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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21176
WALL DATA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1189299
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
11332 N.E. 122ND WAY, KIRKLAND, WASHINGTON 98034-6931
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(425) 814-9255
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS
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Common Stock
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and nonvoting stock held by
nonaffiliates of the registrant at March 1, 1998 was approximately $144,380,927.
The number of shares of the registrant's Common Stock outstanding at March
1, 1998 was 9,904,492.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement for its annual meeting of
shareholders on May 20, 1998, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year, is
incorporated by reference in Part III hereof.
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PART I
When used in this discussion, the words "believes", "anticipates" and
"intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"-- Important Factors Regarding Forward-Looking Statements." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are urged, however, to review the
factors set forth in reports the Company files from time to time with the
Securities and Exchange Commission.
ITEM 1. BUSINESS
OVERVIEW
Wall Data Incorporated ("Wall Data" or the "Company") develops, markets and
supports enterprise software products and associated application tools and
provides comprehensive support and services for its products. The Company's
products deliver existing corporate computing systems, including various host,
database, client/server and public information, to users in a browser or
Windows-based environment. Using Wall Data solutions, organizations can extend
their enterprise information to allow their internal users, remote users,
third-party partners and customers to access information and applications over
corporate intranets, extranets, the Internet and Local Area Networks/Wide Area
Networks ("LAN/WAN").
To reach its global customer base, Wall Data delivers products and services
through multiple distribution channels. The Company uses a combination of direct
sales, telesales, resellers, distributors, original equipment manufacturer
("OEM") arrangements and the Internet.
Wall Data was incorporated in 1982 and has a 15-year history of extending
corporate computing systems to users on new platforms and providing outstanding
business solutions to customers worldwide. With the introduction of Microsoft
Corporation ("Microsoft") Windows in 1989, the Company focused its strategy and
resources on the emerging market for Windows-based personal computer
("PC")-to-host connectivity software and launched the RUMBA(R) brand of software
products. To allow customers to extend their enterprise information and
applications to the Internet, the Company has launched its Cyberprise(TM)
strategy and is increasingly focused on emerging markets for Internet-based
enterprise application solutions.
RECENT DEVELOPMENTS
NEW CORPORATE DIRECTION
In January 1998, Wall Data announced the Cyberprise strategy to the public.
Cyberprise products and services enable customers to use existing enterprise
information systems in conjunction with Internet-based technologies. By
migrating existing systems, customers can gain a competitive advantage by
delivering Internet-based solutions more rapidly and at a lower cost than if
they created new applications. New products and services involve a significant
amount of risk. See "--Important Factors Regarding Forward-Looking
Statements -- New Markets; Longer Sales Cycle."
PLANNED PRODUCTS AND RELEASES
In connection with the launch of the Cyberprise strategy, Wall Data
announced the rollout of a complete line of Cyberprise products in 1998.
CYBERPRISE(TM) SERVER PRODUCTS
Cyberprise Server products are the foundation of the Cyberprise solution.
The Cyberprise Server software product line is a Web application server
platform. These products allow users to access their existing enterprise
computing applications and information, as well as public information, through
an easy-to-use, channel-based interface. This channel interface can be easily
customized and accessed through a browser. Cyberprise Server
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software products include features such as Web-based administration and
management, centralized system controls and domain security.
CYBERPRISE HOST PRODUCTS
Cyberprise Host software products provide direct, persistent, browser-based
access to mission-critical information and applications on host systems. The
products enable intranet users to interact with real-time information in a
secure, highly scaleable environment and offer the same mission-critical
reliability found in Wall Data's RUMBA client products.
CYBERPRISE TOOL PRODUCTS
Cyberprise Tool products enable internal developers, consultants, value
added resellers ("VARs") and business users to extend the basic capabilities of
Cyberprise products by creating customized solutions. Cyberprise Tool products
allow developers to customize the presentation of information to users, migrate
client/server applications to the Web and build Web applications that connect to
host transaction applications.
CYBERPRISE DATA PRODUCTS
Cyberprise Data software products publish database queries and reports,
database applications, spreadsheets, word processing documents and other data
sources that make data available to anyone with a Web browser. Additionally,
Cyberprise Data products publish solutions developed with Cyberprise Tool
products, enabling end-users to have relevant, browser-based solutions.
CYBERPRISE CHANNEL PRODUCTS
Cyberprise Channel products deliver business-specific corporate and public
content solutions in an organized fashion to employees, partners and customers
through a browser.
CYBERPRISE SERVICES
Cyberprise Services include service and support, consulting services and
specialized programs that facilitate moving mission-critical systems to the
Cyberprise environment.
PRODUCTS
The Company's software products provide computer users in business
organizations with easy access to and use of computer applications and data
residing on multiple host mainframes, minicomputers and servers in
enterprise-wide information system networks and public information networks.
Using Wall Data solution platforms, organizations can extend their enterprise
information to allow their internal users, remote users, third-party partners
and customers to access information and applications over corporate LAN/WAN
systems, intranets, extranets and the Internet.
In addition to the products discussed above under "--Planned Products and
Releases," Wall Data's product line currently includes the following products:
HOST CONNECTIVITY SOFTWARE PRODUCTS
The Company's principal product line is the RUMBA family of PC-based host
connectivity software products, which operate in the Microsoft Windows, Windows
95 and Windows NT environments. RUMBA products support the exchange of
information between PC applications and host applications operating on IBM and
IBM-compatible mainframe computers, IBM AS/400 midrange computers, Digital
Equipment Corporation ("Digital") VAX computers, UNIX computers, Hewlett-Packard
Company ("HP") 3000 and 9000 computers and a variety of client-server and
desktop databases. RUMBA products implement PC-to-enterprise connections using a
wide array of network and communication system configurations, including several
types of direct and LAN communication hardware, multiple LAN operating systems
and a broad range of communications servers and gateways. RUMBA software is
designed to be implemented enterprise-
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wide and to leverage customers' existing investments in host computers,
applications, PCs and networking infrastructure, including investments in
corporate intranets and the Internet.
The Company has derived a substantial majority of its net revenues to date
from sales of its RUMBA client software products, which accounted for 81%, 86%
and 88% of net revenues in 1997, 1996 and 1995, respectively. The RUMBA product
line and related enhancements are expected to continue to account for a majority
of the Company's net revenues in 1998. A decline in demand for RUMBA products as
a result of competition, technological changes or otherwise could have a
material adverse effect on the Company's results of operations. See "--Important
Factors Regarding Forward-Looking Statements -- Dependence on a Single Product
Line."
The Company's RUMBA software products fall into two categories: RUMBA
client software products and RUMBA tool products. In 1989, Wall Data introduced
RUMBA for the Mainframe, Windows Version, which allowed PC users to access and
use host information and applications on IBM and IBM-compatible mainframes.
Since then, the Company has introduced new client software products and features
that allow PC users to access and use host applications and data in various
enterprise-wide networks and public information networks. RUMBA tool products
allow advanced users, developers and administrators to create custom
applications to suit user needs.
RUMBA Client Software Products. RUMBA client software products allow
business users running the Microsoft Windows, Windows 95 and Windows NT
operating systems easy access to character-based and client/server applications
and data residing on IBM and IBM-compatible mainframe computers, IBM AS/400
midrange computers, Digital VAX computers, UNIX computers, HP 3000 and 9000
computers and a variety of client-server and desktop databases. The Company's
client software products operate on PCs. These products implement PC-to-host
connections using a wide array of network and communication system
configurations and are designed to be implemented enterprise-wide. The modular
architecture of RUMBA products has allowed the Company to deliver individual
products to specific markets in accordance with the demands of that market.
Generally, these products are licensed on a per-user basis and may be available
pursuant to enterprise-wide or site licenses.
RUMBA OFFICE products offer a suite of solutions for users needing to
access enterprise server or host systems by providing access to a vast range of
character-based and client/server applications on business-critical systems such
as IBM mainframe, IBM AS/400, Digital VAX, UNIX and HP systems. The modular
architecture of RUMBA OFFICE integrates file and print management, database
access, mail and messaging, and Internet features into a single universal
client. In addition, features such as QuickAssist, which eliminates repetitive
keystrokes, and Hotspots and QuickStep, which allow host applications to be
operated by a mouse instead of the keyboard, help to provide customers with
productivity-enhanced business tools.
RUMBA Tool Products. The Company's RUMBA software tools operate on client
PCs and network servers to enable software developers and advanced users to
customize or develop PC applications making use of host information in
conjunction with RUMBA software. By implementing industry-standard architectures
for custom solution development, including Microsoft's ActiveX component
architecture, RUMBA tool products give developers the ability to produce custom
software solutions that meet specific user needs without having to create the
enterprise information access technology themselves.
RUMBA tools deliver a range of capabilities for enhancing the presentation
of enterprise information on PCs and are designed for users and developers of
varying proficiency: (i) advanced Windows application users can use RUMBA
application tools to present enterprise information in the formats of familiar
Windows applications, such as Excel or Lotus 1-2-3 spreadsheets; (ii) advanced
users or Windows developers can use RUMBA application tools to customize or
develop specific Windows applications designed to incorporate enterprise
information; and (iii) more sophisticated developers can use RUMBA application
tools in connection with industry-standard application programming interfaces
and computer-aided software engineering tools to develop sophisticated PC
applications and transaction programs interfacing with host applications. These
products are licensed on a per-unit basis and may be available pursuant to
enterprise-wide or site licenses.
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Other Software Products. The Company also offers ARPEGGIO(R) and SALSA(R)
software products. ARPEGGIO products allow organizations to publish database
information across a variety of platforms. SALSA products allow advanced
computer users to create their own customized client/server applications.
SERVICE
Wall Data is committed to providing responsive, high-quality product
support and product upgrades for the Company's software products. These services
are marketed under the ONESTEP(R) brand. This flexible annual program provides
responsive, priority product support at predictable costs, augments customers'
support staff and maximizes user productivity. Customers can select the support
options that best fit the size, structure and service requirements of their
organization. Separate service offerings are available for various Wall Data
products. Individual program options include: priority telephone access to Wall
Data senior support engineers; electronic services on the Web that provide
on-line case entry, privileged access to Wall Data's online information base,
and the ability to download current product updates and fixes; and upgrade
subscription, which keeps the customer's software current with the latest
upgrades and updates.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products primarily to multinational and national
business organizations with installed enterprise computer systems. These
organizations vary in size, complexity and purchasing-decision structures. To
address these ranges of sales and marketing opportunities, Wall Data uses a
combination of direct sales, telesales, resellers, distributors and OEM
arrangements.
The direct sales force focuses on large business organizations and markets
to several levels within these organizations, including the executive,
management information systems, department/division and user levels. The Company
also sells its products through indirect channels, primarily consisting of
distributors and national and regional resellers addressing the business market.
The Company supports its resellers and distributors with experienced sales,
marketing, systems engineering and technical support staffs. In addition, the
Company relies on resellers and distributors to market and support its products
in certain markets. There can be no assurance, however, that such resellers and
distributors will be able to market the Company's products effectively or be
qualified to provide timely and cost-effective customer support or service. See
"--Important Factors Regarding Forward-Looking Statements -- Reliance on
Resellers and Distributors."
Wall Data sells its product lines through national distributors such as
Ingram Micro, Inc., Merisel, Inc. and Tech Data Corporation, which may in turn
sell to other resellers, VARs and dealers. Additionally, the Company's resellers
include Corporate Software and Technology, Entex Information Systems, Shared
Medical Systems, Softmart, Inc. and Software Spectrum, Inc. The Company's
agreements with resellers and distributors typically are not exclusive and may
be terminated by either party without cause. Many of the Company's resellers and
distributors carry competing product lines. There can be no assurance that any
resellers or distributors will continue to represent the Company's products or
that additional resellers or distributors will agree, or continue, to represent
the Company's products. The Company's distributors generally are permitted
inventory exchange or rotation rights.
