58 143,183 $ 0.82
5.38 to 5.38 600,000 8.48 5.38 187,500 5.38
5.81 to 7.25 644,000 7.89 6.77 264,750 6.73
7.38 to 10.38 540,732 8.86 8.65 104,535 7.81
10.44 to 15.00 630,178 9.00 12.98 102,142 13.94
-------------- --------------
0.35 to 15.00 2,590,093 8.25 8.00 802,110 6.42
============== ==============
</TABLE>
Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which provides for the
sale of up to 650,000 shares to eligible employees by means of payroll
deductions. Employees may designate up to 10% of their earnings, as
defined, to purchase shares at prices not less than 85% of fair market
value. From inception through December 31, 1996, 520,871 shares had been
purchased at prices ranging from $4.89 to $12.75 per share.
The fair value of the employee's purchase rights was estimated using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Volatility 46.8% 46.8%
Risk free interest rate 5.7% 6.2%
Expected term, in years 0.66 0.68
</TABLE>
8. SIGNIFICANT CHARGES
-------------------
In 1995, operating expenses included $9,703,000 for office consolidations,
sales and use taxes, senior management changes, doubtful accounts
receivable and other miscellaneous matters. The Company also wrote-off
$1,050,000 of capitalized software development costs which were considered
unrealizable based on anticipated future revenues. Of the total 1995
significant charges, $8,444,000 was general and administrative expense,
$1,050,000 was amortization of capitalized software costs, $617,000 was
sales and marketing expense, $375,000 was product development expense and
$267,000 was costs of maintenance, consulting and other services.
In 1994, the Company discontinued a client/server software development
project and wrote-off $7,878,000 of capitalized software development costs.
In connection with the discontinuance of the software development project,
the Company reduced its total employment by approximately 15% and expensed
$2,527,000, primarily for severance and related costs.
9. COMMITMENTS AND CONTINGENCIES
-------------------------------
The Company has operating leases for office space with varying expiration
dates through 2016, and for computer equipment with varying expiration
dates through 1999. The leases generally provide for minimum annual rentals
and payment of taxes, insurance and maintenance costs. Rental expense for
operating leases was $4,009,000, $3,396,000 and $4,757,000 in 1996, 1995
and 1994, respectively.
28
<PAGE>
At December 31, 1996, the Company had office space which was considered
excess capacity. The difference between the Company's total lease
commitments for its excess capacity and the total expected sublease income
was $1,401,000 and is included in short- and long-term accrued liabilities.
Future minimum lease payments under noncancellable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 4,422
1998 4,284
1999 2,653
2000 2,110
2001 1,195
Thereafter 8,111
-------
Total $22,775
=======
</TABLE>
The Company has a line of credit with a financial institution in the amount
of $3,000,000, secured by marketable securities. The line of credit
expires on June 30, 1997. The Company did not borrow against this line of
credit during 1996. The credit agreement provides that the Company shall
maintain certain financial ratios, and contains restrictions related to
various matters, including the Company's ability to effect mergers or
acquisitions without the banks approval and the Company's ability to pay
dividends while borrowings are outstanding under the line of credit.
The Company is not party to any legal proceedings other than ordinary
routine litigation incidental to the Company's business. The Company
believes that the ultimate resolution of these matters will not have a
material adverse effect on the Company's consolidated financial statements
taken as a whole.
10. FOREIGN OPERATIONS
--------------------
The Company primarily operates in three geographic areas, North America,
Europe and Asia Pacific. Corporate assets consist of cash and cash
equivalents, short- and long-term investments, capitalized software and
deferred tax assets.
Geographical area data are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Revenues: 1996 1995 1994
----------------------- -------- --------- ---------
<S> <C> <C> <C>
North America $ 44,811 $ 41,271 $ 50,336
Europe 14,151 12,637 16,575
Asia Pacific 3,872 4,658 2,269
-------- --------- ---------
Total revenues $ 62,834 $ 58,566 $ 69,180
======== ========= =========
YEAR ENDED DECEMBER 31,
Operating income (loss): 1996 1995 1994
------------------------ -------- --------- ---------
North America ($920) ($9,399) $ 1,700
Europe 1,612 (3,329) 5,203
Asia Pacific 108 704 (108)
Unusual charges (1) (2,784) - (23,253)
------- -------- --------
Total operating loss ($1,984) ($12,024) ($16,458)
======= ======== ========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
Identifiable assets at: 1996 1995 1994
---------------------- ------- ------- -------
<S> <C> <C> <C>
North America $ 8,655 $ 9,995 $16,063
Europe 6,672 4,354 6,650
Asia Pacific 2,837 3,015 1,183
Corporate 64,155 65,134 65,938
------- ------- -------
Total assets $82,319 $82,498 $89,834
======= ======= =======
</TABLE>
(1) Unusual charges consists of $2,784,000 and $12,848,000 for the write-
off of purchased in-process research and development for the years
ended December 31, 1996 and 1994, respectively, and $10,405,000 for
the write off-of capitalized software costs and related severance and
other costs for the year ended December 31, 1994.
