<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19872
WALKER INTERACTIVE SYSTEMS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2862954
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
303 Second Street, San Francisco, CA 94107
-------------------------------------------
(Address of principal executive offices including zip code)
(415) 495-8811
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
-----
There were 14,078,019 Shares of $.001 Par Value Common Stock outstanding as of
November 8, 1999.
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998.............................................................3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1999
and 1998...............................................................................4
Consolidated Statements of Cash Flows for the
three and nine months ended September 30, 1999
and 1998...............................................................................5
Notes to Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................18
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................20
Item 6. Exhibits and Reports on Form 8-K........................................................20
Signatures ........................................................................................21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
ASSETS 30, 1999 30, 1999
---------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,880 $ 15,556
Short-term investments 7,702 5,135
Accounts receivable, net 23,410 30,457
Prepaid expenses 4,636 2,347
---------- ---------
Total current assets 46,628 53,495
Long-term investments 5,431 1,906
Property and equipment, net 4,308 4,962
Capitalized software, net 12,863 18,186
Deferred tax assets, net - 12,501
Other assets 543 4,047
---------- ---------
TOTAL ASSETS $ 69,773 $ 95,097
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 20,326 $ 18,496
Deferred revenue 16,149 14,819
---------- ---------
Total current liabilities 36,475 33,315
Deferred revenue 3,525 1,600
Accrued rent 1,021 954
Other long-term obligations 2,489 2,177
---------- ---------
Total liabilities 43,510 38,046
---------- ---------
Commitments and Contingencies - -
Stockholders' equity
Common stock, $.001 par value: 50,000,000 shares
authorized; issued 14,184,865 shares - September 30,
1999; 14,184,685 shares - December 31, 1998 14 14
Additional paid-in capital 74,116 74,719
Accumulated other comprehensive income 130 232
Accumulated deficit (47,703) (17,662)
Treasury stock at cost (106,666 shares - September 30, 1999;
49,207 shares - December 31, 1998) (294) (252)
---------- ---------
Total stockholders' equity 26,263 57,051
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 69,773 $ 95,097
========== =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
License $ 3,073 $ 3,116 $ 11,241 $ 15,083
Maintenance 7,613 7,857 23,560 23,184
Consulting 10,002 13,739 35,138 35,547
------- ------- -------- --------
Total revenues 20,688 24,712 69,939 73,814
OPERATING EXPENSES:
Costs of revenues:
Costs of licenses, maintenance and consulting 9,997 10,711 32,961 30,969
Amortization of capitalized software 1,297 1,474 3,926 3,544
Sales and marketing 5,129 5,760 16,772 17,097
Product development 3,410 3,033 10,872 9,425
General and administrative 3,501 3,496 10,798 9,392
Write-down of capitalized research and
development and associated goodwill - - 9,003 -
Restructuring charges 559 - 3,693 -
------- ------- -------- --------
Total operating expenses 23,893 24,474 88,025 70,427
Operating income (loss) (3,205) 238 (18,086) 3,387
Interest income, net 273 250 746 834
------- ------- -------- --------
Income (loss) before income taxes (2,932) 488 (17,340) 4,221
Income tax expense 200 173 12,701 1,517
------- ------- -------- --------
NET INCOME (LOSS) $(3,132) $ 315 $(30,041) $ 2,704
======= ======= ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ (0.22) $ 0.02 $ (2,14) $ 0.19
======= ======= ======== ========
Shares used in computing
basic net income (loss) per share 14,126 14,042 14,057 13,998
======= ======= ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ (0.22) $ 0.02 $ (2,14) $ 0.18
======= ======= ======== ========
Shares used in computing
diluted net income (loss) per share 14,126 14,973 14,057 14,881
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(30,134) $2,704
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,008 5,351
Tax benefit of nonqualified stock options - 218
Write-down of capitalized research and
development and associated goodwill 9,003 -
Changes in operating assets and liabilities:
Accounts receivable, net 7,047 (5,518)
Prepaids & other assets (2,289) (295)
Accounts payable & accrued liabilities 2,308 (2,175)
Deferred tax asset 12,501 1,517
Deferred revenue 3,255 (1,365)
Other 65 558
-------- --------
Net cash provided by operations 7,764 995
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised 381 1,997
Treasury stock acquired (1,026) (2,114)
Capital lease and loan payments (109) (59)
Repayment of borrowings - (1,422)
-------- --------
Net cash used by financing activities (754) (1,598)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments (12,042) (3,706)
Maturities of short-term investments 4,375 10,200
Sales of short-term investments 1,507 5,510
Purchases of property (1,148) (1,962)
Additions to capitalized software (4,377) (5,659)
Other (1) 10
-------- --------
Net cash provided (used) by investing activities (11,686) 4,393
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,676) 3,790
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,556 7,646
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 10,880 $ 11,436
======== ========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements and include all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position,
operating results and cash flows for those periods. Results for the
interim periods are not necessarily indicative of the results for the
entire year. These consolidated financial statements and any notes
thereto, should be read in conjunction with the audited consolidated
financial statements included in the Walker Interactive Systems, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998.
2. EARNINGS PER SHARE
------------------
The Company calculates basic earnings per share ("EPS") and diluted
EPS in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". Basic EPS is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding for that period. Diluted EPS takes into account the
effect of dilutive instruments, such as stock options, and uses the
average share price for the period in determining the number of
incremental shares that are to be added to the weighted average number
of shares outstanding.
The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 14,126 14,042 14,057 13,998
Add: effect of dilutive securities - 931 - 883
------ ------ ------ ------
Shares used to compute diluted EPS 14,126 14,973 14,057 14,881
====== ====== ====== ======
</TABLE>
6
<PAGE>
3. COMPREHENSIVE INCOME
--------------------
SFAS No. 130 requires disclosure of total non-stockholder changes in
equity, which include unrealized gains and losses on securities
classified as available-for-sale under SFAS No. 115, foreign currency
translation adjustments accounted for under SFAS No. 52, and minimum
pension liability adjustments made pursuant to SFAS No. 87.
The reconciliation of net income (loss) to comprehensive income (loss)
for the three and nine months ended September 30, 1999 and 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(3,132) $ 315 $(30,041) $2,704
Other comprehensive income (loss) 128 160 (102) 150
------- ----- -------- ------
Total comprehensive income (loss) $(3,004) $ 475 $(30,143) $2,854
======= ===== ======== ======
</TABLE>
4. RESTRUCTURING CHARGES
---------------------
During the quarter ended June 30, 1999, the Board of Directors
approved a plan to realign Walker's focus on its core financial and
analytic applications. Associated with this change in strategy, the
Board of Directors approved steps to restructure its operations to
increase operating efficiencies. The Company will focus on the Tamaris
and Horizon product lines, specifically investing in Web-enabled
functionality. The Company will continue to support its Aptos and
IMMPOWER customers, focusing sales and marketing on certain geographic
regions, but will limit its investment in these applications. During
the quarter ended June 30, 1999, the Company recorded a pretax charge
of $12.1 million in connection with the change in strategic direction
and the related cost restructuring.
The Company evaluates capitalized research and development carrying
amounts, and associated goodwill, against related estimated
undiscounted cashflows. During the second quarter of 1999 the
evaluation, based on the change of strategic direction, indicated that
the future undiscounted cashflows were not sufficient to recover the
carrying values of some assets. These assets were adjusted to net
realizable value resulting in a second quarter charge of $5.3 million
associated with IMMPOWER and Aptos capitalized research and
development costs and $3.2 million related to goodwill. The Company
additionally wrote-off $0.5 million in capitalized research and
development costs which had no future value in the same period.