Wall Data also has entered into OEM agreements with certain companies
including IBM pursuant to which these companies market derivatives of RUMBA
products under various names. The OEM agreements generally provide for
nonexclusive licenses of specific versions of RUMBA software and allow the OEMs
to combine the specific version of RUMBA software with their product-specific
software and to distribute and market the derivative of the RUMBA software
product under their own names. The Company generally receives a license fee or
royalty based on the number of copies of products or derivatives of RUMBA
distributed to end users or used internally. The Company's OEM agreement with
IBM expires in 2001. Such agreements may be terminated by either party upon
breach by the other party, and the agreement with IBM is terminable by IBM upon
90 days' notice. The Company intends to pursue OEM agreements with additional
companies. Sales pursuant to OEM agreements accounted for approximately 7% of
the Company's net revenues in 1997.
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The Company's marketing programs are designed to create user awareness and
generate sales opportunities for its direct sales force and telesales, as well
as its resellers, distributors and OEMs. These programs include press releases,
press and industry analyst relations, advertising in trade and business
publications, direct mail advertising, participation in regional conferences,
seminars, trade shows and industry conferences and provision of ongoing customer
communication programs. In addition, the Company provides demonstration disks
and trial versions of the software to promote the products and provide product
information. Additional sales support is provided to resellers through product
literature and promotional programs. The Company also assists the marketing
efforts of certain of its resellers and distributors by providing funds for
promotional and educational purposes.
Approximately 30%, 29% and 28% of the Company's net revenues in 1997, 1996
and 1995, respectively, were attributable to sales made to customers outside
North America. The Company expects that international sales will continue to be
a significant portion of its business. The Company's international sales efforts
are focused primarily on large business organizations that may have computing
resources located throughout the world. The Company has sales and/or marketing
staff located in Argentina, Australia, Brazil, Canada, England, France, Germany,
Ireland, Italy, Japan, Mexico, Singapore, Spain and the United States.
Currently, the Company's sales in Europe are made primarily through local
resellers and distributors. Agreements with local resellers and distributors
generally provide the resellers nonexclusive rights to sell the Company's
products in a specified geographic area. Resellers typically are required to pay
license fees for all products shipped to them and agree to market the products.
Generally, the agreement may be terminated by the Company if the reseller
breaches the agreement or fails to reach agreed-upon sales quotas and, after one
year, may be terminated by either party with three months' notice. See Note 12
of Notes to Consolidated Financial Statements for more information regarding
foreign operations and export sales.
The Company faces certain risks inherent in international business
operations, including fluctuations in foreign currency exchange rates, the
instability of certain overseas economic environments, longer accounts
receivable payment cycles, difficulties in staffing and managing international
operations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, potentially adverse tax consequences, repatriation of earnings
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the Company's results
of operations. See "--Important Factors Regarding Forward-Looking
Statements -- International Operations."
PRODUCT DEVELOPMENT
The Company intends to enhance and expand its product lines in connection
with evolving customer requirements and industry standards and other
technological changes. The Company believes its future success will depend on
its ability to do so and any failure by the Company to anticipate or respond
adequately to changes in technology and customer preferences, or any significant
delay in product development or introduction, could have a material adverse
effect on the Company's results of operations. The Company employs engineers to
develop new products and product enhancements. Historically, the Company
generally has developed new products internally but, from time to time, has
acquired or licensed technologies from third parties. Although there can be no
guarantee that product development efforts will result in commercially viable
products, Wall Data intends to continue to make substantial investments in
product development. See "-- Important Factors Regarding Forward-Looking
Statements -- New Products; Technological Change; Uncertain Acceptance of the
Company's New Products." Wall Data's product development expenses totaled $19.7
million, $22.9 million and $19.8 million in 1997, 1996 and 1995, respectively.
COMPETITION
The enterprise software market is intensely competitive and subject to
rapidly changing technology and evolving standards incorporated into PCs,
networks, host computers and enterprise servers.
The market for the Company's products is also characterized by significant
price competition, and the Company expects it will face increasing pricing
pressures. There can be no assurance that the Company will be able to maintain
its historic prices, and an inability to do so could materially adversely affect
the Company's results of operations.
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The principal competitive factors affecting the market for the Company's
products include product functionality, ease of use, price, quality, performance
and reliability; quality of customer service and support; product availability;
vendor credibility; and ability to keep pace with technological change. There
can be no assurance that the Company will continue to compete successfully in
the face of increasing competition from new products and enhancements introduced
by existing competitors and new companies entering the market.
The Company competes with providers of PC-to-host connectivity products,
including, without limitation, IBM, Attachmate Corporation and WRQ, Inc. In
addition, the Company competes with providers of software products for TCP/IP
networks such as Novell, Inc. ("Novell"), FTP Software, Inc., NetManage, Inc.
and Hummingbird Communications, Limited. With the introduction of Internet-based
solutions, the Company also may compete with providers of software products for
Internet and corporate intranet information publishing products such as IBM and
Netscape Communications Corp. These products allow PCs to access information
from enterprise servers or host systems using Internet browsers, and may cause
customers to re-evaluate their information and application access strategy in
ways that reduce the need for the Company's client products.
In general, customers and prospective customers of the Company's products
have competitors' connectivity products installed, and the Company competes with
these vendors for customer orders. The Company derives a substantial portion of
its net revenues from sales of its RUMBA products for IBM and IBM-compatible
mainframe computers and IBM AS/400 midrange computers. IBM sells products that
compete with those of the Company and can exercise significant customer
influence and technology control in the IBM PC-to-host connectivity market. The
Company also competes with providers of LAN systems and software products that
can provide PC-to-host connectivity. Microsoft currently incorporates limited
PC-to-host connectivity technology in Windows. The Company expects that
Microsoft will continue to include and expand this technology in its future
products and product enhancements. The introduction by Microsoft of a client
software connectivity product or formation of a significant relationship with a
competitor of the Company could materially adversely affect sales of the
Company's products. Also, the introduction of Internet and corporate intranet
technology by the Company's traditional competitors or by any other company in
the Internet/intranet technology market could reduce the demand for the
Company's products. Many of the Company's competitors have substantially greater
financial, technical, sales and marketing and other resources, as well as
greater name recognition and a larger installed base, than the Company. The
Company believes that competition will increase in the future.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a combination
of patent, trademark and copyright laws, trade secrets, confidentiality
procedures and contractual provisions, including employee and third-party
nondisclosure and proprietary rights agreements, to protect its proprietary
rights. The Company has registered and filed applications to register its
trademarks "WALL DATA", "RUMBA", "ONESTEP", "SALSA" and "ARPEGGIO" and their
associated logos in the United States and other countries and has pending
trademark applications in the United States and other countries for "Cyberprise"
and "The Power of Cyberprise". The laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, it expects software piracy to be a persistent problem.
The Company typically distributes its products to users under nonexclusive,
nontransferable licenses, which restrict use of the product solely for the
customer's internal operations. In licensing some of its products, the Company
relies on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable. In other circumstances, the Company makes
available enterprise-wide licenses, which permit use and copying of the product
for internal purposes only and typically are for limited terms. In addition, the
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Company has entered into certain agreements pursuant to which it has licensed
object code for specific products and, in certain cases, has entered into source
code escrow agreements. Pursuant to these escrow agreements, the Company
deposits the source code for the licensed product and related materials with an
escrow agent or trustee who must maintain the confidentiality of the source code
and may release the source code and materials to the licensee only in the event
of insolvency or dissolution of, or reasonably certain nonperformance by, the
Company. Upon such release, the licensee may use the released source code and
materials only in accordance with the restrictions under the terms of its
license or OEM agreement with the Company.
No material claims have been made against the Company for infringement of
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against the Company in the
future.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will become increasingly subject to infringement claims. The
cost of responding to any such assertion may be material, whether or not the
assertion is valid. See "--Important Factors Regarding Forward-Looking
Statements -- Intellectual Property and Proprietary Rights."
SEASONALITY
The Company's business is seasonal. A substantial portion of the Company's
annual net revenues and operating income typically occur in the fourth quarter,
and in each of the last five years, the first quarter revenues have been down
sequentially compared with the immediately preceding fourth quarter. In
addition, the third quarter of each year typically is characterized by more
difficult sales cycles, particularly in Europe, as customers tend to procure
more slowly during the summer months.
EMPLOYEES
As of December 31, 1997, the Company's headcount totaled 793 persons,
including employees and contractors. The Company believes that its future
success continues to depend, in part, on its ability to continue to attract and
retain skilled technical, marketing and management personnel. Competition for
such personnel in the computer industry is intense. The Company believes its
relations with its employees are good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following important factors, among others, could cause Wall Data's
actual results to differ materially from those expressed in Wall Data's
forward-looking statements in this Report and presented elsewhere by management
from time to time.
New Products; Technological Change; Uncertain Acceptance of the Company's
New Products. The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in customer needs and
frequent new product introductions. The Company's future success will depend on
its ability to enhance its current products, to develop new products on a timely
and cost-effective basis that meet changing customer needs and to respond to
emerging industry standards and other technological changes, such as Web-based
technologies. In particular, the Company must be able to modify its products to
maintain compatibility with IBM and IBM-compatible mainframe computers, IBM
AS/400 midrange computers, Digital VAX computers, Novell LAN operating systems,
Microsoft Windows, and industry-standard PCs, hosts and communications
interfaces. In addition, the Company must adapt its current products, and
develop new ones, to address the rapidly evolving Internet and corporate
intranet market. Any failure by the Company to anticipate or respond adequately
to changes in technology and customer preferences or industry standards, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's results of operations. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely basis, or that such new products or product
enhancements will achieve market acceptance. See "-- Product Development" and
"--Competition."
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Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite significant testing by the
Company and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in loss of or
delay in market acceptance. Furthermore, from time to time the Company and
others may announce new products, capabilities or technologies that have the
potential to replace or shorten the life cycles of the Company's existing
products. There can be no assurance that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products or cause distributors to return products to the Company. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on the Company's results of operations.
New Markets; Longer Sales Cycle. The Company's initial software products
provided client-based software that operated in a LAN/WAN environment. The
Company has now announced products that allow organizations to extend their
enterprise applications and information beyond the LAN/WAN environment to their
corporate intranet, extranets and the Internet. The Company's new Cyberprise
strategy and products are focused on enabling organizations to migrate their
existing enterprise information to Internet-based technologies. As the Company
increases its focus on providing leading Internet-based enterprise solutions for
its customers, the Company's business is expected to be characterized by longer
sales cycles and more complex use of its software. These sales generally include
increased involvement by application developers, integrators or other
consultants and involve a significant commitment of capital by prospective
customers, with attendant delays. The Company has relatively limited experience
with sales of Internet-based server software products or licensing models used
in that environment, and there can be no assurance that the Company will be able
to successfully manage its new product line, and the failure to do so could have
a material adverse effect on the Company's business, operating results and
financial condition.
Variability in Quarterly Performance. The Company's results of operations
historically have varied substantially from quarter to quarter, and the Company
expects that they will continue to do so. The timing and amount of the Company's
quarterly net revenues depend on a number of factors, such as the size and
timing of customer orders or license agreements, the timing of the introduction
and customer acceptance of new products or product enhancements by the Company
or its competitors, changes in computer operating systems introduced by
Microsoft, IBM or other companies, changes in pricing policies by the Company or
its competitors, product returns or rotations, fluctuations in foreign exchange
rates, customers postponing purchases of software products while they find year
2000 fixes, and changes in general economic conditions. Products generally are
shipped as orders are received. Accordingly, the Company historically has
operated with little or no backlog. In addition, the Company's operating
expenses are relatively fixed in the short term, and a significant portion of
the revenues for each quarter typically is received near the end of the quarter.
As a result, variations in timing of revenues can cause significant variations
in quarterly results of operations. The Company does not generally take measures
that are specifically designed to limit fluctuations in the Company's quarterly
results of operations. There can be no assurance that the Company will be
profitable on a quarter-to-quarter basis in the future.
The growth in net revenues and operating income experienced by the Company
in past years is not necessarily indicative of future results. In view of the
significant growth of the Company's operations in past years, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied on as an indication of future
performance.
The Company's business is seasonal. A substantial portion of the Company's
annual net revenues and operating income typically occur in the fourth quarter,
and in each of the last five years, the first quarter revenues have been down
sequentially compared with the immediately preceding fourth quarter. In
addition, the third quarter of each year typically is characterized by more
difficult sales cycles, particularly in Europe, as customers tend to procure
more slowly in the summer months.