11. TREASURY STOCK ACQUISITIONS
-----------------------------
During 1995, the Board of Directors authorized the Company to spend up to
$6,000,000 to repurchase shares of its common stock on the open market
over a two-year period for use in connection with its employee stock
option plans and its employee stock purchase plan. Through December 31,
1996, the Company had acquired 492,000 shares of its common stock under
this program for a total cost of $5,626,000.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 1997 Annual Meeting of
Stockholders under the captions "Proposal 1," "Additional Information -
Management" and "Additional Information - Compliance With The Reporting
Requirements of Section 16(A)."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 1997 Annual Meeting of
Stockholders under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 1997 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain Beneficial Owners
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 1997 Annual Meeting of
Stockholders under the caption "Certain Transactions."
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
<TABLE>
<CAPTION>
1. Consolidated Financial Statements Page
----
<S> <C>
Independent Auditors' Report..................................................... 17
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995....... 18
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994................................................................... 19
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994............................................................. 20
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994................................................................... 21
Notes to Consolidated Financial Statements....................................... 22
2. Consolidated Financial Statement Schedule Page
----
Schedule II - Valuation and Qualifying Accounts.................................. 37
</TABLE>
All other financial statement schedules not listed above are omitted
as the required information is not applicable or the information is
presented in the consolidated financial statements or related notes.
3. Exhibits
The following exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
------ -----------------------
3.1 The Company's Amended and Restated Certificate of
Incorporation.(3)
3.2 Bylaws of Registrant.(4)
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.(4)
10.2 1992 Employee Stock Purchase Plan, as amended to date.(7)
10.3 1989 Employee Stock Option Plan and related forms of Incentive
Stock Option Grant and Supplemental Stock Option Grant.(4)
32
<PAGE>
10.4 1986 Employee Stock Purchase Plan and related form of Employee
Stock Purchase Agreement.(4)
10.5 Purchase and Sale Agreement between Registrant and Global
Software, Inc., dated as of August 31, 1990.(4)
10.6 Lease between Registrant and Marathon U. S. Realties, Inc.,
dated October 20, 1988 and Amendment No. 1, dated as of
October 31, 1990.(4)
10.7 Lease between Registrant and Chicago Title and Trust Company,
dated as of December 3, 1990.(4)
10.8 Agreement for Lease between Registrant, Walker Interactive
Products International and Alton House Limited, dated as of
March 18, 1991.(4)
10.9 1993 Non-Employee Directors' Stock Option Plan, as amended to
date.(8)
10.10 1995 Equity Incentive Plan.(2)
10.11 Agreement for the Sale and Purchase of The Solutions Group
Limited by and among Walker Interactive Products
International, and Adrian J. Dixon and Nigel G. Heath,
dated as of June 30, 1995.(1)
10.12 Form of Executive Employment Agreement entered into between
Registrant and certain of its officers.(6)
10.13 1995 Executive Employment Agreement between the Registrant
and Leonard Y. Liu.(5)
10.14 1995 Non-Statutory Stock Option Plan for Non-Officer
Employees, as amended to date.(8)
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule (electronic filing only)
List of Management Contracts and Compensatory Plans:
1992 Employee Stock Purchase Plan, as amended to date.(7)
1989 Employee Stock Option Plan and related form of Incentive
Stock Option Grant and Supplemental Stock Option Grant.(4)
1986 Employee Stock Purchase Plan and related form of Employee
Stock Purchase Agreement.(4)
1993 Non-Employee Directors' Stock Option Plan, as amended to
date.(8)
1995 Non-Statutory Stock Option Plan for Non-Officer Employees,
as amended to date.(8)
1995 Equity Incentive Plan.(2)
Form of Indemnity Agreement entered into between Registrant and
its directors and officers.(4)
33
<PAGE>
Form of Executive Employment Agreement entered into between
Registrant and certain of its officers.