Costs associated with office consolidations in Europe and North
America resulted in a second quarter pretax charge of $3.1 million
which was required to cover costs of reducing certain areas of the
workforce and facilities to levels more appropriate to current and
expected business requirements. A charge of $2.0 million was
recognized to cover costs associated with excess facilities. The
Company intends to continue to search for tenants to sublet any vacant
excess facilities. The Company also recognized a charge of $1.1
million due to the reduction in workforce; 40 employees were
terminated in the quarter ended June 30, 1999 or will be terminated as
a result of the Company's realignment strategy. Of the total, 14 were
in product development, 13 were in administrative and finance
positions, nine were engaged in sales and marketing, and four were in
customer support. All terminated employees were informed of their
terminations by June 30, 1999. During the quarter ended September 30,
1999, the Company recorded an additional charge of $0.6 million
associated with an additional five percent reduction in its workforce
and further consolidation of its facilities.
7
<PAGE>
Restructuring charges taken during the second and third quarter of 1999 and
related charges against respective liabilities as of September 30, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
Remaining expected
Restructuring Balance at charges to liability
Charges Charges to liability September 30, 1999 in 1999
------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Termination payments
to employees $ 1,547 $ (919) $ 628 $ (236)
Facility closures 2,146 (357) 1,789 (277)
Write-down of capitalized
research and development 5,788 (5,788) - -
Goodwill impairment 3,215 (3,215) - -
------------------------------------------------------------------------------------
$12,696 $(10,279) $2,417 $ (513)
------------------------------------------------------------------------------------
<CAPTION>
Expected
balance at
Dec. 31, 1999
-------------
<S> <C>
Termination payments
to employees $ 392
Facility closures 1,512
Write-down of capitalized
research and development -
Goodwill impairment -
--------------
$ 1,904
--------------
</TABLE>
Subsequent to December 31, 1999, the remaining expected charges against
liabilities will be attributable to remaining termination payments to
employees and future lease payments on excess facilities.
8
<PAGE>
WALKER INTERACTIVE SYSTEMS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The report on this Form 10-Q contains forward-looking statements, including
statements related to prospects associated with certain product lines, working
capital requirements and Year 2000 related issues. Discussions containing such
forward-looking statements may be found in the material set forth in this
section, generally and specifically herein under the captions "Restructuring
Charges", "Liquidity and Capital Resources", "Year 2000 Readiness" and
"Additional Risk Factors." Actual events or results may differ materially from
those discussed herein. The Company disclaims any obligation to update these
forward-looking statements as a result of subsequent events. The risk factors
on pages 13 through 18, among others, should be considered in evaluating the
Company's prospects and future financial performance.
Walker Interactive Systems, Inc. (hereinafter "Walker" or the "Company") was
incorporated in California in 1973 and reincorporated in Delaware in March 1992.
Walker designs, develops, markets and supports, on an international basis, a
family of network computing and client server based enterprise wide financial,
operational and analytic application software products and related services.
These products and services enable organizations to improve profitability
through the availability of timely and accurate information, reflect new
business processes as a result of organizational change and exploit the latest
technological advances in order to reduce costs.
Walker designs its software products specifically for the network computing and
client/server models and believes that its architecture is among the most
scalable and adaptable available for enterprise-level financial and analytical
applications software. The Company's strategy is to offer enterprise wide
financial, operational and analytical application software solutions, and
related services, to a variety of industries with best-of-breed software
products utilized in a wide variety of cross-industry solutions. The Walker
applications support and enhance enterprise-wide financial, operational and
analytic processes, including planning, budgeting, forecasting, consolidation,
financial management, performance measurement, revenue and procurement
management. The Company's software products utilize the Microsoft Windows
operating systems on the desktop, NT, UNIX and OS/390 operating systems on the
server and industry-leading On Line Analytical Processing ("OLAP"), Relational
Database Management Systems ("RDBMS") including Hyperion Solutions Essbase,
IBM's DB2, Oracle Express and Microsoft SQL/Server.
The Tamaris product line represents the Company's core suite of business and
financial solutions utilizing the power of the enterprise server, while the
Aptos suite of financial applications runs on UNIX and Windows NT servers. The
Company also develops and markets Horizon best-of-breed analytic applications
which provide financial reporting, budgeting and financial consolidation
solutions. The Horizon analytic applications products integrate with Tamaris
and also work standalone with leading Enterprise Resource Planning ("ERP")
applications.
The Company's software products include productivity tools that allow the
Company's applications to be customized to fit the customer's particular
requirements. The Company complements its software products by providing
specialized professional consulting services to assist customers with
customization and implementation of financial, analytical and operational
solutions to fuel business advantage.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services.
RESTRUCTURING CHARGES
- ---------------------
During the quarter ended June 30, 1999, the Board of Directors approved a plan
to realign Walker's focus on its core financial and analytic applications.
Associated with this change in strategy, the Board of Directors approved steps
to restructure its operations to increase operating efficiencies. The Company
will focus on the Tamaris and Horizon product lines, specifically investing in
Web-enabled functionality. The Company will continue to support its Aptos and
IMMPOWER customers, focusing sales and marketing on certain geographic regions,
but will limit its investment in these applications. During the quarter ended
June 30, 1999, the Company recorded a pretax charge of $12.1 million in
connection with the change in strategic direction and the related cost
restructuring.
9
<PAGE>
The Company evaluates capitalized research and development carrying amounts, and
associated goodwill, against related estimated undiscounted cashflows. During
the second quarter of 1999, the evaluation, based on the change of strategic
direction, indicated that the future undiscounted cashflows were not sufficient
to recover the carrying values of some assets. These assets were adjusted to net
realizable value resulting in a second quarter charge of $5.3 million associated
with IMMPOWER and Aptos capitalized research and development costs and $3.2
million related to goodwill. The Company additionally wrote-off $0.5 million in
capitalized research and development costs which had no future value in the same
period.
Costs associated with office consolidations in Europe and North America resulted
in a second quarter pretax charge of $3.1 million which was required to cover
costs of reducing certain areas of the workforce and facilities to levels more
appropriate to current and expected business requirements. A charge of $2.0
million was recognized to cover costs associated with excess facilities. The
Company intends to continue to search for tenants to sublet any vacant excess
facilities. The Company also recognized a charge of $1.1 million due to the
reduction in workforce; 40 employees were terminated in the quarter ended June
30, 1999 or will be terminated as a result of the Company's realignment
strategy. Of the total, 14 were in product development, 13 were in
administrative and finance positions, nine were engaged in sales and marketing,
and four were in customer support. All terminated employees were informed of
their terminations by June 30, 1999. During the quarter ended September 30,
1999, the Company recorded an additional charge of $0.6 million associated with
an additional five percent reduction in its workforce and further consolidation
of its facilities.
Restructuring charges taken during the second and third quarter of 1999 and
related charges against respective liabilities as of September 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Remaining expected
Restructuring Balance at charges to liability
Charges Charges to liability September 30, 1999 in 1999
------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Termination payments
to employees $ 1,547 $ (919) $ 628 $ (236)
Facility closures 2,146 (357) 1,789 (277)
Write-down of capitalized
research and development 5,788 (5,788) - -
Goodwill impairment 3,215 (3,215) - -
------------------------------------------------------------------------------------
$12,696 $(10,279) $ 2,417 $ (513)
------------------------------------------------------------------------------------
<CAPTION>
Expected
balance at
Dec. 31, 1999
-------------
<S> <C>
Termination payments
to employees $ 392
Facility closures 1,512
Write-down of capitalized
research and development -
Goodwill impairment -
--------------
$ 1,904
--------------
</TABLE>
Subsequent to December 31, 1999, the remaining expected charges against
liabilities will be attributable to remaining termination payments to employees
and future lease payments on excess facilities.
The following paragraph contains forward-looking statements. Walker will
continue to evaluate its reserves in the future which may result in additional
charges associated with the Company's change in strategy or ongoing cost
reduction program. There can be no assurance that Walker will or will not
dispose of or sell assets, liabilities and/or intellectual property associated
with the IMMPOWER or Aptos product lines.
RESULTS OF OPERATIONS
- ---------------------
REVENUES. The Company recorded total revenues of $20.7 million and $24.7
million for the three months ended September 30, 1999 and 1998, respectively.
The 16 percent decrease is primarily attributable to a decrease in consulting
revenues. For the first nine months of 1999, total revenues for the Company
were $69.9 million compared to $73.8 million for the same period last year. The
five percent decrease in year-to-date total revenues is primarily a result of
lower license revenues in 1999 when compared to the prior year.