Competition. The connectivity market within the computer industry is
intensely competitive and subject to rapidly changing technology and evolving
standards incorporated into PCs, networks, host computers and enterprise
servers. In general, customers and prospective customers of the Company's
products also have
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competitors' connectivity products installed, and the Company competes with
these vendors for customer orders. The introduction by Microsoft of a client
software connectivity product or formation of a significant relationship with a
competitor of the Company could adversely affect sales of the Company's
products. Also, the introduction of Internet and corporate intranet technology
by the Company's traditional competitors or by any other company in the
Internet/intranet technology market may reduce the demand for the Company's
products. Many of the Company's competitors have substantially greater
financial, technical, sales and marketing and other resources, as well as
greater name recognition and a larger installed base, than the Company. The
Company believes that competition will increase in the future. The market for
the Company's products is also characterized by significant price competition,
and the Company expects that it will face increasing pricing pressures. There
can be no assurance that the Company will be able to maintain its historic
prices, and an inability to do so could adversely affect the Company's results
of operations. There can be no assurance that the Company will continue to
compete successfully in the face of increasing competition from new products and
enhancements introduced by existing competitors and new companies entering the
market. See "--Competition."
Dependence on a Single Product Line. The Company has derived a substantial
portion of its net revenues to date from sales of its RUMBA client software
connectivity products, and the RUMBA product line and related enhancements are
expected to continue to account for a substantial portion of the Company's net
revenues for the foreseeable future. A decline in demand for RUMBA products as a
result of competition, technological change or otherwise would have a material
adverse effect on the Company's results of operations. See "--Products" and
"--Competition."
Dependence on Host Computers. The Company's products are designed for use
with IBM and IBM-compatible mainframe computers, IBM AS/400 midrange computers
and Digital VAX computers. If business organizations were to reduce their use of
these host computers, the market for the Company's products would be adversely
affected. In addition, because the Company's products operate in conjunction
with IBM and Digital system software, the Company must adapt its products to
technological changes by IBM and Digital. Any failure by the Company to do so in
a timely manner would adversely affect the Company's results of operations. See
"--Products" and "--Competition."
Dependence on Microsoft Windows. Substantially all of the Company's net
revenues are derived from the sales of products designed to achieve host
connectivity within a Microsoft Windows environment and are marketed primarily
to Windows users. As a result, sales of the Company's products could be
materially adversely affected by market developments adverse to Windows. In
addition, the Company's strategy of developing products using the Windows
environment is substantially dependent on its ability to gain access to, and to
develop expertise in, current and future Windows developments by Microsoft in a
timely fashion. See "--Products" and "--Competition."
Dependence on the Internet. As the Company focuses on delivering
Internet-based solutions for its customers' enterprise application needs, sales
of the Company's products will increasingly depend on adequate access to the
Internet. The Internet also may develop more slowly than expected for a variety
of reasons, such as inadequate development of the necessary infrastructure or
complementary products. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
potential growth. If the necessary infrastructure or complementary products are
not developed, or if the Internet develops more slowly than expected, the
Company's business, operating results and financial condition will be materially
adversely affected.
Reliance on Resellers and Distributors. Although the Company intends to
continue to expand its own sales and marketing staff to sell products directly
to its customers, in the future the Company expects to continue to rely on
resellers and distributors for sales of its products. There can be no assurance,
however, that such resellers and distributors will be able to market the
Company's products effectively. The Company's agreements with resellers and
distributors are not exclusive and may be terminated by either party without
cause. Many of the Company's resellers and distributors carry competing product
lines. There can be no assurance that any reseller or distributor will continue
to represent the Company's products. In addition, the Company will be
increasingly dependent on the continued viability and financial stability of
resellers and
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distributors, which, in turn, are substantially dependent on the PC industry.
The inability to recruit, or the loss of, important resellers or distributors
could materially adversely affect the Company's results of operations. See
"--Sales, Marketing and Distribution."
The Company also expects to rely increasingly on resellers and distributors
to support its products. There can be no assurance, however, that the Company
will be able to attract resellers and distributors qualified to provide timely
and cost-effective customer support or service. Any deficiencies in the service
or support provided by such entities could have a material adverse effect on the
Company's results of operations. See "--Sales, Marketing and Distribution."
International Operations. The Company expects that international sales will
continue to account for a significant portion of its business. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products less competitive in those markets in which the Company's
products are sold. The Company does not currently engage in foreign currency
hedging transactions, although it may implement such transactions in the future.
Operating expenses relating to foreign offices also are subject to the effects
of fluctuations of foreign currency exchange rates. The Company faces certain
risks inherent in international business operations, including fluctuations in
foreign currency exchange rates, the instability of certain overseas economic
environments, longer accounts receivable payment cycles, difficulties in
staffing and managing international operations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, potentially adverse tax
consequences, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's results of operations.
Risks Related to the Year 2000. The Company has developed plans to address
issues related to the impact on its products and systems of the year 2000.
Products have been modified, financial and operational systems have been
assessed and plans have been developed to address modification requirements. If
the Company or its vendors or distributors are unable to resolve such issues in
a timely manner or if the Company's products are used in conjunction with the
software of other suppliers that have not adequately addressed year 2000 issues,
it could result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
Dependence on Key Personnel; Management of Growth. The Company's success
depends to a significant extent on a number of senior management personnel,
including the President and Chief Executive Officer, John R. Wall, and the Chief
Operating Officer, Kevin B. Vitale. The loss of the services of these key
persons would have a material adverse effect on the Company. The Company has no
employment agreement with Mr. Wall or Mr. Vitale. The Company's success also
depends in part on its ability to attract and retain qualified professional,
technical, managerial and marketing personnel. Competition for such personnel in
the software industry is intense. There can be no assurance that the Company
will be successful in attracting and retaining the personnel it requires to
develop new and enhanced products and to conduct its operations successfully.
The ability of the Company to sustain growth will depend in part on the ability
of its officers and key personnel to manage growth successfully through
implementation of appropriate management systems and controls. The Company's
results of operations could be materially adversely affected if the Company were
unable to attract, hire, assimilate, train and manage these personnel, or if
revenues failed to increase at a rate sufficient to absorb the resulting
increase in expenses. See "--Sales, Marketing and Distribution" and
"--Employees."
Intellectual Property and Proprietary Rights. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, it expects software piracy to
be a persistent problem. In licensing some of its products, the Company relies
on "shrink wrap" licenses that are not signed by licensees and, therefore, may
be unenforceable. In addition, the laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that these protections will be
adequate or that the Company's competitors will not independently develop
similar technology. There can be no
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assurance that third parties will not assert infringement claims against the
Company in the future. As the number of software products in the industry
increases and the functionality of these products further overlaps, the Company
believes that software programs will become increasingly subject to infringement
claims. The cost of responding to any such assertion may be material, whether or
not the assertion is valid. See "--Proprietary Rights."
EXECUTIVE OFFICERS AT DECEMBER 31, 1997
The executive officers of the Company and their ages at December 31, 1997
are as follows:
John R. Wall 40 President and Chief Executive Officer of the Company
since August 1997; President since May 1996; Director
since May 1994; Executive Vice President from June
1991 to May 1996; Secretary from January 1993 to May
1994; Director from inception to May 1991 and
Chairman of the Board of Directors from 1985 to 1991;
President from 1982 to 1985; Vice President, Research
and Development from 1985 to 1991; Chairman of The
Washington Software Association from January 1994 to
December 1995; Founding Trustee and Chairman of the
Washington Software Foundation; Board of Trustees of
the Corporate Council for the Arts.
Kevin B. Vitale 40 Chief Operating Officer and a Director of the Company
since August 1997; Executive Vice President from
April 1996 to July 1997; Vice President, Operations
and Services of the Company from July 1993 to April
1996; Vice President, Corporate Quality and Customer
Service of NetFRAME Systems Incorporated from July
1989 to July 1993; Director of The Washington
Software Association since 1997; Director of
DataChannel, Inc.; founding member of the Technical
Support Alliance Network ("TSANet"), served as board
member and Treasurer for the past four years.
Alexandra A. Brookshire 43 Vice President, General Counsel and Secretary of the
Company since April 1994; lawyer with Perkins Coie
LLC law firm from 1985 to April 1994, becoming a
partner in 1989; lawyer with Dewey Ballantine law
firm from 1981 to 1985.
Richard Van Hoesen 42 Vice President Finance, Chief Financial Officer and
Treasurer of the Company since May 1996; Vice
President Finance and Chief Financial Officer of
Consilium, Inc. from October 1994 to May 1996;
Director, Investor Relations of Sun Microsystems,
Inc. from April 1992 to October 1994.
The Company has announced that Rick Fox will join the Company as Vice
President Finance, Chief Financial Officer and Treasurer effective April 1998,
following the departure of Mr. Van Hoesen in March 1998. During his 28-year
tenure with Ernst & Young, Mr. Fox held many leadership positions with the firm,
including managing partner of the firm's Seattle office and a member of the
Ernst & Young National Partner Advisory Counsel. Immediately prior to joining
Wall Data, Mr. Fox served as senior vice president of PACCAR Inc responsible for
the company's accounting, treasury and information systems.
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BOARD OF DIRECTORS AT DECEMBER 31, 1997
The directors of the Company at December 31, 1997 are as follows:
Robert J. Frankenberg 50 Chairman of the Board of Wall Data; President and
Chief Executive Officer of Encanto Networks, Inc.
Jeffrey A. Heimbuck 51 Former President and Chief Executive Officer of Inmac
Corporation
Henry N. Lewis 59 Managing Director and Principal of Computer Ventures
Group Limited
David F. Millet 53 Managing Director of Gemini Investments
Steve Sarich, Jr. 77 President of 321 Investment Company
Bettie A. Steiger 64 Principal, Market and Technology Innovation of Xerox
Corporation
John R. Wall 40 President and Chief Executive Officer of Wall Data
Kevin B. Vitale 40 Chief Operating Officer of Wall Data
ITEM 2. PROPERTIES
The Company's headquarters is located in Kirkland, Washington, where it
leases approximately 65,000 square feet for its principal executive,
administrative, sales and marketing, customer support and service and product
development activities. The Company also leases approximately 12,500 square feet
of office space in London, England and leases space for its other national and
international offices.
ITEM 3. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings or claims, either asserted
or unasserted, that arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, management does not believe
that any pending legal matters will have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (symbol
"WALL"). The number of shareholders of record of the Company's Common Stock at
January 31, 1998 was 336.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in the expansion and operations of its business and does not anticipate
paying cash dividends in the foreseeable future.