1995 Executive Employment Agreement between the Registrant and
Leonard Y. Liu.(5)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1996.
_______________
(1) Incorporated by reference to the corresponding exhibit to the Current
Report on Form 8-K, filed July 13, 1995.
(2) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1993.
(3) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1992.
(4) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1, as amended (Registration No. 33-45737).
(5) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30,1995.
(6) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1995.
(7) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-8, as amended (Registration No. 333-02942).
(8) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-8, as amended (Registration No. 333-08629).
34
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
SIGNATURES
Pursuant to the requirements of Sections 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.
WALKER INTERACTIVE SYSTEMS, INC.
--------------------------------
(Registrant)
Date: March 21, 1997 By: /s/ LEONARD Y. LIU
----------------------
Leonard Y. Liu
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Leonard Y. Liu and Bruce C. Pollock, and each or
any one of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisiste and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or his or
her substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ LEONARD Y. LIU Chairman of the Board of Directors. March 21, 1997
- ------------------------------ President and Chief Executive Officer
Leonard Y. Liu (Principal Executive Officer)
/s/ BRUCE C. POLLOCK Senior Vice President, Chief Financial March 21, 1997
- ------------------------------ Officer and Assistant Secretary
Bruce C. Pollock (Principal Financial Officer)
/s/ BARBARA M. HUBBARD Vice President, Corporate Controller March 21, 1997
- ------------------------------ (Principal Accounting Officer)
Barbara M. Hubbard
/s/ RICHARD C. ALBERDING March 21, 1997
- ------------------------------ Director
Richard C. Alberding
/s/ TANIA AMOCHAEV March 21, 1997
- ------------------------------ Director
Tania Amochaev
/s/ WILLIAM A. HASLER March 21, 1997
- ------------------------------ Director
William A. Hasler
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
/s/ DAVID C. HODGSON Director March 21, 1997
- ---------------------------
David C. Hodgson
/s/ JOHN M. LILLIE Director March 21, 1997
- ---------------------------
John M. Lillie
/s/ DAVID M. SAYKALLY Director March 21, 1997
- ---------------------------
David M. Saykally
/s/ DAVID C. WETMORE Director March 21, 1997
- ---------------------------
David C. Wetmore
</TABLE>
36
<PAGE>
SCHEDULE II
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Amounts Balance at End
Allowance for Doubtful Accounts: Period Expenses Written-off of Period
- -------------------------------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996 $1,290 $1,076 $782 $1,584
Year Ended December 31, 1995 703 1,353 766 1,290
Year Ended December 31, 1994 265 438 - 703
</TABLE>
37
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Document Page
------ ----------------------- ----
21.1 Subsidiaries 39
23.1 Independent Auditors' Consent 40
38
<PAGE>
Exhibit 21.1
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
SUBSIDIARIES
Walker Interactive Systems Pty. Limited Australia
Walker Interactive Systems (Hong Kong) Limited Hong Kong
Walker Interactive (Singapore) Pte. Limited Singapore
Walker Financial Solutions Limited United Kingdom
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Walker Interactive Systems, Inc. of our report dated February 4,
1997, appearing in this Annual Report on Form 10-K of Walker Interactive
Systems, Inc. for the year ended December 31, 1996 :
Registration Statement No. 33-46721 on Form S-8
Registration Statement No. 33-64424 on Form S-8
Registration Statement No. 33-64426 on Form S-8
Registration Statement No. 33-87022 on Form S-8
Registration Statement No. 333-02942 on Form S-8
Registration Statement No. 333-08629 on Form S-8
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WALKER
INTERACTIVE SYSTEMS, INC. ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,475
<SECURITIES> 24,695
<RECEIVABLES> 12,900
<ALLOWANCES> 1,584
<INVENTORY> 0
<CURRENT-ASSETS> 44,345
<PP&E> 21,673
<DEPRECIATION> 17,341
<TOTAL-ASSETS> 82,319
<CURRENT-LIABILITIES> 28,007
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 46,759
<TOTAL-LIABILITY-AND-EQUITY> 82,319
<SALES> 62,834
<TOTAL-REVENUES> 62,834
<CGS> 27,829
<TOTAL-COSTS> 64,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 86
<INCOME-TAX> 202
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (116)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