License revenues for the current quarter remained flat from the prior year at
$3.1 million. License revenues generated from North American operations
increased over the prior year but were offset by declines in revenues generated
in Europe and in the Asia Pacific region. For the first nine months of 1999,
license revenues decreased $3.9 million or 25 percent from $15.1 million in 1998
to $11.2 million in 1999. The Company's license revenue decrease is primarily
attributable to a decrease in year-to-date license revenues in the European
region. The Company believes the decrease in license revenues in 1999 is
primarily attributable to a continued softness in the enterprise financial
10
<PAGE>
application software industry. The Company believes that potential customers
are utilizing resources to ensure that current software applications are Year
2000 compatible instead of purchasing and implementing new software
applications. Additionally, continued pressure from the Year 2000 transition
and a lengthening of the sales cycle relative to all product lines negatively
impacted year-to-date license revenues. The ongoing downturn in the Asia
Pacific economy continues to restrict license revenue growth in that region.
Consulting revenues are generated from new and existing customers for services
related to training, implementation, customization, migration, enhancement, Year
2000 readiness engagements, best practice consulting engagements and other
special projects. The Company generates a majority of its consulting revenues
from implementation-related projects. Consulting revenues for the third quarter
were $10.0 million, a decrease of $3.7 million or 27 percent from $13.7 million
in the same period of the prior year. Consulting revenues were negatively
impacted during the quarter as decreases in license revenues eroded the
Company's consulting service revenue base. Further affecting consulting
revenues was the completion of several large engagements during the quarter
which were not replaced by engagements with similar revenue streams. For the
nine months ended September 30, 1999, consulting revenues of $35.1million
decreased $0.4 million or one percent from $35.5 million for the same period in
1998.
COSTS OF LICENSES, MAINTENANCE AND CONSULTING. Although the cost of licenses,
maintenance and consulting, in absolute dollars, decreased seven percent, the
costs represented 48 percent and 43 percent of total revenues for the three
months ended September 30, 1999 and 1998, respectively. The increase in the
ratio of costs of licenses, maintenance and consulting over total revenues for
the third quarter of 1999 is primarily attributable to lower revenues associated
with the Company's consulting services. Consulting revenues for the third
quarter decreased 27 percent from third quarter of 1998, while the related cost
structure decreased slightly. For the nine months ended September 30, 1999,
costs of licenses, maintenance and consulting represented 47 percent of total
revenues compared to 42 percent for the same period in 1998. The decrease in
total license revenues, which generally have a higher profit margin compared to
consulting revenue, has negatively impacted cost of licenses, maintenance and
consulting as a percent of total revenues.
AMORTIZATION OF CAPITALIZED SOFTWARE. Amortization of capitalized software
decreased $0.2 million or 12 percent in the third quarter of 1999 compared to
the same period in 1998. The decrease is primarily attributable to a decrease
in amortization associated with products that have been written off as part of
the Company's restructuring actions in the second quarter of 1999. For the nine
months ended September 30, 1999, amortization of capitalized software increased
11 percent to $3.9 million compared to $3.5 million for the same period in 1998.
The increase is primarily due to the first half impact of additional
amortization associated with the Company's ongoing practice of evaluating the
lives of capitalized software products and additional amortization resulting
from recent product releases. Offsetting the increase in amortization is the
decrease in amortization associated with products which have been written off as
part of the Company's restructuring actions in the second quarter of 1999.
SALES AND MARKETING. Sales and marketing expenses decreased $0.6 million or 11
percent to $5.1 million for the three months ended September 30, 1999 compared
to $5.8 million for the same period in 1998. For the first nine months of 1999,
sales and marketing expenses decreased $0.3 million or two percent to $16.8
million compared to $17.1 million for the same prior year period. Cost savings
associated with the reductions in North America headcount and marketing
promotions in 1999 were partially offset by additional expenses associated with
sales offices opened during the first quarter of 1999 and increased sales
expenses in Europe and Asia Pacific over the prior year.
11
<PAGE>
PRODUCT DEVELOPMENT. Product development-related expenses, excluding
amortization of capitalized software, are detailed as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product development costs, including additions
to capitalized software (gross) $ 4,415 $ 4,984 $15,011 $15,095
Less: additions to capitalized software (1,005) (1,951) (4,139) (5,670)
------- ------- ------- -------
Product development expenses $ 3,410 $ 3,033 $10,872 $ 9,425
======= ======= ======= =======
</TABLE>
During the first quarter of 1999, the Company acquired $0.2 million in software
technology which complemented internally developed products and related
technology. Excluding the acquired software, gross product development expenses
decreased due to headcount reductions resulting from the second quarter of 1999
realignment of strategic direction and restructuring. Additions to capitalized
software, in absolute dollars, decreased as a result of lower gross product
development expenses. Capitalized software additions in absolute dollars and as
a percentage of gross product development costs decreased from the prior year as
more product development resources were allocated to non-capitalizable projects.
Historical additions to capitalized software, in absolute dollars and as a
percentage of gross product development costs, are not a reliable indicator of
additions to capitalized software that will be incurred in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were flat at
$3.5 million for the three months ended September 30, 1999 and 1998,
respectively. For the first nine months of 1999, general and administrative
expenses increased $1.4 million to $10.9 million compared to $9.4 million for
the same period in 1998. The 15 percent increase for the first nine months of
1999 is attributable to increased usage of outside contractors and increased
labor expenses during the first half of 1999.
INCOME TAX EXPENSE. During the quarter ended September 30, 1999, the Company
recorded an income tax expense of $0.2 million associated with foreign
withholding taxes and foreign tax accruals.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities provided cash of $7.8 million in the first
nine months of 1999 and $1.0 million during the comparable 1998 period.
Increased collections of outstanding receivables and the change in deferred
revenue were the primary factor contributing to cash provided from operations.
These impacts were offset by the Company's net loss of $30.1 million for the
nine months ended September 30, 1999.
Financing activities used $0.7 million in cash during the first nine months of
1999 and $1.6 million during the same period in 1998. There were proceeds of
$0.4 million from the employee stock purchase plan issuances during the first
nine months of 1999 compared to $2.0 million from employee stock purchase plan
issuances and stock option exercises in the comparable 1998 period. The
Company used $1.0 million in cash in the first nine months of 1999 and $2.1
million in cash in the comparable 1998 period for the acquisition of common
stock from the open market. All stock repurchases were made pursuant to
resolutions of the Company's Board of Directors authorizing the repurchase of
the Company's outstanding shares of common stock, which in aggregate is not to
exceed a total cost of $17.5 million. As of September 30, 1999, the Company had
acquired 1,049,500 shares of its common stock at a cost of $11.1 million. As of
September 30, 1999, the Company had reissued 974,000 of the repurchased shares
in connection with the Company's employee stock purchase plan, one of its
employee stock option plans and the December 1997 acquisition of Revere, Inc.
("Revere").
In connection with the acquisition of Revere, the Company assumed a line of
credit with an outstanding balance of $1.5 million. The outstanding balance on
the assumed line of credit was subsequently paid in full in January 1998.
The Company has a line of credit in the amount of $6.0 million, secured by
marketable securities. The line of credit expires on December 31, 1999. The
Company has never borrowed against this line of credit.
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Investing activities used cash of $11.7 million in the first nine months of 1999
compared to providing cash of $4.3 million for the same period in 1998. The
increase in cash used is primarily attributable to an increase of investment
purchases in 1999.