High and low sales prices for the Company's Common Stock for each quarter
in 1996 and 1997 are as follows:
STOCK PRICE
--------------------
YEAR HIGH LOW
- ---- ------ ------
1996
First Quarter........................................ $17.25 $13.00
Second Quarter....................................... 23.75 14.75
Third Quarter........................................ 27.50 16.25
Fourth Quarter....................................... 24.75 12.25
1997
First Quarter........................................ 19.63 14.50
Second Quarter....................................... 29.13 15.13
Third Quarter........................................ 28.25 17.00
Fourth Quarter....................................... 20.50 11.31
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ITEM 6. SELECTED FINANCIAL DATA
WALL DATA INCORPORATED
SELECTED FIVE-YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
STATEMENT OF OPERATIONS
Net revenues............................. $140,851 $139,364 $110,741 $101,240 $64,641
Gross margin............................. 113,556 108,890 86,522 85,754 55,097
Operating expenses....................... 113,865 103,829 91,737 64,726 40,613
Income (loss) from operations............ (309) 5,061 (5,215) 21,028 14,484
Net income............................... 2,251 4,193 7,251 14,184 9,545
Earnings per share -- assuming
dilution............................... 0.23 0.43 0.72 1.40 1.00
Pro forma net income*.................... 9,581 6,145 2,766 16,664 11,529
Pro forma earnings per share -- assuming
dilution............................... 0.97 0.63 0.28 1.65 1.21
Average shares outstanding -- assuming
dilution............................... 9,886 9,721 10,027 10,124 9,520
BALANCE SHEET
Cash and cash equivalents................ $ 70,814 $ 62,483 $ 51,969 $ 48,927 $50,308
Working capital.......................... 72,849 71,798 60,720 56,308 55,333
Total assets............................. 136,576 127,154 109,339 105,626 74,431
Long-term obligations, net of current
portion................................ -- -- -- -- 127
Shareholders' equity..................... 94,887 90,803 83,702 81,206 62,333
KEY RATIOS
Current ratio............................ 2.7 3.0 3.3 3.3 5.6
Pro forma return on net revenues*........ 6.8% 4.4% 2.5% 16.5% 17.8%
Pro forma return on average total
assets*................................ 7.3% 5.2% 2.6% 18.5% 25.5%
Pro forma return on average stockholders'
equity*................................ 10.3% 7.0% 3.4% 23.2% 32.3%
- ---------------
* Excludes nonrecurring gain in 1995 of $14.0 million ($8.7 million, or $0.87
per share on a diluted basis, after income taxes) and nonrecurring charges in
1997, 1996 and 1995 of $11.5 million ($7.3 million, or $0.74 per share on a
diluted basis, after income taxes), $3.1 million ($2.0 million, or $0.20 per
share on a diluted basis, after income taxes), and $6.8 million ($4.2 million,
or $0.42 per share on a diluted basis, after income taxes), respectively. See
Notes 6 and 11 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company's results of operations have historically varied substantially
from quarter to quarter, and the Company expects that they will continue to do
so. The timing and amount of the Company's quarterly net revenues depend on a
number of factors, such as the size and timing of customer orders or license
agreements, the timing of the introduction and customer acceptance of new
products or product enhancements by the Company or its competitors, changes in
PC operating systems introduced by Microsoft, IBM or other companies, changes in
pricing policies by the Company or its competitors, product returns or
rotations, fluctuations in foreign exchange rates, customers postponing
purchases of software products while they find
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year 2000 fixes and changes in general economic conditions. Net revenues will
also depend upon the success of the Company's recently announced Cyberprise
strategy. Products generally are shipped as orders are received and,
accordingly, the Company historically has operated with little or no backlog. In
addition, the Company's operating expenses are relatively fixed in the short
term and a significant portion of the revenues for each quarter typically is
received near the end of the quarter. As a result, variations in timing of
revenues can cause significant variations in quarterly results of operations.
The Company has developed plans to address issues related to the impact on
its products and systems of the year 2000. Products have been modified,
financial and operational systems have been assessed and plans have been
developed to address modification requirements. The financial impact of making
the required changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows. However,
if the Company or its vendors or distributors are unable to resolve such issues
in a timely manner or if the Company's products are used in conjunction with the
software of other suppliers that have not adequately addressed year 2000 issues,
it could result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
The growth in net revenues and operating income experienced by the Company
during the past five years is not necessarily indicative of future results. In
view of the significant growth of the Company's operations in recent years, the
Company believes that period-to-period comparisons of its financial results are
not necessarily meaningful and should not be relied on as an indication of
future performance.
The Company's business is seasonal, with a substantial percentage of its
annual net revenues and operating income typically occurring in the fourth
quarter of the year. Since 1991, the Company has frequently incurred higher
operating expenses in each sequential quarter primarily due to an increase in
the number of employees. The Company expects that in the first quarter of 1998
lower net revenues, as compared to the fourth quarter of 1997, will result in
significantly lower net income.
Revenues
1997 CHANGE 1996 CHANGE 1995
-------- ------ -------- ------ --------
(DOLLAR AMOUNTS IN THOUSANDS)
Net Revenues..................... $140,851 1% $139,364 26% $110,741
Net revenues increased 1% in 1997. Increases in revenue from ONESTEP
customer support contracts was substantially offset by decreases in revenue from
licenses of RUMBA products. The Company believes that the growth in net revenues
in 1997 was lower than in prior years due to lengthening sales cycles for its
core products as its customers continue to evaluate Internet technology
strategies for future mission-critical systems. Approximately 60% and 25% of net
revenues in 1997 related to products containing 32-bit technology and 16-bit
technology, respectively.
Net revenues increased 26% in 1996 primarily due to increases in revenues
from the Windows version of RUMBA OFFICE, the Company's multi-host product, and
ONESTEP customer support contracts, partially offset by reductions in sales of
certain single host products, principally RUMBA for the Mainframe. In March
1996, the Company released commercial versions of a number of RUMBA software
products, incorporating the ActiveX component architecture designed for the
Windows 95 and Windows NT 32-bit operating systems. Approximately 29% and 61% of
net revenues in 1996 related to products containing 32-bit technology and 16-bit
technology, respectively. In 1995, approximately 89% of net revenues resulted
from 16-bit products. Net revenues from the SALSA product family, which the
Company introduced in March 1996, were not significant.
The Company has derived a substantial majority of its net revenues to date
from licenses of its RUMBA client software products, which accounted for 81%,
86% and 88% of net revenues in 1997, 1996 and 1995, respectively. The RUMBA
product line and related enhancements are expected to account for a majority of
the Company's net revenues for 1998. A decline in demand for RUMBA products as a
result of competition, technological changes or otherwise would have a material
adverse effect on the Company's results of operations. The Company recently
announced its Cyberprise strategy, which is designed to enable companies
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to move existing mission-critical systems and public information to the Web and
extend those systems to remote users, vendors and customers. There can be no
assurance that the Cyberprise strategy will be successful. See "--Important
Factors Regarding Forward-Looking Statements -- New Products; Technological
Change; Uncertain Acceptance of the Company's New Products" and "--New Markets;
Longer Sales Cycle."
Net revenues related to sales of the Company's products and services
outside North America represented $42.4 million, or 30% of net revenues, in 1997
compared to $40.0 million, or 29% of net revenues, in 1996 and $30.6 million, or
28% of net revenues, in 1995. The increases in international net revenues in
1997 and 1996 were primarily due to increased acceptance of RUMBA products and
increased sales and marketing activities in Europe, particularly in the United
Kingdom. Most of the Company's international revenues in 1997, 1996 and 1995
were generated through its indirect distribution channels. The Company's
international sales are denominated in U.S. dollars and local currencies.
Operating expenses incurred in local currencies relating to the Company's
offices in Europe, Japan, Australia, Singapore and Latin America are also
subject to the effects of fluctuations of foreign currency exchange rates.
Foreign currency exchange rate changes did not have a significant effect on net
revenues in 1997, 1996 and 1995, but exchange rate fluctuations could have an
adverse effect on future net revenues. The Company has experienced limited
difficulties in hiring, training and retaining management-level staff abroad and
in selecting international resellers with technological and sales expertise to
distribute the Company's products. Additional risks inherent in the Company's
international business activities, which have not materially affected the
Company's business to date, generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, longer accounts receivable
payment cycles, difficulties in managing international operations, potentially
adverse tax consequences, repatriation of earnings and the burdens of complying
with a wide variety of foreign laws.
The Financial Accounting Standards Board recently approved the new American
Institute of Certified Public Accountants Statement of Position ("SOP") No.
97-2, "Software Revenue Recognition." SOP No. 97-2 will be effective for the
Company beginning in the first quarter of 1998. The Company is currently
assessing the impact, if any, of SOP No. 97-2 on its revenue recognition policy.
GROSS MARGIN AND COST OF REVENUE
1997 CHANGE 1996 CHANGE 1995
---- ------ ---- ------ ----
(DOLLAR AMOUNTS IN THOUSANDS)
GROSS MARGIN...................... $113,556 4% $108,890 26% $86,522
Percentage of net revenues...... 81% 78% 78%
Cost of revenues consists of software publishing costs, which include
labor, product media, packaging and documentation, publishing, engineering,
technical support and product quality assurance costs, royalties and licensing
costs, amortization of product localization costs and provisions for obsolete
inventory, doubtful accounts, and reseller rebates. Gross margin, as a
percentage of net revenues, increased in 1997 from 1996 primarily due to lower
software publishing costs and lower royalties and licensing costs, partially
offset by an increase in the amortization of localization costs. Software
publishing costs decreased in 1997 due to the conversion of all product media
from diskettes to compact discs and the adoption of simplified, uniform product
packaging. Royalties and licensing costs decreased in 1997 due to lower RUMBA
software license revenues and lower costs for third-party technology. The
amortization of localization costs increased primarily due to third-party
localization costs incurred in 1996 relating to the major product launches for
certain RUMBA products. The Company amortizes third-party localization costs
over a 24-month period. Gross margin, as a percentage of net revenues, in 1996
approximated the percentage in 1995. Expenses for royalties and amortization of
prepaid licenses may increase in the future if the Company introduces more
products incorporating software licensed from third parties, and amortization of
product localization costs will increase as the Company introduces new products
in international markets.
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OPERATING EXPENSES
1997 CHANGE 1996 CHANGE 1995
---- ------ ---- ------ ----
(DOLLAR AMOUNTS IN THOUSANDS)
OPERATING EXPENSES
Product development............... $19,675 (14%) $22,924 16% $19,765
Percentage of net revenues........ 14% 16% 18%
All internal software development expenses are expensed as incurred.
Product development expenses are primarily associated with the enhancement of
existing products and the development of new software products, such as ARPEGGIO
LIVE! and RUMBA OBJECTX which were developed and released in 1997 and RUMBA
95/NT, SALSA and ARPEGGIO which were developed in 1995 and 1996 and released in
the first half of 1996. Product development expenses decreased in 1997 due to
lower average headcount, arising from the completion of initial versions of
RUMBA 95/NT and SALSA products in 1996. The reduction also reflects the benefits
obtained from the object-based architecture that was developed during 1996 and
1995. Product development expenses increased in 1996 due to increases in labor
costs (due in part to a small increase in average staffing levels) support costs
for third-party technology, and depreciation. Product development expenses as a
percentage of net revenues decreased in 1997 compared to 1996 due to the
completion of the two major development projects, RUMBA 95/NT and SALSA in early
1996; the percentage decreased in 1996 compared to 1995 due to the completion of
these development projects, together with the higher revenue growth rate in
1996.
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
OPERATING EXPENSES
Sales and marketing............... $66,938 5% $63,939 17% $54,615
Percentage of net revenues........ 48% 46% 49%
During 1995 through 1997 the Company generally expanded its sales and
marketing operations by increasing staffing levels coupled with increases in the
amount and breadth of its cooperative advertising programs with resellers and
distributors, other marketing programs and trade show activity. The number of
sales offices maintained by the Company totaled 49, 57 and 54 at the end of
1997, 1996 and 1995, respectively, including, at the end of 1997, six offices in
Europe, two offices in Canada, three offices in Latin America and one office
each in Australia, Japan, Mexico and Singapore. The increase in expenses in 1996
was also a result of higher incentive compensation resulting from increased net
revenues and product launch expenses relating to the introduction of the RUMBA
95/NT, SALSA and ARPEGGIO product families. Sales and marketing expenses as a
percentage of net revenues increased in 1997 compared to 1996 primarily due to
the lower revenue growth rate in 1997; the percentage decreased in 1996 compared
to 1995 primarily due to the higher revenue growth rate in 1996.
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
OPERATING EXPENSES
General and administrative........ $15,764 14% $13,818 31% $10,552
Percentage of net revenues........ 11% 10% 10%
General and administrative expenses include general administrative, finance
and accounting, and legal expenses, costs for the management information systems
and human resources departments, and the amortization of goodwill relating to
certain acquisitions. The increases in general and administrative expenses in
1997 and 1996 resulted primarily from increased staffing and associated expenses
necessary to manage and support the Company's growth and, in 1996, also from
higher legal fees as a result of the shareholders' class action lawsuit. (See
Notes 6 and 11 of Notes to Consolidated Financial Statements.) The Company
intends to continue to maintain its general and administrative expenses as
necessary to support its operations. The amortization of goodwill will increase
in 1998 as a result of the Company's acquisition of Software Development Tools,
Inc. in November 1997 and of First Service Computer Dienstleistungs-GmbH ("First
Service") in March 1998. (See Note 14 of Notes to Consolidated Financial
Statements.)
