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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 1999
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 (I.R.S. Employer
incorporation or organization) Identification No.)
11332 N.E. 122ND WAY, KIRKLAND, WASHINGTON 98034
(Address of principal executive offices) (Zip Code)
(425) 814-9255
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stocks, as of the latest practicable date.
OUTSTANDING AT
CLASS FEBRUARY 28, 1999
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COMMON STOCK 10,149,483
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WALL DATA INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Income Statements for the three and
nine months ended January 31, 1999 and 1998 3
Consolidated Balance Sheets as of
January 31, 1999 and April 30, 1998 4
Consolidated Statements of Cash Flows for the nine
months ended January 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosure about
Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALL DATA INCORPORATED
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998 1999 1998
--------- --------- --------- ---------
Net revenues
License fees $ 34,325 $ 30,515 $ 96,849 $ 82,658
Services 7,490 6,212 22,730 17,680
--------- --------- --------- ---------
Total net revenues 41,815 36,727 119,579 100,338
Cost of revenues
License fees 5,306 4,290 15,861 14,778
Services 2,921 2,242 8,880 6,082
--------- --------- --------- ---------
Total cost of revenues 8,227 6,532 24,741 20,860
--------- --------- --------- ---------
Gross margin 33,588 30,195 94,838 79,478
Operating expenses:
Product development 4,918 5,577 15,173 15,299
Sales and marketing 20,633 19,451 59,374 52,600
General and administrative 3,851 3,238 11,260 9,604
Amortization of intangibles from acquisitions 590 150 1,640 332
Restructuring charges -- -- 2,405 --
Other non-recurring charges -- 741 -- 11,488
--------- --------- --------- ---------
Total operating expenses 29,992 29,157 89,852 89,323
--------- --------- --------- ---------
Operating income (loss) 3,596 1,038 4,986 (9,845)
Other income, net 730 708 2,174 2,711
--------- --------- --------- ---------
Income (loss) before income taxes 4,326 1,746 7,160 (7,134)
Provision for income taxes 1,242 2,002 1,807 (1,392)
--------- --------- --------- ---------
Net income (loss) $ 3,084 $ (256) $ 5,353 $ (5,742)
========= ========= ========= =========
Net income:
Basic earnings (loss) per share $ 0.31 $ (0.03) $ 0.54 $ (0.62)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.30 $ (0.03) $ 0.53 $ (0.62)
========= ========= ========= =========
Shares used to calculate earnings per share:
Basic 10,010 9,390 9,956 9,333
========= ========= ========= =========
Diluted 10,321 9,390 10,102 9,333
========= ========= ========= =========
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31, APRIL 30,
1999 1998
------------ ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 64,702 $ 57,490
Accounts receivable 42,422 33,534
Inventories 195 952
Deferred income taxes 5,698 5,701
Other current assets 5,532 2,847
-------- --------
Total current assets 118,549 100,524
Fixed assets, net 10,301 10,665
Deferred income taxes 400 458
Long-term investments 2,017 2,965
Intangible assets related to acquisitions 16,116 16,551
Other assets 5,459 9,042
-------- --------
$152,842 $140,205
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,838 $ 8,382
Accrued expenses 17,642 17,063
Income taxes payable 4,401 3,583
Deferred revenues 18,856 15,019
-------- --------
Total current liabilities 48,737 44,047
-------- --------
Deferred income taxes 3,142 3,390
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 61,027 58,882
Retained earnings 38,659 33,306
Accumulated other comprehensive income 1,277 580
-------- --------
Total shareholders' equity 100,963 92,768
-------- --------
$152,842 $140,205
======== ========
See accompanying notes.