As of September 30, 1999, the Company's principal sources of liquidity included
cash, cash equivalents and short- and long-term investments aggregating $24.0
million. The following sentence is a forward looking statement. The Company
believes that its principal sources of liquidity, together with funds expected
to be generated from operations, will satisfy the Company's currently
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
YEAR 2000 READINESS
- -------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment and software and devices with imbedded technology that are time-
sensitive may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
The Company has completed an assessment to determine the effect that the Year
2000 issue will have on it. The Company believes that its current commercial
application software products generally offered for license by the Company to
end-user customers are Year 2000 ready. However, certain versions of these
products currently installed at customers' sites will require upgrading or other
modifications to become Year 2000 ready. The Company has identified those
affected customers who are on the Company's warranty maintenance program, has
contacted those customers and is assisting those customers to assess their
readiness. The Company is making available to those customers a Year 2000 ready
release of its software and will assist such customers to become Year 2000
ready. The following sentence is a forward-looking statement. The Company
believes that the costs associated with making certain versions of the Company's
products Year 2000 ready will not be material to the Company's business, results
of operations or financial condition.
The Company has completed an assessment of its computer equipment and software,
including information technology systems, such as accounting, data processing
and telephone/PBX systems, and non-information technology systems, such as fax
machines and alarm systems, to determine if they are Year 2000 ready. The
following three sentences are forward-looking statements. The Company believes
that certain of its non-critical computer equipment and software will require
replacement or modification, at a total cost which is not material to the
Company's results of operations or financial condition. The Company believes
that even if such replacements or modifications were not completed, the Year
2000 issue would not have a material adverse effect on the Company's business,
results of operations or financial condition. In addition, even if the
Company's vendors or suppliers fail to become Year 2000 ready in a timely
manner, the Company believes that such failure would not have a material adverse
effect on the Company's business, results of operations or financial condition.
The costs and impact of the Year 2000 issue are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, the
functioning of its products in accordance with specifications and other factors.
There can be no assurance that these estimates will prove to be accurate and
actual results could differ from those currently anticipated. Specific factors
that could cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues and the
functioning of the Company's products in accordance with specifications. In
addition, variability of definitions of "Year 2000 ready" and the number of
products that the Company has sold, may lead to claims for which the impact on
the Company is not currently estimable. No assurance can be given that the
aggregate cost of defending and resolving such claims, if any, would not
materially adversely affect the Company's business, results of operations or
financial condition.
OTHER MATTERS
- -------------
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On September 30, 1999, the Company announced the appointment of Frank M.
Richardson as its Chief Executive Officer ("CEO"). Leonard Y. Liu, the former
CEO, will continue as Chairman of the Board.
ADDITIONAL RISK FACTORS
- -----------------------
The Company operates in a rapidly changing environment that involves numerous
risks and uncertainties which could have a material adverse effect on the
Company. The following discussion details some, but not all, of these risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES.
There can be no assurance that the Company will not need to raise substantial
additional capital to fund its operations in the future. There can be no
assurance that additional financing will be available on acceptable terms or
will be available at all.
FLUCTUATION IN OPERATING RESULTS.
The Company's operating results fluctuate as a result of a variety of factors
including:
(i) the execution of new license agreements;
(ii) the shipment of software products;
(iii) customer acceptance criteria for services performed;
(iv) completion of milestone or other significant development
requirements pursuant to the Company's license agreements;
(v) the financial terms of consulting agreements and the inclusion of
fixed as opposed to variable pricing;
(vi) third-party royalty payments for licensed software;
(vii) the demand for the Company's products and services;
(viii) changes in the Company's product mix;
(ix) the development and launch of new products, and the life cycles of
the Company's existing products;
(x) research and development expenditures required to update and expand
the Company's product portfolio and related third-party consulting
costs;
(xi) sales and marketing expenses generally related to the entry into new
markets with new or existing products and maintenance of market
share in existing markets;
(xii) acquisitions and the integration and development of acquired
entities or products;
(xiii) competitive conditions in the industry; and
(xiv) general economic conditions.
As a result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
The Company's quarterly operating results are particularly dependent on the
number of license agreement bookings executed in each quarter. The amount of
quarterly bookings has varied substantially from quarter to quarter due to a
variety of reasons including:
(i) a high proportion of license agreements are negotiated during the
latter part of each quarter and may not be completed before the
quarter end;
(ii) the sales cycles for some of the Company's products are relatively
long due to the Company's focus on "enterprise solutions" as opposed
to individual products, which adds complexity to the customer's
selection, negotiation and approval process;
(iii) the amount related to each booking may vary significantly due to the
need for different solutions for different customers;
(iv) procurement procedures may vary from customer to customer, which may
affect the timing of the bookings;
(v) customers may continue to forego or delay software purchases due to
increased attention and spending on Year 2000 related projects;
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(vi) the period for a customer to complete product evaluations and to
complete any subsequent purchase approval may be delayed due to
resource limitations; and
(vii) economic, political and industrial conditions can adversely affect
business opportunities without notice.
In addition, bookings that are executed during a particular quarter may not be
recognized as revenue during such quarter because such bookings may not have met
the Company's revenue recognition criteria. No assurance can be given that the
Company will be able to effect new bookings in accordance with historical
results or management's expectations, and the inability of the Company to do so
could have a material adverse effect on the Company's operating results.
The Company believes that Year 2000 pressures have caused customers to forego or
delay the licensing of new software as they utilize resources to ensure that
their existing software products are Year 2000 ready. Continuation of this
trend will have an adverse impact on Company revenues and results of operations.
There can be no assurance that revenues will return to historical levels or
obtain historical growth rates in the Year 2000 or beyond.
While the Company typically sells its software under a standard license
agreement, license agreements associated with large enterprise solutions often
require the negotiation of terms and conditions that differ substantially from
the Company's standard license agreement terms. The negotiation of these
agreements may extend the sales cycle. The Company may not always obtain terms
and conditions that permit the recognition of revenue upon shipment of the
licensed product or under the percentage of completion method of contract
accounting rules. Accordingly, revenue may not be recognized after shipment of
a product because specified milestones have not been met or because applicable
services have not been completed or cash is secured.
The Company has entered and expects to enter into fixed-price consulting
agreements, particularly in response to increased competition in the industry.
The Company has recognized lower profit margins on certain fixed-price service
agreements when compared to variable agreements. No assurance can be given that
the Company will be able to negotiate fixed-price agreements on terms that will
allow the Company to retain its historical operating margins.
The Company has historically generated a majority of its consulting revenue from
pre- and post-implementation services. Recently, the Company has provided
services that include, but are not limited to, Year 2000 readiness engagements,
best practice solution engagements and other hardware and software solutions.
The Company intends to continue its pursuit of consulting engagements for which
the Company believes it is qualified. There can be no assurance that these
engagements will result in profit margins equal to or greater than those
engagements that are specific to a customer's product implementation. Also,
there can be no assurance that consulting revenue generated from non-
implementation-related projects will continue in the future.
Employee- and facility-related expenditures comprise a significant portion of
the Company's operating costs and expenses, and are therefore relatively fixed
over the short term. In addition, the Company's expense levels are based, in
significant part, on the Company's forecasted revenue. If revenue levels fall
below expectations, net income is likely to be adversely affected. There can be
no assurance that the Company will be profitable on a quarterly or annual basis
in the future. Any of the foregoing factors could cause the Company's future
operating results to fall below the expectations of public securities market
analysts, which could have an adverse effect on the trading price of the
Company's common stock. See "Volatility of Stock Price."
RELIANCE ON THIRD PARTY TECHNOLOGY.
The Company generates revenue from internally developed software products, some
of which utilize technology licensed from third parties. The Company expects to
continue utilizing third party technology and may enter into agreements with
additional business partners. If sales of software utilizing third party
technology increase disproportionately, gross margins may be below historical
levels due to third party royalty obligations. There can be no assurance that
the third parties will renew existing agreements with the Company or will not
require financial conditions which are unfavorable to the Company. In addition,
there can be no assurance that existing third party agreements will not be
terminated.
INDUSTRY.
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Certain software companies, including the Company, have experienced significant
economic downturns as a result of technological shifts, competitive pressures
and uncertainties caused by the Year 2000 transition. These downturns are
characterized by decreased product demand, price erosion, work slowdowns and
layoffs. The Company's operations may, in the future, experience substantial
fluctuations from period to period because of such industry patterns and general
economic and political conditions which could affect the timing of orders from
customers. There can be no assurance that such factors will not have a
materially adverse effect on the Company's business, operating results or
financial condition.