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1997 CHANGE 1996 CHANGE 1995
------- ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
OPERATING EXPENSES
Nonrecurring charges.................... $11,488 265% $3,148 (54)% $6,805
Percentage of net revenues.............. 8% 2% 6%
During 1997, the Company recorded nonrecurring charges totaling $11.5
million ($7.3 million, or $0.74 per share on a diluted share basis, after tax).
In June 1997, the Company agreed to settle the shareholders' class action
lawsuit for $9.1 million, including related legal fees. (See Notes 6 and 11 of
Notes to Consolidated Financial Statements.) The Company also recorded
nonrecurring charges in 1997 of $1.0 million for the restructuring of the SALSA
business unit, $0.6 million for retirement payments to the Company's former
Chairman, President and CEO, and $0.7 million for the write-off of in-process
research and development resulting from the acquisition of Software Development
Tools, Inc. (See Note 6 of Notes to Consolidated Financial Statements.) During
1996, the Company determined to streamline its business operations and recorded
nonrecurring charges totaling $3.1 million ($2.0 million, or $0.20 per share on
a diluted basis, after income taxes) primarily relating to the write-off of
technology investments and prepaid royalties no longer relevant to the Company's
ongoing product offerings and programs. In 1995, the Company recorded
nonrecurring charges totaling $6.8 million ($4.2 million, or $0.42 per share on
a diluted basis, after income taxes) primarily for the write-off of in-process
research and development resulting from the acquisition of Concentric Data
Systems, Inc. in April 1995 and the write-off of the remaining goodwill from
another acquisition. (See Note 6 of Notes to Consolidated Financial Statements.)
OTHER INCOME (EXPENSE)
1997 CHANGE 1996 CHANGE 1995
------ ------ ------ ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
OTHER INCOME (EXPENSE)
Gain on sale of equity investment... -- -- -- -- $14,040
Percentage of net revenues.......... -- -- 13%
Interest income..................... $3,538 21% $2,934 (8)% $ 3,191
Percentage of net revenues....... 3% 2% 3%
Other income (expense), net......... $ (735) (2)% $ (748) 131% $ (324)
Percentage of net revenues....... (1)% (1)% --
Interest income increased in 1997 compared to 1996 due to higher investment
balances; interest income decreased in 1996 compared to 1995 due to lower
average interest rates. Other income, net of other expenses, includes interest
expense, foreign currency transaction gains and losses and miscellaneous income
and expenses. Foreign currency transactions resulted in net exchange losses of
$0.8 million in 1997, $0.6 million in 1996 and $0.5 million in 1995. To date,
the Company has not engaged in currency hedging transactions against sales
denominated in currencies other than U.S. dollars, although the Company may do
so in the future. In April 1995, the Company sold its equity investment in SPRY,
Inc. for a gain of $14.0 million ($8.7 million, or $0.87 per share on a diluted
basis, after income taxes). (See Note 6 of Notes to Consolidated Financial
Statements.)
INCOME TAXES
1997 CHANGE 1996 CHANGE 1995
---- ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
PROVISION FOR INCOME TAXES.................. $243 (92)% $3,054 (31)% $4,441
Percentage of net revenues................ 0.2% 2% 4%
Effective tax rate........................ 10% 42% 38%
The provision for income taxes includes U.S. federal, state and
international taxes currently payable and deferred taxes arising from temporary
differences in determining income for financial statement and tax purposes. The
decrease in the Company's effective tax rate in 1997 as compared to 1996
resulted primarily
18
20
from Foreign Sales Corporation tax benefits and from operating losses incurred
in higher tax rate jurisdictions combined with significant operating profits
earned in jurisdictions with lower tax rates. The increase in the Company's
effective tax rate in 1996 was due to higher profits in certain international
subsidiaries, which are subject to higher tax rates coupled with certain
nondeductible expenses. The Company anticipates that the effective tax rate in
1998 will increase significantly from 1997 and be somewhat lower than in 1996.
LIQUIDITY AND CAPITAL RESOURCES
1997 1996 1995
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
Cash and cash equivalents..................... $70,814 $62,483 $51,969
Working capital............................... $72,849 $71,798 $60,720
Net cash flow provided by operating
activities.................................. $19,888 $18,143 $ 5,736
The Company's cash and cash equivalents totaled $70.8 million, or 52% of
total assets, at December 31, 1997, compared to $62.5 million, or 49% of total
assets, at December 31, 1996.
The Company's expenditures for property and equipment for the years ended
December 31, 1997, 1996 and 1995 totaled $3.9 million, $5.1 million and $7.1
million, respectively. The decrease in expenditures in 1997 compared to 1996 and
in 1996 compared to 1995 primarily resulted from reduced growth in average
staffing levels. Although the Company does not currently have any specific
commitments with regard to capital expenditures, it expects to continue to
acquire new capital equipment and make other capital expenditures. Purchases of
prepaid software technology totaled $2.4 million, $1.3 million and $3.2 million
in 1997, 1996 and 1995, respectively. Capitalized third-party localization costs
totaled $3.0 million in both 1997 and 1996; such costs were not material in
1995. The decrease in capitalized localization costs in 1997 as compared to 1996
and the increase in such costs in 1996 as compared to 1995 resulted from the
significant increase in the volume of new product introductions in 1996 compared
to 1997 and 1995 and the expansion of sales operations into new international
markets.
In April 1995, the Board of Directors authorized a stock repurchase program
of up to $10.0 million. Through December 31, 1995, the Company had repurchased
488,200 shares with a total cost of $8.5 million. No shares were repurchased in
1997 or 1996.
In October 1997, the Company acquired a 15% interest in Suntek Information
System Co. Ltd. for approximately $0.9 million. In November 1997, the Company
acquired Software Development Tools, Inc. for $2.0 million. Also in November
1997, the Company acquired a 10% equity interest in DataChannel, Inc. for
approximately $1.7 million. In April 1995, the Company acquired Concentric Data
Systems, Inc. for approximately $7.8 million. See Note 6 of Notes to
Consolidated Financial Statements. The Company will consider, from time to time,
joint ventures, additional acquisitions or investments in other businesses or
third-party technology. The Company believes that existing cash and cash
equivalents, together with funds from operations, will provide the Company with
sufficient funds to finance its operations through 1998.
On March 12, 1998, the Company acquired all the outstanding capital stock
of First Service of Hattingen, Germany and related entities. First Service
distributes and supports a range of connectivity software solutions to major
corporations throughout Germany and has been selling and supporting Wall Data's
products and technologies for more than seven years. The total purchase price
approximates $11.0 million, including deferred payments of approximately $2.0
million that are substantially payable in one year, contingent on the
satisfaction of certain guarantees and warranties. The acquisition will be
accounted for under the purchase method of accounting. See Note 14 of Notes to
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data are
included beginning on page F-1 of this Report:
PAGE
----
Consolidated Income Statements -- years ended December 31,
1997, 1996 and 1995....................................... F-1
Consolidated Balance Sheets -- December 31, 1997 and 1996... F-2
Consolidated Statements of Shareholders' Equity -- years
ended December 31, 1997, 1996 and 1995.................... F-3
Consolidated Statements of Cash Flow -- years ended December
31, 1997, 1996 and 1995................................... F-4
Notes to Consolidated Financial Statements.................. F-5
Report of Ernst & Young LLP, Independent Auditors........... F-16
Selected Quarterly Financial Data and Market Information.... F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
22
PART III
Part III is incorporated herein by reference from the Company's definitive
proxy statement issued in connection with the Company's 1998 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's 1997 fiscal year. Certain
information regarding the executive officers and directors of the Company is set
forth in Part I of this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements -- all consolidated financial statements of the
Company as set forth under Item 8 of this Report.
(2) Financial Statement Schedules -- Schedule II Valuation and Qualifying
Accounts.
The independent auditors' report with respect to the financial
statement schedules appears on page F-16 of this Report. All other
financial statements and schedules not listed are omitted because
either they are not applicable or not required, or the required
information is included in the consolidated financial statements.
(3) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation of Wall Data
Incorporated.*
3.2 Restated Bylaws of Wall Data Incorporated.*
+10.1 Amended and Restated 1983 Stock Option Plan (Incorporated by
reference to Registration Statement No. 33-57816)
+10.2 Restated 1993 Stock Option Plan (Incorporated by reference
to the Company's Form 10-K for the fiscal year ended
December 31, 1996). Amendment thereto dated March 11, 1998.*
+10.3 Restated 1993 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1996). Amendment thereto
dated October 28, 1997.*
10.4 Restated Employee Stock Purchase Plan (Incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996).
+10.5 Separation Agreement and General Release dated June 30, 1997
between Wall Data Incorporated and James Simpson.*
10.6 Agreement for Information Technology Services dated May 31,
1997 between Wall Data Incorporated and Electronic Data
Systems Corporation.**
+10.7 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Registration Statement No.
33-57816).
10.8 Lease between Totem Skyline Associates III as Landlord and
Wall Data Incorporated as Tenant dated as of December 2,
1993 and Sublease between Wall Data Incorporated as Landlord
and Totem Skyline Associates III as Tenant dated as of
December 2, 1993 (Incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.9 Rights Agreement dated as of July 19, 1995 between Wall Data
Incorporated and First Interstate Bank of Washington, N.A.,
as rights agent (Incorporated by reference to the Company's
Form 8-A dated July 19, 1995).
21
23
EXHIBIT
NO. DESCRIPTION
------- -----------
11.1 Computation of Earnings Per Share.*
21.1 Subsidiaries of Wall Data Incorporated.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
27.1 Financial Data Schedule.*
27.2 Restated Financial Data Schedule for 1997.*
27.3 Restated Financial Data Schedule for 1996.*
- ---------------
+ Management contract or compensatory plan
* Included herewith
** Included herewith; confidential treatment has been requested as to a portion
of this document
(b) Reports on Form 8-K:
None.
22
24
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Net revenues:
License Fees............................................. $118,905 $124,815 $102,800
Services................................................. 21,946 14,549 7,941
-------- -------- --------
Total net revenues............................... 140,851 139,364 110,741
Cost of revenues:
License Fees............................................. 19,645 23,474 19,661
Services................................................. 7,650 7,000 4,558
-------- -------- --------
Total cost of revenues........................... 27,295 30,474 24,219
-------- -------- --------
Gross margin............................................... 113,556 108,890 86,522
Operating expenses:
Product development...................................... 19,675 22,924 19,765
Sales and marketing...................................... 66,938 63,939 54,615
General and administrative............................... 15,764 13,818 10,552
Non-recurring charges.................................... 11,488 3,148 6,805
-------- -------- --------
Total operating expenses......................... 113,865 103,829 91,737
-------- -------- --------
Operating income (loss).................................... (309) 5,061 (5,215)
Other income (expense):
Gain on sale of equity investment........................ -- -- 14,040
Interest income.......................................... 3,538 2,934 3,191
Other, net............................................... (735) (748) (324)
-------- -------- --------
Total other income, net.......................... 2,803 2,186 16,907
-------- -------- --------
Income before income taxes................................. 2,494 7,247 11,692
Provision for income taxes................................. 243 3,054 4,441
-------- -------- --------
Net income................................................. $ 2,251 $ 4,193 $ 7,251
======== ======== ========
Earnings per share -- basic................................ $ 0.24 $ 0.46 $ 0.79
======== ======== ========
Earnings per share -- assuming dilution.................... $ 0.23 $ 0.43 $ 0.72
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
25
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
1997 1996
-------- --------
Current assets:
Cash and cash equivalents................................. $ 70,814 $ 62,483
Accounts receivable, net of allowances of $3,757 and
$3,740................................................. 35,113 38,694
Inventories............................................... 738 733
Deferred income taxes..................................... 5,701 3,977
Prepaid expenses and other current assets................. 2,172 2,262
-------- --------
Total current assets.............................. 114,538 108,149
Fixed assets, net........................................... 10,597 12,735
Deferred income taxes....................................... 458 155
Long-term investments....................................... 2,636 --
Other assets................................................ 8,347 6,115
-------- --------
$136,576 $127,154
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,106 $ 6,774
Accrued compensation...................................... 7,365 7,989
Other accrued liabilities................................. 7,167 5,676
Income taxes payable...................................... 3,735 4,722
Deferred revenues......................................... 15,316 11,190
-------- --------
Total current liabilities......................... 41,689 36,351
-------- --------
Shareholders' equity:
Preferred Stock -- Series A Junior
Participating -- 500,000 shares authorized; none issued
and outstanding........................................ -- --
Common Stock, no par value -- authorized 45,000,000
shares; issued and outstanding 9,312,480 shares
(9,132,980 in 1996).................................... 56,771 54,357
Retained earnings......................................... 37,762 35,791
Cumulative translation adjustment......................... 354 655
-------- --------
Total shareholders' equity........................ 94,887 90,803
-------- --------
$136,576 $127,154
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
26
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
--------- -------- --------- ----------- -------
Balance at January 1, 1995.................... 9,128,692 $ 56,862 $24,259 $ 85 $81,206
Issuance of Common Stock in payment of note
payable and related accrued interest..... 29,321 1,571 -- -- 1,571
Repurchases of Common Stock................. (488,200) (8,539) -- -- (8,539)
Exercise of Common Stock options............ 271,610 853 -- -- 853
Stock issued under stock purchase plan...... 17,685 398 -- -- 398
Income tax benefit from exercise of Common
Stock options............................ -- 1,150 -- -- 1,150
Net income for the year..................... -- -- 7,251 -- 7,251
Translation adjustment...................... -- -- -- (188) (188)
--------- -------- ------- ----- -------
Balance at December 31, 1995.................. 8,959,108 52,295 31,510 (103) 83,702
Exercise of Common Stock options............ 134,475 1,101 -- -- 1,101
Stock issued under stock purchase plan...... 39,397 473 -- -- 473
Income tax benefit from exercise of Common
Stock options............................ -- 375 -- -- 375
Stock option compensation................... -- 113 -- -- 113
Unrealized gain on investment............... -- -- 88 -- 88
Net income for the year..................... -- -- 4,193 -- 4,193
Translation adjustment...................... -- -- -- 758 758
--------- -------- ------- ----- -------
Balance at December 31, 1996.................. 9,132,980 54,357 35,791 655 90,803
Exercise of Common Stock options............ 106,413 1,009 -- -- 1,009
Stock issued under stock purchase plan...... 73,087 1,052 -- -- 1,052
Income tax benefit from exercise of Common
Stock options............................ -- 271 -- -- 271
Stock option compensation................... -- 82 -- -- 82
Unrealized loss on investment............... -- -- (280) -- (280)
Net income for the year..................... -- -- 2,251 -- 2,251
Translation adjustment...................... -- -- -- (301) (301)
--------- -------- ------- ----- -------
Balance at December 31, 1997.................. 9,312,480 $ 56,771 $37,762 $ 354 $94,887
========= ======== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
27
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEAR ENDED DECEMBER 3L
--------------------------------
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES
Net income............................................... $ 2,251 $ 4,193 $ 7,251
Adjustments to reconcile net income to net cash provided
by operations:
Deferred income taxes................................. (2,031) 684 (2,164)
Provision for doubtful accounts....................... 434 455 425
Depreciation and amortization......................... 9,635 10,149 7,024
Non-recurring charges................................. 1,639 3,148 6,805
Gain on sale of equity investment..................... -- -- (14,040)
Other, net............................................ 102 168 129
Decrease (increase) in operating assets:
Accounts receivable................................. 2,964 (10,794) (578)
Inventories......................................... (265) 321 (31)
Other current assets................................ 171 549 (919)
Increase (decrease) in operating liabilities:
Accounts payable.................................... 1,169 (302) (387)
Accrued liabilities................................. 293 4,149 775
Income taxes payable................................ (587) 2,130 (3,337)
Deferred revenues................................... 4,113 3,293 4,783
-------- -------- --------
Net cash provided by operating activities........ 19,888 18,143 5,736
-------- -------- --------
INVESTING ACTIVITIES
Sales of short-term investments.......................... -- -- 22,000
Proceeds from sale of equity investment.................. -- -- 20,000
Acquisition of Concentric Data Systems, Inc., net of cash
acquired.............................................. -- -- (4,948)
Acquisition of Software Development Tools, Inc., net of
cash acquired......................................... (1,906) -- --
Investment in Suntek Information System Co. Ltd. and
DataChannel, Inc...................................... (2,636) -- --
Purchases of fixed assets................................ (3,857) (5,056) (7,133)
Purchases of prepaid software technology................. (2,397) (1,337) (3,223)
Capitalized localization costs........................... (2,973) (3,019) --
Other.................................................... (368) (618) (1,166)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (14,137) (10,030) 25,530
-------- -------- --------
FINANCING ACTIVITIES
Payments pursuant to repurchase and retirement of
stock................................................. -- -- (8,539)
Tax benefit from stock options exercised................. 271 375 1,150
Proceeds from issuances under stock plans................ 2,143 1,574 1,251
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 2,414 1,949 (6,138)
-------- -------- --------
Net increase in cash and cash equivalents.................. 8,165 10,062 25,128
Effect of exchange rate changes on cash.................... 166 452 (86)
Cash and cash equivalents at beginning of year............. 62,483 51,969 26,927
-------- -------- --------
Cash and cash equivalents at end of year................... $ 70,814 $ 62,483 $ 51,969
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
28
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Wall Data Incorporated ("Wall Data" or the "Company") develops and markets
enterprise software products and associated application tools and provides
comprehensive support and services for its products. The Company's products
deliver existing corporate computing systems, including various host, database,
client/server and public information, to users in a browser or Windows-based
environment. Using Wall Data solutions, organizations can extend their
enterprise information to allow their internal users, remote users, third party
partners and customers to access information and applications over corporate
intranets, extranets, the Internet, Local Area Networks and Wide Area Networks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs and
expenses are translated at the average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown separately
in shareholders' equity.
Revenue Recognition
Revenue from sales of software and hardware products to end-users,
distributors and dealers is recognized when the products are shipped. The
Company's agreements with certain distributors and resellers permit them to
exchange products under certain circumstances and permit returns from certain
resellers subject to specific limitations; an accrual is recognized for
estimated sales returns and exchanges. Revenue from software products licensed
to original equipment manufacturers is recognized as earned. Revenue from
service fees is deferred and recognized on a straight-line basis over the term
of the related agreements. The Company's revenue recognition policies conform to
Statement of Position 91-1, "Software Revenue Recognition," promulgated by the
American Institute of Certified Public Accountants.
The Financial Accounting Standards Board recently approved the new American
Institute of Certified Public Accountants Statement of Position ("SOP") No.
97-2, "Software Revenue Recognition." SOP No. 97-2 will be effective for the
Company beginning in 1998. The Company is currently assessing the impact, if
any, of SOP No. 97-2 on its revenue recognition policy.
Income Taxes
The provision for income taxes includes U.S. federal, state and
international taxes currently payable and deferred taxes arising from temporary
differences between income tax and financial reporting.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less at the date of purchase to be cash equivalents. Cost approximates
market value for all cash and cash equivalents. All cash equivalents are
classified as available-for-sale.
F-5
29
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives ranging from two to ten years
for financial reporting purposes and by different methods approved for income
tax purposes.
Long-term Investments
Long-term investments, consisting of equity investments, are recorded at
cost due to the lack of significant influence.
Prepaid Software Technology Fees
Prepaid software technology license fees are amortized to cost of revenue
using the shorter of the straight-line method over periods not to exceed 24
months or fees based on actual product shipments.
Product Development Costs
A Financial Accounting Standards Board statement requires the
capitalization of certain internal software development costs. Such costs are
not material. Internal product development costs are expensed as incurred.
External costs incurred to localize software products into local market
languages are capitalized and amortized to cost of revenue using the
straight-line method over periods not to exceed 24 months.
Stock Based Compensation
During 1996, the Company adopted the disclosure provisions under Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require companies to record
compensation expense for stock-based employee compensation based on a prescribed
method for determining fair value. The Company has elected to continue to
account for stock option grants to employees in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes
compensation expense for stock options only when the exercise price is less than
the quoted market price at the date of grant.
Advertising Costs
All advertising costs are expensed as incurred. Total advertising expenses
approximated $5.7 million, $6.9 million and $4.5 million in 1997, 1996 and 1995,
respectively.
Earnings per Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS
No. 128 requires presentation of basic earnings per share and diluted earnings
per share. Basic earnings per share excludes dilution and is based on the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share includes the effect of dilutive common equivalent
shares from stock options, using the treasury stock method. The adoption of this
new accounting standard did not have a material effect on the reported earnings
per share of the Company. Prior year earnings per share have been adjusted to
conform to the new accounting standard. The amount of the adjustments was not
material.
F-6
30
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results may differ from
those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
2. MARKETABLE SECURITIES
Marketable securities consist primarily of investment-grade commercial
paper and are classified as available-for-sale. Marketable debt securities with
maturity dates less than three months at December 31, 1997 and 1996 total $45
million and $48 million, respectively, at cost, and are included in cash and
cash equivalents. The estimated fair value of the commercial paper approximates
cost. Marketable equity securities, which are not material, are included in
other assets.
3. FIXED ASSETS
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
Equipment......................................... $25,624 $21,834
Furniture and fixtures............................ 6,100 5,685
------- -------
31,724 27,519
Less -- accumulated depreciation and
amortization.................................... 21,127 14,784
------- -------
$10,597 $12,735
======= =======
4. OTHER ASSETS
Other assets primarily consists of prepaid software technology license
fees, external product localization costs and intangible assets resulting from
the acquisitions of Software Development Tools, Inc. ("SDTI") in 1997 and
Concentric Data Systems, Inc. ("Concentric") in 1995. See Note 6. As of December
31, 1997 and 1996, prepaid software technology license fees totaled $2.0 million
and $1.2 million, net of accumulated amortization of $1.1 million and $1.5
million, respectively. Royalties and amortization of prepaid licenses totaled
$1.7 million, $4.1 million and $2.7 million in 1997, 1996 and 1995,
respectively, and are included in cost of revenues. As of December 31, 1997 and
1996, external product localization costs totaled $3.3 million and $2.7 million,
net of accumulated amortization of $2.8 million and $0.6 million, respectively.
Amortization of external product localization costs totaled $2.2 million and
$0.6 million in 1997 and 1996, respectively; such costs were not material in
1995. Intangible assets arising from acquisitions, including goodwill, totaled
$2.3 million and $1.4 million at December 31, 1997 and 1996, respectively, net
of accumulated amortization of $0.7 million in 1997 and $0.4 million in 1996.
Other assets and long-term investments are regularly reviewed for possible
impairment and are written off if, in the opinion of management, their value has
been impaired.
F-7
31
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. LEASES
The Company rents office facilities under operating lease agreements.
Future minimum lease payments under noncancelable operating leases with terms in
excess of one year are as follows (in thousands):
1998....................................... $ 3,089
1999....................................... 2,706
2000....................................... 2,288
2001....................................... 2,027
2002....................................... 1,894
Thereafter................................. 2,777
-------
Total minimum lease payments..... $14,781
=======
Rental expenses under operating leases amounted to approximately $5.2
million, $5.4 million and $4.2 million in 1997, 1996 and 1995, respectively.
6. INVESTMENTS, DISPOSITIONS AND OTHER NON-RECURRING ITEMS
In October 1997, the Company acquired a 15% equity interest in Suntek
Information System Co. Ltd. ("Suntek") for approximately $0.9 million. Suntek
distributes and supports software products in Korea. Management believes that
the investment has not been impaired since the acquisition date.
In November 1997, the Company acquired all the outstanding shares of SDTI
for $2.0 million. An additional $1.0 million is payable contingent on the future
earnings performance of SDTI. SDTI was a privately held developer of Windows
development tools designed to provide a graphical interface to host applications
and to migrate IBM AS/400 and mainframe applications to client/server
environments. The acquisition has been accounted for under the purchase method
of accounting. As a result of this transaction, the Company recorded
non-recurring charges of approximately $741,000 ($667,000, or $0.07 per share on
a diluted basis, after income taxes) for the write-off of in-process research
and development. Approximately $1.3 million of the purchase price was allocated
to developed technology, goodwill and other intangible assets. The intangible
assets are being amortized on a straight-line basis over periods ranging from
four to ten years. Pro forma information relating to the acquisition of SDTI has
not been presented due to immateriality.