INTERNATIONAL.
The Company plans to increase its presence in international markets by marketing
its Tamaris, Horizon and consulting and services products. The Aptos and
IMMPOWER product lines will be focused in the geographic areas that have
traditionally proven successful. Risks associated with such pursuits include,
but are not limited to, the following:
(i) changing market demands,
(ii) economic and political conditions in foreign markets,
(iii) foreign exchange fluctuations,
(iv) longer collections cycles,
(v) difficulty in managing a geographically dispersed organization and
(vi) changes in international tax laws.
The downturn in the Asia Pacific business climate had and continues to have an
adverse effect on some market opportunities. Operating results are likely to be
adversely affected if the Company's expansion into international markets is not
successful.
COMPETITION.
The business and financial applications software market for complex
organizations is intensely competitive. The Company's principal competitors
with Tamaris solutions are SAP AG, Oracle Corporation and PeopleSoft, Inc. With
the Horizon suite of products, the Company principally competes with Hyperion
Solutions Corporation, and Comshare, Inc. With Aptos solutions, the Company
principally competes with Oracle Corporation, Lawson Software, Inc., Platinum
Software, Inc., and Systems Union Group Ltd. With the IMMPOWER suite of
products, the Company principally competes with Datastream/SQL, Indus
International, Marcam, Mincom, PSDI and SAP AG.
The Company also competes to a lesser extent with other independent software
application vendors. Some of the Company's current and potential competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. Some of these competitors also offer business application
products not offered by the Company, primarily in the areas of human resources
and manufacturing. However, Walker remains one of the few companies committed
to providing and enhancing applications for the mainframe environment. Most of
the competitors listed above compete with Walker by offering UNIX-based
applications.
The Company encounters competition from a broader range of firms in the market
for professional services. Principal competitors include Andersen Consulting,
IBM Global Services and the consulting divisions of the major accounting firms.
These competitors possess greater resources than the Company. Niche consulting
firms that specialize in the Company's products also compete with the Company
primarily on the basis of price.
The principal competitive factors in the market for business and financial
applications software and services include:
(i) product functionality,
(ii) flexibility,
(iii) portability,
(iv) integration,
(v) reliability,
(vi) performance,
(vii) product availability,
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(viii) speed of implementation,
(ix) quality of customer support and user documentation,
(x) vendor reputation,
(xi) experience,
(xii) financial stability,
(xiii) cost effectiveness, and
(xiv) price.
The Company believes that it competes favorably with respect to these factors.
There can be no assurance, however, that the Company will be able to compete
successfully in the future.
RAPID TECHNOLOGICAL CHANGE.
The software industry is characterized by rapid technological change. The pace
of change has accelerated due to advances in mainframe and client/server
technology and the growth in Internet, Intranet and extranet utilization. The
Company expects to evaluate potential opportunities and may invest in those
which are compatible with the Company's strategic direction. However, there can
be no assurance that any such investments will be profitable. The Company's
products are also designed primarily for use with certain mainframe and
client/server systems. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete. Accordingly, the Company's future success depends in part upon its
ability to continue to enhance its current products and to develop and introduce
new products that respond to evolving customer requirements and keep pace with
technological development and emerging industry standards, such as new operating
systems, hardware platforms, interfaces and third party applications software.
There can be no assurance that:
(i) 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;
(ii) the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of
such products and enhancements; or
(iii) any new products or enhancements that it may introduce will achieve
market acceptance.
PRODUCT DEVELOPMENT.
The Company's continued success is dependent on its continued ability to
introduce, develop and market new and enhanced versions of its software
products, although there can be no assurance that such ability can be
maintained. The Company plans to continue its investment in product development
in future periods. However, there can be no assurance that revenues will be
sufficient to support the future product development that 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
assurance that the Company's new or upgraded products will be accepted, will not
be delayed or canceled, or will not contain errors or "bugs" that could affect
the performance of the product or cause damage to users' data.
PROPRIETARY RIGHTS.
The Company regards its products as proprietary. Through its license agreements
with customers and its internal security systems, confidentiality procedures and
employee agreements, the Company has taken steps to maintain the trade secrecy
of its products. However, there can be no assurances that misappropriation will
not occur. In addition, the laws of some countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
There can be no assurance that the confidentiality of any proprietary
information will provide any meaningful competitive advantage. The Company has
no patents relating to its products. The Company believes that, because of the
rapid pace of technological change in the computer software industry, patents
and copyrights are less significant than factors such as the knowledge, ability
and experience of the Company's employees, frequent product enhancements and the
timeliness and quality of support services. There can be no assurance that the
Company's current efforts to retain its products as proprietary will be
adequate.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against thex Company in the future
with respect
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to current or future products or that any such assertions will not
require the Company to enter into royalty arrangements or result in costly
litigation.
PRODUCT LIABILITY.
The Company's license agreements with its customers contain provisions designed
to limit the Company's exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in such
license agreements may not be enforced as a result of international, federal,
state and local laws or ordinances or unfavorable judicial decisions. The
license and support of the Company's software for use in mission critical
applications creates the risk of product liability claims against the Company.
Damage liability or injunctive relief resulting from such a claim could cause a
materially adverse impact on the Company's business, operating results and
financial condition.
EMPLOYEES.
The Company believes that its continued success will depend in large part upon
its ability to attract, train and retain highly-skilled technical, sales,
marketing and managerial personnel. Because of a high level of demand,
competition for such personnel is intense and the Company sometimes experiences
difficulty in locating candidates with appropriate qualifications or within
desired geographic locations. Revenue growth is dependent on the Company's
ability to attract, train, retain and productively manage such personnel.
ACQUISITION-RELATED RISKS.
The Company has acquired and may continue to acquire complimentary businesses,
products or technology. The process of integrating an acquired company's
business into the Company's operations may result in unforeseen operating
difficulties and expenditures and may require significant management attention
that would otherwise be available for the ongoing development of the Company's
business. There can be no assurance that any anticipated benefits of an
acquisition will be realized. Future acquisitions by the Company could result
in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and amortization related to goodwill and other
intangible assets, which could materially affect the Company's operating results
and financial condition. Acquisitions involve numerous risks, including
difficulties in the assimilation of operations, technologies and products of the
acquired company, risks associated with entering markets in which the Company
has no or limited direct prior experience and the potential loss of key
employees of the acquired company.
VOLATILITY OF STOCK PRICE.
High technology companies, including the Company, frequently experience
volatility in their common stock prices. Factors such as quarterly fluctuations
in results of operations, announcements of technological innovations by the
Company or its competitors or the introduction of new products by the Company or
its competitors and macroeconomic conditions in the computer hardware and
software industries generally may have a significant adverse impact on the
market price of the Company's stock. If revenues or earnings in any quarter
fail to meet the expectations of the investment community, there could be an
immediate impact on the Company's stock price. In addition, the Company has
issued shares and stock options which if sold directly or exercised and sold on
the open market in large concentrations, could cause the Company's stock price
to decline in the short term. Furthermore, the stock market has from time to
time experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies, in some cases
unrelated to the operating performance of those companies. These broad market
fluctuations may materially adversely affect the market price of the stock of
the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has U.S. dollar interest-bearing investments that are subject to
interest rate risk. The Company analyzed its investments at year-end to
determine the sensitivity to interest rate changes. The fair values of these
instruments were determined by net present values. The Company's sensitivity
analysis used the same change in interest rates for all maturities. All other
factors were held constant. If interest rates increased by 10 percent the
expected effect on net income related to the Company's investments would be
immaterial.
The majority of the Company's revenues are denominated in the U.S. dollar. The
Company does not engage in interest rate swaps or enter into foreign currency
forward contracts.
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No material changes have occurred since December 31, 1998.
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PART II. OTHER INFORMATION
- ---------------------------
Item 1. LEGAL PROCEEDINGS
In September 1999, Commercial Data Servers, Inc., a California
corporation, dba Xbridge systems, inc. ("CDS"), filed a civil action against the
Company and International Business Machines Corp., a New York corporation
("IBM"), in the Superior Court of the State of California, County of San
Francisco. The action alleges that the Company and IBM acted to injure
competition in alleged violation of California's antitrust statute, prohibiting
group boycotts, exclusive dealing arrangements and attempts to monopolize, and
California's unfair competition statute, prohibiting unfair, unlawful and/or
fraudulent business practices. CDS requested that the court grant CDS
declaratory relief and monetary relief in an unspecified amount, including
restitution and disgorgement of certain amounts, treble damages, attorneys' fees
and costs and interest. The Company filed its answer to CDS' complaint in
October 1999. IBM removed the action to the United States District Court, San
Jose Division, for the Northern District of California in October 1999, and
subsequently filed a motion to dismiss. The following sentence contains forward-
looking statements. Although no assurance can be given, the Company believes
that CDS' claims against the Company are without merit and that the final
resolution of this matter will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.20 Form of Executive Severance Benefits Agreement entered into
between the registrant and certain of its employees.
27.1 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1999.
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WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALKER INTERACTIVE SYSTEMS, INC.
--------------------------------
(Registrant)
Date: November 12, 1999 By: /s/ Michael B. Shahbazian
----------------- -------------------------
Michael B. Shahbazian
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-Q
INDEX TO EXHIBITS
10.20 Form of Executive Severance Benefits Agreement entered into
between the registrant and certain of its employees.
27.1 Financial Data Schedule (electronic filing only)
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Exhibit 10.20
EXECUTIVE SEVERANCE BENEFITS AGREEMENT
This Executive Severance Benefits Agreement (this "Agreement") is entered
into by and between Walker Interactive Systems, Inc., a Delaware corporation
(the "Company") and ____________ ("Executive"), effective July __, 1999. This
Agreement is intended to provide Executive with the compensation and benefits
described herein upon the occurrence of specific events. Certain capitalized
terms used in this Agreement are defined in Article 6.
The Company and Executive hereby agree as follows:
ARTICLE 1
EMPLOYMENT BY THE COMPANY
1.1 The Company currently employs Executive.
1.2 The Company and Executive wish to set forth the compensation and
benefits which Executive shall be entitled to receive in the event Executive's
employment with the Company is terminated under the circumstances described
herein.
1.3 The duties and obligations of the Company to Executive under this
Agreement shall be in consideration for Executive's past services to the
Company, Executive's continued employment with the Company and Executive's
execution of the general waiver and release described in Section 3.2.
1.4 This Agreement shall supersede any other agreement relating to
Executive's severance from employment with the Company.
ARTICLE 2
SEVERANCE BENEFITS
2.1 Covered Termination Severance Benefits. If within twenty-four (24)
months following a Change of Control, Executive's employment terminates due to
an Involuntary Termination Without Cause or a Constructive Termination, such
termination of employment will be deemed a "Covered Termination". A Covered
Termination entitles Executive to receive the following benefits set forth in
Sections 2.2 through 2.4 and Sections 2.9 and 2.10.
2.2 Severance Payment. Executive shall receive a severance payment equal
to twelve (12) months of Base Pay plus Bonus, subject to applicable tax
withholding, payable at such time or times as the Company may elect; provided
that Executive shall not receive such
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severance payments at a rate slower than the Company's regularly scheduled
payment dates for payroll and bonus. If Executive is indebted to the Company at
his or her date of termination, the Company reserves the right to offset any
severance payment under this Agreement by the amount of such indebtedness. In no
event shall payment of any severance payment be made prior to Executive's date
of termination or in the absence of an effective release pursuant to Section 3.2
2.3 Acceleration Of Stock Option Vesting. The portion of Executive's stock
options that would have vested on or before the date twelve (12) months from the
occurrence of the Covered Termination shall accelerate and immediately become
vested and exercisable. Notwithstanding the foregoing, if the Change of Control
was a transaction that was accounted for as a pooling of interests for financial
reporting purposes, then the unvested portion of such stock options shall not
accelerate unless the Company receives reasonable assurances from the Company's
independent public accountants (and from the acquiring party's independent
public accountants) that in their good faith judgement such acceleration will
not adversely affect the pooling of interests accounting treatment of such
Change of Control transaction.
2.4 COBRA Continuation. Executive and Executive's covered dependents who
are enrolled in a health or dental plan sponsored by the Company may be eligible
to continue coverage under such health or dental plan (or to convert to an
individual policy), at the time of the Executive's termination of employment
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The
Company will notify the individual of any such right to continue health coverage
at the time of termination. The Company will continue to pay its share of
Executive's health insurance premiums until the earlier of: (i) twelve (12)
months after the date of termination, or (ii) such time as the Executive becomes
eligible to participate in another employer's health insurance plan (the "COBRA
Period"); provided that Executive elects to continue coverage under COBRA and
timely pays Executive's portion of the premiums. No provision of this Agreement
will affect the continuation coverage rules under COBRA, except that the
Company's payment of any applicable insurance premiums during the COBRA Period
will be credited as payment by Executive for purposes of Executive's payment
required under COBRA. Therefore, the period during which Executive must elect to
continue the Company's group medical or dental coverage at his or her own
expense under COBRA, the length of time during which COBRA coverage will be made
available to the Executive, and all other rights and obligations of Executive
under COBRA (except the obligation to pay insurance premiums that the Company
pays during the COBRA Period) will be applied in the same manner that such rules
would apply in the absence of this Agreement.
2.5 Company Termination Severance Benefits. In the event Executive's
employment terminates due to an Involuntary Termination Without Cause other than
within twenty-four (24) months following a Change of Control (a "Company
Termination"), Executive shall be entitled to receive the following benefits set
forth in Sections 2.6 through 2.10.
2.6 Severance Payment. Executive shall receive a severance payment equal
to twelve (12) months of Base Pay, subject to applicable tax withholding,
payable at such time or times as the Company may elect; provided that Executive
shall not receive such severance payments at a rate slower than the Company's
regularly scheduled payment dates for payroll and
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bonus. If Executive is indebted to the Company at his or her date of
termination, the Company reserves the right to offset any severance payment
under this Agreement by the amount of such indebtedness. In no event shall
payment of any severance payment be made prior to Executive's date of
termination or in the absence of an effective release pursuant to Section 3.2
2.7 Stock Option Vesting and Exercise Period. Except for the options
listed on Exhibit A hereto, the portion of Executive's stock options that would
have vested on or before the date twelve (12) months from the occurrence of the
Company Termination shall accelerate and immediately become vested and
exercisable and the period during which Executive may exercise any and all stock
options deemed vested as of the date of Executive's termination shall be
extended such that Executive will have twelve (12) months after the date of such
termination to exercise such options.
2.8 COBRA Continuation. Executive and Executive's covered dependents who
are enrolled in a health or dental plan sponsored by the Company may be eligible
to continue coverage under such health or dental plan (or to convert to an
individual policy), at the time of the Executive's termination of employment
under COBRA. The Company will notify the individual of any such right to
continue health coverage at the time of termination. The Company will continue
to pay its share of Executive's health insurance premiums for three (3) months
after the date of termination; provided that Executive elects to continue
coverage under COBRA and timely pays Executive's portion of the premiums. No
provision of this Agreement will affect the continuation coverage rules under
COBRA, except that the Company's payment of any applicable insurance premiums
during such three month period will be credited as payment by Executive for
purposes of Executive's payment required under COBRA. Therefore, the period
during which Executive must elect to continue the Company's group medical or
dental coverage at his or her own expense under COBRA, the length of time during
which COBRA coverage will be made available to the Executive, and all other
rights and obligations of Executive under COBRA (except the obligation to pay
insurance premiums that the Company pays during such three month period) will be
applied in the same manner that such rules would apply in the absence of this
Agreement.
2.9 Accrued Vacation Pay. In addition to any other amount payable under
this Article 2, Executive will be entitled to receive any accrued vacation pay
in accordance with the Company's vacation pay policy then in effect for
employees generally.
2.10 Mitigation. Except as otherwise specifically provided herein,
Executive shall not be required to mitigate damages or the amount of any payment
provided under this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by Executive as a result of employment by another
employer or by any retirement benefits received by Executive after the date of
the Covered Termination, Company Termination or otherwise.