In November 1997, the Company and DataChannel, Inc. ("DataChannel") entered
into an agreement under which DataChannel licensed its ChannelManager technology
to the Company. DataChannel is a software development company that creates tools
that streamline the presentation and management of information over corporate
intranets. Pursuant to the licensing agreement, the Company recorded guaranteed
royalties to DataChannel of $1.0 million. The Company is required to pay an
additional $4.0 million for minimum royalties in 1998. In addition, the Company
acquired a 10% equity interest in DataChannel for approximately $1.7 million.
During the second quarter of 1997, the Company recorded several
non-recurring charges totaling $10.7 million ($6.7 million, or $0.67 per share
on a diluted basis, after income taxes). Approximately $9.1 million represents a
charge for the settlement of the shareholders' class action lawsuit. The Company
also recorded restructuring charges of approximately $1.0 million for the
write-off of inventory, technology investments and severance payments relating
to the SALSA business line. The remaining charges represent retirement payments
to the Company's former Chairman and Chief Executive Officer. In July 1997, the
Board of Directors also voted to accelerate the vesting of certain stock options
to the former Chairman. The related compensation expense, which was not
material, was recorded as an expense in the third quarter.
F-8
32
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
During the fourth quarter of 1996, the Company recorded non-recurring
charges totaling $3.1 million ($2.0 million, or $0.20 per share on a diluted
basis, after income taxes) resulting from decisions to streamline operations and
improve operating efficiencies. The charges primarily related to the write-off
of technology investments and prepaid royalties no longer relevant to the
Company's ongoing product offerings and programs.
In April 1995, the Company acquired all the outstanding shares of
Concentric, a privately held developer of Windows- and DOS-based data access and
reporting tools, for $7.8 million cash. The acquisition has been accounted for
under the purchase method of accounting. As a result of this transaction, the
Company recorded non-recurring charges of approximately $5.5 million ($3.4
million, or $0.34 per share on a diluted basis, after income taxes), for the
write-off of in-process research and development and the write-off of existing
Wall Data prepaid licenses for technology, which was supplanted by the
Concentric technology. Approximately $1.8 million of the purchase price was
allocated to goodwill, which is being amortized over five years. Non-recurring
charges in 1995 also included a $1.0 million write-off of the remaining
unamortized goodwill from a prior acquisition.
In September 1994, the Company acquired a minority equity interest in SPRY,
Inc. ("SPRY"), a developer of Internet access software, for $6.0 million. The
investment was accounted for under the equity method of accounting. In April
1995, the Company sold its equity interest in SPRY for $20.0 million in cash and
recorded a gain of $14.0 million ($8.7 million, or $0.87 per share on a diluted
basis, after income taxes), which is included in other income.
7. INCOME TAXES
Income before income taxes consists of the following:
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
U.S. ........................................... $ 839 $2,775 $ 9,375
International................................... 1,655 4,472 2,317
------ ------ -------
Total income before income taxes........... $2,494 $7,247 $11,692
====== ====== =======
The provision for income taxes consists of the following:
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
Current tax expense:
U.S. federal................................. $ 1,375 $ 125 $ 5,130
State........................................ 149 52 626
International................................ 427 2,203 849
------- ------ -------
Total current provision................... 1,951 2,380 6,605
Deferred tax expense (benefit):
U.S. federal................................. (1,914) 700 (1,903)
State........................................ (139) 87 (253)
International................................ 345 (113) (8)
------- ------ -------
Total deferred provision (benefit)........ (1,708) 674 (2,164)
------- ------ -------
Total provision for income taxes $ 243 $3,054 $ 4,441
======= ====== =======
F-9
33
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The effective rate differs from the U.S. federal statutory rate as follows:
1997 1996 1995
----- ------ ------
(IN THOUSANDS)
Income tax provision at statutory rate............ $ 848 $2,463 $4,092
International losses producing no current tax
benefit......................................... 847 312 366
Utilization of international operating loss
carryforward.................................... -- -- (234)
Tax credits....................................... (300) (100) (300)
State taxes, net.................................. 60 68 255
Foreign Sales Corporation......................... (715) (215) (315)
Nondeductible expenses............................ 112 246 200
Effect of lower tax rates in certain foreign
countries....................................... (663) -- --
Other, net........................................ 54 280 377
----- ------ ------
$ 243 $3,054 $4,441
===== ====== ======
The Company received compensation deductions in 1997, 1996 and 1995 for
income tax purposes of $0.8 million, $1.0 million and $3.0 million,
respectively, resulting from the exercise of nonqualified stock options and from
disqualifying dispositions of Common Stock received through exercise of
incentive stock options. As required by generally accepted accounting
principles, the resulting tax benefits of $0.3 million, $0.4 million and $1.2
million, respectively, are reported as additions to shareholders' equity rather
than as a reduction of income tax expense.
Deferred income tax assets consist of the following:
DECEMBER 31,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
Tax credits............................................... $ 1,226 $ --
Accrued compensation and benefits......................... 1,057 943
Other accrued expenses.................................... 943 701
Reserves for sales returns and doubtful accounts.......... 1,196 1,217
Cooperative advertising reserves.......................... 655 428
Depreciation and amortization............................. 270 155
Intercompany profit elimination........................... 26 553
Net operating losses of international subsidiaries........ 1,571 723
Other, net................................................ 786 135
------- ------
7,730 4,855
Valuation allowance....................................... (1,571) (723)
------- ------
Net deferred tax assets................................... $ 6,159 $4,132
======= ======
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
net operating losses of certain international subsidiaries. The increase in the
valuation allowance in 1997 results from additional net operating losses of
these subsidiaries. As of December 31, 1997, the Company's international
subsidiaries have unused net operating loss carryforwards, for income tax
purposes, of $4.5 million, which expire primarily in 2002.
Income taxes paid in 1997 and 1995 totaled $0.7 million and $8.2 million,
respectively. In 1996, the Company received net refunds of $0.5 million.
F-10
34
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. SHAREHOLDERS' EQUITY
In April 1995, the Board of Directors authorized the repurchase of the
Company's Common Stock up to an aggregate purchase price of $10.0 million. As of
December 31, 1995, the Company had repurchased 488,200 shares of Common Stock
for approximately $8.5 million. The Company did not repurchase any shares in
1997 or 1996.
In July 1995, the Board of Directors adopted a shareholder rights
agreement, designed to protect shareholders from coercive takeover tactics, and
declared a dividend of one preferred share purchase right for each outstanding
share of the Company's Common Stock to stockholders of record as of July 31,
1995. The rights entitle the holder (a) to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, no par value per share, of the
Company at a price of $110, subject to adjustment to prevent dilution, upon the
occurrence of triggering events, or (b), in certain circumstances, to purchase
Wall Data Common Stock (or stock of the acquiring entity, as the case may be) at
a 50% discount from its then current market value. Such events would include the
acquisition of Wall Data shares through open market purchases or a tender offer
that, in the aggregate, equals or exceeds 20% of outstanding shares. At the
option of the Board of Directors, the rights may be exchanged for one share of
Wall Data Common Stock for each right. Such rights do not extend to any holder
whose action triggered the rights. The rights expire in August 2005 and may be
redeemed prior to that time at the option of the Board of Directors for nominal
consideration. Until a triggering event occurs, the rights will not trade
separately from the related Wall Data Common Stock.
The Company has several stock-based compensation plans that are described
below. The Company has elected to continue to apply APB Opinion No. 25 in
accounting for its plans and, accordingly, recognizes compensation expense for
employee stock options only when the exercise price is less than the quoted
market price at the date of grant; stock compensation expense was not material
in 1997, 1996 and 1995. Had stock-based compensation been determined based on
the prescribed method for estimating fair value under SFAS No. 123, the
Company's pro forma net income and earnings per share in 1997, 1996 and 1995
would have been $0.2 million, or $0.02 per share on a diluted basis, $2.7
million, or $0.28 per share on a diluted basis, and $6.6 million, or $0.65 per
share on a diluted basis, respectively. The pro forma effects on net income for
1997, 1996 and 1995 are not indicative of the pro forma effects in future years
because SFAS No. 123 does not apply to grants prior to 1995 and additional
grants in future years are anticipated. The pro forma amounts have been
determined using the Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 5.9%, 6.5% and 6.3%; volatility factors of 79%, 74% and 77%;
expected life of five years and a zero dividend yield for each year.
The Company has stock option plans that provide for nonqualified and
incentive stock options for officers, employees and consultants. A committee of
the Board of Directors determines the terms and conditions of options granted
under the plans, including the exercise price; however, the exercise price for
incentive stock options shall not be less than the fair market value at the date
of grant. Options granted under the plans generally become exercisable,
cumulatively, at a rate of 25% per year from the date of grant, and expire 10
years from the date of grant. The Company also has a stock option plan for
non-employee directors providing for grants of nonqualified options at an
exercise price that is not less than the fair market value at the date of grant.
In July 1995 and January 1996, the Compensation Committee of the Board of
Directors authorized the exchange of new options for certain previously granted
stock options. Approximately 818,000 shares, ranging in price from $17.00 to
$54.25 per share, were exchanged for new options with an exercise price ranging
from $15.32 to $18.75 per share.
F-11
35
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock option activity and option price information for all option plans is
as follows:
OUTSTANDING OPTIONS
-----------------------------
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
---------- ----------------
Balance at January 1, 1995........................ 1,717,370 $ 16.02
Granted........................................... 1,301,500 17.63
Exercised......................................... (271,610) 3.29
Canceled.......................................... (1,031,479) 29.14
----------
Balance at December 31, 1995...................... 1,715,781 11.38
Granted........................................... 775,750 16.32
Exercised......................................... (134,475) 8.19
Canceled.......................................... (378,143) 18.33
----------
Balance at December 31, 1996...................... 1,978,913 12.12
Granted........................................... 685,750 16.39
Exercised......................................... (106,413) 12.39
Canceled.......................................... (264,601) 17.17
----------
Balance at December 31, 1997...................... 2,293,649 $ 12.80
==========
The weighted average fair value of options granted in 1997, 1996 and 1995,
as determined under the method prescribed in SFAS No. 123, is $11.12, $11.10 and
$11.76, respectively.
Additional information concerning outstanding stock options and exercisable
stock options as of December 31, 1997 is set forth below:
OUTSTANDING OPTIONS
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
Less than $2.00..................... 521,978 3.59 $ 0.22 517,309 $ 0.21
$2.00 to $15.00..................... 408,921 9.13 13.52 60,377 13.74
$15.00 to $20.00.................... 1,095,014 8.28 16.22 465,564 16.18
Greater than $20.00................. 267,736 7.99 22.31 104,261 21.95
--------- ---------
2,293,649 7.33 $12.80 1,147,511 $ 9.38
========= =========
Approximately 380,000 shares were available for future grant as of December
31, 1997. At December 31, 1996 and 1995, options for the purchase of
approximately 827,000 and 753,000 shares were exercisable at a weighted average
exercise price of $6.33 and $4.10 per share, respectively.
The Company has an employee stock purchase plan for all eligible employees.
Under the plan, employees may purchase shares of Common Stock having a total
value not exceeding 10% of gross compensation, at a price per share equal to 85%
of the lower of fair market value of the Common Stock on the first or last
business day of each six-month offering period. As of December 31, 1997,
approximately 137,000 shares had been issued under the plan, and 263,000 shares
are reserved for future issuance.
F-12
36
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. RECONCILIATION OF EARNINGS PER SHARE
The following table presents a reconciliation of basic earnings per share
to earnings per share -- assuming dilution (income and shares in thousands):
NET AVERAGE
INCOME SHARES PER SHARE
1997 (NUMERATOR) (DENOMINATOR) AMOUNT
---- ----------- ------------- ---------
Earnings per share -- basic................ $2,251 9,245 $0.24
Effect of Dilutive Securities Stock
options.................................. 641
------ ------ -----
Earnings per share -- assuming
dilution.............................. $2,251 9,886 $0.23
====== ====== =====
1996
----
Earnings per share -- basic................ $4,193 9,058 $0.46
Effect of Dilutive Securities Stock
options.................................. 663
------ ------ -----
Earnings per share -- assuming
dilution.............................. $4,193 9,721 $0.43
====== ====== =====
1995
----
Earnings per share -- basic................ $7,251 9,224 $0.79
Effect of Dilutive Securities Stock
options.................................. 803
------ ------ -----
Earnings per share -- assuming
dilution.............................. $7,251 10,027 $0.72
====== ====== =====
Certain options to purchase shares of Common Stock were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. The total shares
that were thus excluded approximated 1,650,000, 1,513,000 and 1,089,000 in 1997,
1996 and 1995, respectively.