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ARTICLE 3
LIMITATIONS AND CONDITIONS ON BENEFITS
3.1 Tax Consequences. The Company shall withhold appropriate federal,
state, local (and foreign, if applicable) income and employment taxes from any
payments hereunder. Executive acknowledges that he or she has been advised by
the Company to consult with a tax advisor or attorney with respect to the tax
consequences, if any, of these amendments to his or her stock option grants.
3.2 Employee Agreement And Release Prior To Receipt Of Benefits. Upon the
occurrence of a Covered Termination or Company Termination, and prior to the
receipt of any benefits under this Agreement on account of such Covered
Termination or Company Termination, Executive shall execute the Employee
Agreement and Release (the "Release") in the form attached hereto as Exhibit B.
Such Release shall specifically relate to all of Executive's rights and claims
in existence at the time of such execution and shall confirm Executive's
obligations under the Company's standard form of proprietary information and
inventions agreement. It is understood that Executive has twenty-one (21)
calendar days to consider whether to execute such Release, and Executive may
revoke such Release within seven (7) calendar days after execution. In the
event Executive does not execute such Release within the twenty-one (21)-day
period, or if Executive revokes such Release within the subsequent seven (7)-day
period, no benefits shall be payable under this Agreement, and this Agreement
shall be null and void.
3.3 Limitation on Competitive Activities. During the twelve (12) month
period after the occurrence of a Covered Termination or Company Termination,
Executive will not directly or indirectly (whether for compensation or without
compensation), as an individual proprietor, partner, stockholder, officer,
employee, consultant, director, joint venturer, investor, lender, or in any
other capacity whatsoever (other than as the holder of not more than one percent
(1%) of the total outstanding stock of a publicly held company), engage in any
business activity that is competitive with the business of the Company
("Competitive Activity"). For purposes of this Agreement, "Competitive Activity"
shall be deemed to include, without limitation, obtaining employment, performing
work or providing services to SAP, PeopleSoft, Oracle, Hyperion or QSP (or any
related corporation, partnership or other related entity). These Competitive
Activities are prohibited in addition to any limitations on Executive's
activities set forth in his Proprietary Information Agreement with the Company,
and they are considered by the parties hereto to constitute a reasonable
restriction for the purpose of protecting the business of the Company. However,
if any such limitation is found by a court of competent jurisdiction to be
unenforceable because it extends for too long a period or over too great a range
of activities or in too broad a geographic area, it shall be interpreted to
extend only over the maximum period of time, range of activities or geographic
area as to which it may be enforceable. If Executive does not comply with any of
the foregoing, no benefits shall be payable under this Agreement, any benefits
previously paid to Executive pursuant to this Agreement shall be repaid or
surrendered to the Company, and this Agreement shall be null and void.
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ARTICLE 4
OTHER RIGHTS AND BENEFITS
4.1 Nonexclusivity. Nothing in this Agreement shall prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans, programs, policies or practices provided by the Company and for
which Executive may otherwise qualify, nor shall anything herein limit or
otherwise affect such rights as Executive may have under other agreements with
the Company. Except as otherwise expressly provided herein, amounts which are
vested benefits or which Executive is otherwise entitled to receive under any
plan, policy, practice or program of the Company at or subsequent to the date of
a Covered Termination or Company Termination shall be payable in accordance with
such plan, policy, practice or program.
4.2 Certain Reductions in Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event that any payment, distribution or other benefit provided by the
Company to or for the benefit of Executive (whether paid or payable or provided
or to be provided pursuant to the terms of this Agreement or otherwise) (a
"Payment") would (i) constitute a "parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986 ("the Code") and (ii) but for
this Section 4.2, be subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then, in accordance with this Section 4.2, such
Payments shall be reduced to the maximum amount that would result in no portion
of the Payments being subject to the Excise Tax, but only if and to the extent
that such a reduction would result in Executive's receipt of Payments that are
greater than the net amount Executive would receive (after application of the
Excise Tax) if no reduction is made. The amount of required reduction, if any,
shall be the smallest amount so that the Executive's net proceeds with respect
to the Payments (after taking into account payment of any Excise Tax and all
federal, state and local income, employment or other taxes) shall be maximized.
If, notwithstanding any reduction described in this Section 4.2 (or in the
absence of any such reduction), the Internal Revenue Service (the "IRS")
determines that a Payment is subject to the Excise Tax (or subject to a
different amount of the Excise Tax than determined by the Company or the
Executive), then Section 4.2(c) shall apply. If the Excise Tax is not eliminated
pursuant to this Section 4.2, Executive shall pay the Excise Tax.
(b) All determinations required to be made under this Section 4.2
shall be made by the Company's independent auditors. Such auditors shall provide
detailed supporting calculations both to the Company and Executive. Any such
reasonable determination by the Company's independent auditors shall be binding
upon the Company and Executive. The Executive shall determine which and how much
of the Payments, including without limitation any option acceleration benefits
provide under this Agreement or any option ("Option Benefits"), as the case may
be, shall be eliminated or reduced consistent with the requirements of this
Section 4.2, provided that, if Executive does not make such determination within
ten (10) business days of the receipt of the calculations made by the Company's
independent auditors, the Company shall elect which and how much of the Option
Benefits or other Payments, as the case may be, shall be eliminated or reduced
consistent with the requirements of this Section 4.2, and
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then the Company shall notify Executive promptly of such election. Within five
(5) business days thereafter, the Company shall pay to or distribute to or for
the benefit of Executive such amounts as are then due to Executive under this
Agreement.
(c) As a result of the uncertainty in the application of Section 280G
of the Code at the time of the initial determination by the Company's
independent auditors hereunder, it is possible that Option Benefits or other
Payments, as the case may be, will have been made by the Company which should
not have been made ("Overpayment") or that additional Option Benefits or other
Payments, as the case may be, which will not have been made by the Company could
have been made ("Underpayment"), in each case, consistent with the calculations
required to be made hereunder. In the event that the Company's independent
auditors, based upon the assertion of a deficiency by the IRS against Executive
or the Company which the Company's independent auditors believe has a high
probability of success, determine that an Overpayment has been made, any such
Overpayment paid or distributed by the Company to or for the benefit of
Executive shall be treated for all purposes as a loan ab initio to Executive
which Executive shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by Executive to the Company if and to the extent such
deemed loan and payment would not either reduce the amount on which Executive is
subject to tax under Section 1 and Section 4999 of the Code or generate a refund
of such taxes. In the event that the Company's independent auditors, based upon
controlling precedent or other substantial authority, determine that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
ARTICLE 5
TRANSFERABILITY OF BENEFITS
5.1 No benefit hereunder shall be subject to sale, transfer, assignment,
pledge, encumbrance or charge, and any attempt to do so shall be void.
ARTICLE 6
DEFINITIONS
For purposes of this Agreement, the following terms are defined as follows:
6.1 "Base Pay" means Executive's base pay (excluding overtime, bonuses,
draws, commission, and other forms of additional compensation and benefits), at
the rate in effect during the last regularly scheduled payroll period
immediately preceding any termination of Executive's employment.
6.2 "Board" means the Board of Directors of the Company.
6.3 "Bonus" means the average of the amount of Executive's bonus for the
previous two (2) fiscal years of the Company.
6
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6.4 "Cause" means termination of Executive's employment with the Company
for any of the following reasons as determined in good faith by the Board:
(a) an intentional act which materially injures the Company;
(b) an intentional refusal or failure to follow lawful and reasonable
directions of the Board or an individual to whom Executive reports (as
appropriate);
(c) a willful and habitual neglect of duties; or
(d) a conviction of a felony involving moral turpitude which is
reasonably likely to inflict or has inflicted material injury on the Company.
6.5 "Change of Control" means that the Company (a) merges or combines with
any other company or entity and the Company is not the surviving corporation, or
the stockholders of the Company immediately prior to the merger or consolidation
do not hold a majority of the shares of the resulting corporation; (b) sells all
or substantially all its assets to any other company or entity; or (c) has forty
percent (40%) or more of its stock acquired by a person and/or affiliates of
such person.
6.6 "Constructive Termination" means that Executive voluntarily terminates
employment after any of the following are undertaken without Executive's express
written consent:
(a) the assignment to Executive of any duties or responsibilities
which result in a diminution or adverse change of Executive's position, status
or circumstances of employment; provided, however, that a mere change in
Executive's title or reporting relationship shall not constitute a Constructive
Termination;
(b) a reduction by the Company in Executive's Base Pay;
(c) a relocation of Executive's business office to a location more
than thirty (30) miles from the location at which Executive performs duties as
of the date of this Agreement, except for required travel by Executive on the
Company's business to an extent substantially consistent with Executive's
business travel obligations;
(d) any breach by the Company of any provision of this Agreement or
any other material agreement between Executive and the Company concerning
Executive's employment; or
(e) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company.
6.7 "Covered Termination" means an Involuntary Termination Without Cause
or a Constructive Termination.
6.8 "Involuntary Termination Without Cause" means Executive's dismissal or
discharge other than for Cause. The termination of Executive's employment as a
result of
7
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Executive's death or disability will not be deemed to be an Involuntary
Termination Without Cause.
ARTICLE 7
GENERAL PROVISIONS
7.1 Employment Status. This Agreement does not constitute a contract of
employment or impose upon Executive any obligation to remain as an employee, or
impose on the Company any obligation (i) to retain Executive as an employee,
(ii) to change the status of Executive as an at-will employee, or (iii) to
change the Company's policies regarding termination of employment.
7.2 Notices. Any notices provided hereunder must be in writing, and such
notices or any other written communication shall be deemed effective upon the
earlier of personal delivery (including personal delivery by facsimile) or the
third day after mailing by first class mail, to the Company at its primary
office location and to Executive at Executive's address as listed in the
Company's payroll records. Any payments made by the Company to Executive under
the terms of this Agreement shall be delivered to Executive either in person or
at the address as listed in the Company's payroll records.
7.3 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
7.4 Waiver. If either party should waive any breach of any provisions of
this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
7.5 Complete Agreement. This Agreement, including Exhibits, constitutes
the entire agreement between Executive and the Company and is the complete,
final, and exclusive embodiment of their agreement with regard to this subject
matter, wholly superseding all written and oral agreements with respect to
payments and benefits to Executive in the event of employment termination. It is
entered into without reliance on any promise or representation other than those
expressly contained herein.
7.6 Duration of Agreement. This Agreement shall terminate upon the date of
Executive's termination of employment with the Company. If not sooner
terminated, this Agreement shall terminate on July 30, 2000 and beginning on
July 31, 2000 and on each subsequent anniversary of such date, one (1) year
shall be added to the term of this Agreement, unless at least twelve (12) months
prior to such date or anniversary, the Company shall have notified Executive in
writing that such extension will not become effective. Notwithstanding the
8
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foregoing, this Agreement shall not terminate or expire with respect to
Executive if Executive becomes entitled to receive payments and benefits set
forth in Section 2 until Executive shall have received such payments and
benefits in full.
7.7 Amendment or Termination of Agreement. Notwithstanding anything in
Section 7.6 to the contrary, this Agreement may be changed or terminated upon
the mutual written consent of the Company and Executive. The written consent of
the Company to a change or termination of this Agreement must be signed by an
executive officer of the Company after such change or the Board has approved
termination.
7.8 Counterparts. This Agreement may be executed in separate counterparts,
any one of which need not contain signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.
7.9 Headings. The headings of the Articles and Sections hereof are
inserted for convenience only and shall not be deemed to constitute a part
hereof or to affect the meaning thereof.
7.10 Successors and Assigns. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Executive and the Company, and their
respective successors, assigns, heirs, executors and administrators, except that
Executive may not assign any duties hereunder and may not assign any rights
hereunder without the written consent of the Company, which consent shall not be
withheld unreasonably.
7.11 Choice of Law. All questions concerning the construction, validity and
interpretation of this Agreement will be governed by the law of the State of
California, without regard to such state's conflict of laws rules.
7.12 Non-Publication. The parties mutually agree not to disclose publicly
the terms of this Agreement except to the extent that disclosure is mandated by
applicable law or to respective advisors (e.g., attorneys, accountants).
7.13 Construction of Agreement. In the event of a conflict between the text
of the Agreement and any summary, description or other information regarding the
Agreement, the text of the Agreement shall control.
In Witness Whereof, the parties have executed this Agreement on the day and
year written above.
Walker Interactive Systems, Inc. [Executive]
By:________________________________ ___________________________________
Name:______________________________
9
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Title:_____________________________
Exhibit A: Excluded Options
Exhibit B: Employee Agreement and Release
10
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Exhibit A
EXCLUDED OPTIONS
2
<PAGE>
Exhibit B
EMPLOYEE AGREEMENT AND RELEASE
I understand and agree completely to the terms set forth in the foregoing
agreement.
I hereby confirm my obligations under the Walker Interactive Systems,
Inc.'s (the "Company") proprietary information and inventions agreement.
In granting the release herein, I acknowledge that I understand that I am
waiving the benefit of any provision of law in any jurisdiction to the following
effect: "A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected her settlement with the
debtor." (California Civil Code section 1542). I hereby expressly waive and
relinquish all rights and benefits under that section and any law or legal
principle of similar effect in any jurisdiction with respect to the release of
unknown and unsuspected claims granted in this Agreement.
Except as otherwise set forth in this Agreement, I hereby release, acquit
and forever discharge the Company, its parents and subsidiaries, and its and
their respective officers, directors, agents, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages, indemnities
and obligations of every kind and nature, in law, equity, or otherwise, known
and unknown, suspected and unsuspected, disclosed and undisclosed (other than
any claim for indemnification I may have as a result of any third party action
against me based on my employment with the Company), arising out of or in any
way related to agreements, events, acts or conduct at any time prior to the date
I execute this Agreement, including but not limited to: all such claims and
demands directly or indirectly arising out of or in any way connected with my
employment with the Company or the termination of that employment, including but
not limited to, claims of intentional and negligent infliction of emotional
distress, any and all tort claims for personal injury, claims or demands related
to salary, bonuses, commissions, stock, stock options, or any other ownership
interests in the Company, vacation pay, fringe benefits, expense reimbursements,
severance pay, or any other form of compensation; claims pursuant to any
federal, state or local law or cause of action including, but not limited to,
the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination
in Employment Act of 1967, as amended ("ADEA"); the federal Employee Retirement
Income Security Act of 1974, as amended; the federal Americans with Disabilities
Act of 1990; the California Fair Employment and Housing Act, as amended; tort
law; contract law; wrongful discharge; harassment; discrimination; fraud;
defamation; emotional distress; and breach of the implied covenant of good faith
and fair dealing; provided, however, that nothing in this paragraph shall be
construed in any way to release the Company from its obligation to indemnify me
pursuant to the Company's indemnification agreement.
I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under ADEA. I also acknowledge that the consideration given
for the waiver and release in the preceding paragraph hereof is in addition to
anything of value to which I was already entitled. I further acknowledge that I
have been advised by this writing, as required by the ADEA, that: (A) my waiver
and release do not apply to any rights or claims that may arise on or after the
date I execute this Agreement; (B) I have the right to consult with an attorney
prior to executing this Agreement; (C) I have twenty-one (21) days to consider
this Agreement (although I may choose to voluntarily execute this Agreement
earlier); (D) I have seven (7) days following the execution of this Agreement by
the parties to revoke the Agreement; and (E) this Agreement shall not be
effective until the date upon which the revocation period has expired, which
shall be the eighth day after this Agreement is executed by me, provided that
the Company has also executed this Agreement by that date (the "Effective
Date").
Walker Interactive Systems, Inc. [Executive]
By:_______________________________ ___________________________________
Title:____________________________ Date:______________________________
<TABLE> <S> <C>
<PAGE>
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WALKER INTERACTIVE SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE NINE
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