10. EMPLOYEE BENEFITS
The Company has a Retirement Savings Plan to provide for voluntary salary
deferral contributions on a pretax basis in accordance with Section 401(k) of
the Internal Revenue Code of 1986, as amended. To date, the Company has made no
contributions to the plan.
11. LITIGATION
In July 1997, the Company agreed to settle a shareholders' class action
lawsuit for $11.25 million, of which $3.0 million was paid by the Company's
insurance carrier. Included in non-recurring expenses in the second quarter of
1997 is a charge of $9.1 million for the Company's share of the settlement plus
related fees and expenses. The Company paid its share of the settlement in July
1997. Wall Data denied the allegations of the plaintiffs' claims, but agreed to
the settlement to avoid any further expense and the distraction of continued
legal proceedings.
12. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment: software products and related
services for users of personal computers. Net revenue from ONESTEP service
programs totaled 15.6% of total net revenues in 1997 and 10.3% of net revenues
in 1996; net revenues from services did not exceed 10% of the total in prior
years. The Company distributes its products through a combination of direct
sales, telesales, resellers, distributors, original equipment manufacturer
arrangements and the Internet. The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral.
F-13
37
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Sales to one unaffiliated customer, an OEM customer, accounted for 10% of
net revenues in 1995. Sales to any one customer did not exceed 10% of net
revenues in 1997 or 1996.
Information regarding the Company's operations in different geographic
areas in 1997, 1996 and 1995 is set forth below. Amounts presented for North
America include revenues from customers in North America and certain
international revenues, primarily Japan and Latin America; such international
revenues equaled 4%, 4% and 5% of consolidated net revenues in 1997, 1996 and
1995, respectively. Total international revenues equaled 30%, 29% and 28% of
consolidated net revenues in 1997, 1996 and 1995, respectively. Foreign currency
exchange transactions, which are included in other income (expense), resulted in
net exchange losses of $0.8 million, $0.6 million and $0.5 million in 1997, 1996
and 1995, respectively. The Company has not engaged in currency hedging
transactions against sales denominated in foreign currencies; however, it may do
so in the future.
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
NET REVENUES
North America............................ $119,501 $121,657 $ 99,174
Europe................................... 36,373 35,140 25,387
Eliminations............................. (15,023) (17,433) (13,820)
-------- -------- --------
Total net revenues............... $140,851 $139,364 $110,741
======== ======== ========
OPERATING INCOME (LOSS)
North America............................ $ (3,935) $ 476 $ (6,383)
Europe................................... 3,283 5,103 1,348
Eliminations............................. 343 (518) (180)
-------- -------- --------
Total operating income (loss).... $ (309) $ 5,061 $ (5,215)
======== ======== ========
IDENTIFIABLE ASSETS
North America............................ $125,522 $115,252 $108,039
Europe................................... 19,999 18,915 8,778
Eliminations............................. (8,945) (7,013) (7,478)
-------- -------- --------
Total identifiable assets........ $136,576 $127,154 $109,339
======== ======== ========
Intercompany sales are at prices intended to provide a profit for the
selling entity after coverage of product development, marketing, support and
general and administrative expenses. The identifiable assets by geographic area
are those used in the Company's operations in each area.
13. COMMITMENTS
In May 1997, the Company entered into an agreement with a third party to
provide the Company with information technology services for a ten-year period.
The Company has options to terminate the agreement on the fourth, sixth and
eighth anniversaries of the effective date of the agreement. The minimum
commitment for 1998 is approximately $3.4 million. Annual commitments will
increase each year, thereafter, based on the growth of the Company and
inflation.
F-14
38
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. SUBSEQUENT EVENT
On March 12, 1998, the Company acquired all the outstanding capital stock
of First Service Computer Dienstleistungs-GmbH ("First Service") of Hattingen,
Germany and related entities. First Service distributes and supports a range of
connectivity software solutions to major corporations throughout Germany and has
been selling and supporting Wall Data's products and technologies for more than
seven years. The total purchase price approximates $11.0 million, including
deferred payments of approximately $2.0 million that are substantially payable
in one year, contingent on the satisfaction of certain guarantees and
warranties. The acquisition will be accounted for under the purchase method of
accounting.
F-15
39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Wall Data Incorporated
We have audited the accompanying consolidated balance sheets of Wall Data
Incorporated as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wall Data Incorporated at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statement taken as a whole,
present fairly in all material respects the information set forth therein.
Seattle, Washington /s/ ERNST & YOUNG LLP
January 19, 1998
except for Note 14, as to which the date is
March 12, 1998
F-16
40
WALL DATA INCORPORATED
SELECTED QUARTERLY FINANCIAL DATA AND MARKET INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
-----------------------------------------
SEPTEMBER DECEMBER
MARCH 31 JUNE 30 30 31 YEAR
-------- ------- --------- -------- --------
1997(1)(2)
Net revenues................................... $37,023 $35,600 $28,564 $39,664 $140,851
Gross margin................................... 30,269 27,901 22,049 33,337 113,556
Net income (loss).............................. 3,458 (4,654) 19 3,428 2,251
Net income (loss) per share -- assuming
dilution..................................... 0.35 (0.50) 0.00 0.35 0.23
Common stock price per share:
High......................................... 19.63 29.13 28.25 20.50 29.13
Low.......................................... 14.50 15.13 17.00 11.31 11.31
1996(3)
Net revenues................................... $29,856 $34,826 $30,827 $43,855 $139,364
Gross margin................................... 23,207 26,801 23,715 35,167 108,890
Net income (loss).............................. 511 1,661 (645) 2,666 4,193
Net income (loss) per share -- assuming
dilution..................................... 0.05 0.17 (0.07) 0.28 0.43
Common stock price per share:
High......................................... 17.25 23.75 27.50 24.75 27.50
Low.......................................... 13.00 14.75 16.25 12.25 12.25
- Wall Data's Common Stock has been traded on the Nasdaq National Market
under the symbol "WALL" since March 15, 1993, the effective date of the
Company's initial public offering.
- The market prices of a share of Common Stock reflect the high and low
trading prices, as reported by the Nasdaq National Market.
- The Company has not paid cash dividends on its Common Stock.
- As of January 31, 1998, there were 336 holders of record of the Company's
Common Stock.
- ---------------
(1) During the quarter ended June 30, 1997, the Company recorded non-recurring
charges totaling $10.7 million before income taxes, consisting of $9.1
million for the settlement of the shareholders' class action lawsuit, $1.0
million for the restructuring of the SALSA business unit, and $0.6 million
for a retirement payment to the Company's former chairman. See Notes 6 and
11 of Notes to Consolidated Financial Statements.
(2) During the quarter ended December 31, 1997, the Company recorded
non-recurring charges of $0.7 million before income taxes, for the write-off
of in-process research and development resulting from the acquisition of
Software Development Tools, Inc. See Note 6 of Notes to Consolidated
Financial Statements.
(3) During the quarter ended December 31, 1996, the Company recorded
non-recurring charges of $3.1 million before income taxes, primarily for the
write-off of purchased technologies. See Note 6 of Notes to Consolidated
Financial Statements.
F-17
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WALL DATA INCORPORATED
Date: March 25, 1998 By: /s/ JOHN R. WALL
------------------------------------
John R. Wall
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on the 25th day of March, 1998.
SIGNATURE TITLE
--------- -----
/s/ JOHN R. WALL President, Chief Executive Officer and
- ----------------------------------------------------- Director
John R. Wall
/s/ KEVIN B. VITALE Chief Operating Officer and Director
- -----------------------------------------------------
Kevin B. Vitale
/s/ KERRY D. PALMER Acting Chief Financial Officer (Principal
- ----------------------------------------------------- Financial Officer and Principal Accounting
Kerry D. Palmer Officer)
/s/ ROBERT J. FRANKENBERG Director
- -----------------------------------------------------
Robert J. Frankenberg
/s/ JEFFREY A. HEIMBUCK Director
- -----------------------------------------------------
Jeffrey A. Heimbuck
/s/ HENRY N. LEWIS Director
- -----------------------------------------------------
Henry N. Lewis
/s/ DAVID F. MILLET Director
- -----------------------------------------------------
David F. Millet
/s/ STEVE SARICH, JR. Director
- -----------------------------------------------------
Steve Sarich, Jr.
/s/ BETTIE A. STEIGER Director
- -----------------------------------------------------
Bettie A. Steiger
42
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
WALL DATA INCORPORATED
COL. A COL. B COL. C COL. D COL. E
- --------------------------------- ------------ ---------------------------- -------------- --------------
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF REVENUE, COSTS ACCOUNTS DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD OR EXPENSES -- DESCRIBE -- DESCRIBE(A) OF PERIOD
----------- ------------ -------------- ----------- -------------- --------------
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectible
accounts, rebates, and
sales returns............. $3,740,000 $5,421,000 -- $5,404,000 $3,757,000
Valuation allowance for
deferred
tax asset................. $ 723,000 $ 848,000 -- -- $1,571,000
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectible
accounts, rebates, and
sales returns............. $3,180,000 $3,614,000 -- $3,054,000 $3,740,000
Valuation allowance for
deferred tax asset........ $ 411,000 $ 312,000 -- -- $ 723,000
YEAR ENDED DECEMBER 31, 1995
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectible
accounts, rebates, and
sales returns............. $2,037,000 $4,107,000 -- $2,964,000 $3,180,000
Valuation allowance for
deferred
tax asset................. $ 518,000 $ 127,000 -- $ 234,000 $ 411,000
- --------------------------------------------------------------------------------
(A) Deductions consist of write-offs of uncollectible accounts, reseller rebates
and product returns, and utilization of net operating loss carryforwards by
certain international subsidiaries.
43
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ------------
3.1 Restated Articles of Incorporation of Wall Data
Incorporated*...............................................
3.2 Restated Bylaws of Wall Data Incorporated*..................
+10.1 Amended and Restated 1983 Stock Option Plan (Incorporated by
reference to Registration Statement No. 33-57816)...........
+10.2 Restated 1993 Stock Option Plan (Incorporated by reference
to the Company's Form 10-K for the fiscal year ended
December 31, 1996). Amendment thereto dated March 11,
1998*.......................................................
+10.3 Restated 1993 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1996). Amendment thereto
dated October 28, 1997*.....................................
10.4 Restated Employee Stock Purchase Plan (Incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996)....................................
+10.5 Separation Agreement and General Release dated June 30, 1997
between Wall Data Incorporated and James Simpson*...........
10.6 Agreement for Information Technology Services dated May 31,
1997 between Wall Data Incorporated and Electronic Data
Systems Corporation**.......................................
+10.7 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Registration Statement No.
33-57816)...................................................
10.8 Lease between Totem Skyline Associates III as Landlord and
Wall Data Incorporated as Tenant dated as of December 2,
1993 and Sublease between Wall Data Incorporated as Landlord
and Totem Skyline Associates III as Tenant dated as of
December 2, 1993 (Incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1994)......
10.9 Rights Agreement dated as of July 19, 1995 between Wall Data
Incorporated and First Interstate Bank of Washington, N.A.,
as rights agent (Incorporated by reference to the Company's
Form 8-A dated July 19, 1995)...............................
11.1 Computation of Earnings Per Share*..........................
21.1 Subsidiaries of Wall Data Incorporated*.....................
23.1 Consent of Ernst & Young LLP, Independent Auditors*.........
27.1 Financial Data Schedule*....................................
27.2 Restated Financial Data Schedule for 1997.*
27.3 Restated Financial Data Schedule for 1996.*
- ---------------
+ Management contract or compensatory plan
* Included herewith
** Included herewith; confidential treatment has been requested as to a portion
of this document