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WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JANUARY 31,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 5,353 $ (5,742)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Deferred income taxes (187) (2,529)
Depreciation and amortization of fixed assets and intangible assets 6,286 5,533
Amortization of prepaid licenses and localization costs 3,397 2,096
Non-recurring charges 1,614 741
Other, net 1,067 (10)
Decrease (increase) in operating assets:
Accounts receivable (8,888) (5,873)
Inventories 757 195
Other current assets (2,685) 515
Increase (decrease) in operating liabilities:
Accounts payable 1,456 (697)
Accrued expenses 779 319
Income taxes payable 818 (3,336)
Deferred revenues 3,837 2,299
-------- --------
Net cash provided by (used in) operating activities 13,604 (6,489)
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets (4,763) (3,466)
Purchases of prepaid software technology (2,321) (1,494)
Capitalized localization costs (1,124) (1,683)
Investments in subsidiaries (1,000) (4,542)
Other assets 540 (422)
-------- --------
Net cash used in investing activities (8,668) (11,607)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuances under stock plans 2,145 2,397
-------- --------
Net cash provided by financing activities 2,145 2,397
-------- --------
Net increase (decrease) in cash and cash equivalents 7,081 (15,699)
Effect of exchange rate changes on cash 131 (209)
Beginning cash and cash equivalents 57,490 82,384
-------- --------
Ending cash and cash equivalents $ 64,702 $ 66,476
======== ========
See accompanying notes.
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WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JANUARY 31, 1999
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated balance sheets
and related consolidated statements of income and cash flows include all
adjustments, consisting only of normal and recurring items, necessary for
their fair presentation. The results for the three and nine months ended
January 31, 1999 are not necessarily indicative of the results that may be
expected for any future periods. These financial statements and related
notes should be read in conjunction with the Company's audited consolidated
financial statements for the four month period ended April 30, 1998 which
are included in the Company's Transition Report on Form 10-K.
As previously reported, the Company's Board of Directors approved a change
in the Company's fiscal year-end from December 31 to April 30. This change
was made to improve the company's ability to manage operations in light of
seasonal customer buying patterns. The Company has recast the prior year
quarterly financial information to conform to the new fiscal periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which changed the
method for determining and reporting business segment information. The
Company currently operates in two business segments: enterprise products and
services (host connectivity) and Cyberprise products and services (web
enabled products). Based on the growing materiality of the Cyberprise
business segment, the Company will present segment information in its annual
report on Form 10K.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and be
measured at fair value. Although management of the Company has not completed
its assessment of the impact of SFAS No. 133 on its consolidated results of
operations and financial position, management believes that the impact of
SFAS No. 133 will not be material.
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3. 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):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998 1999 1998
------- ------- ------- -------
Net income (loss) (numerator) $ 3,084 $ (256) $ 5,353 $(5,742)
------- ------- ------- -------
Average share (denominator for basic) 10,010 9,390 9,956 9,333
Effect of dilutive stock options 311 -- 146 --
------- ------- ------- -------
Total (denominator for diluted) 10,321 9,390 10,102 9,333
------- ------- ------- -------
Earnings (loss) per share--basic $ 0.31 $ (0.03) $ 0.54 $ (0.62)
======= ======= ======= =======
Earnings (loss) per share--assuming dilution $ 0.30 $ (0.03) $ 0.53 $ (0.62)
======= ======= ======= =======
4. COMPREHENSIVE INCOME
The components of the Company's total comprehensive income were:
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) $ 3,084 $ (256) $ 5,353 $(5,742)
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments, net (682) (495) 582 (209)
Unrealized gains (losses) on securities, net 133 (74) 115 (41)
------- ------- ------- -------
Other comprehensive income (549) (569) 697 (250)
------- ------- ------- -------
Comprehensive income (loss) $ 2,535 $ (825) $ 6,050 $(5,992)
======= ======= ======= =======
5. RESTRUCTURING CHARGES
At the end of the second quarter of fiscal 1999, the Company recorded a $2.4
million charge to restructure its operations in the Asia-Pacific and Latin
America (APLA) markets. The adverse economic conditions in the APLA markets
and declining sales have led the Company to eliminate an administrative
layer and two of its smallest sales offices. The restructuring charge
includes $0.8 million for severance and lease terminations costs, $1.0
million for the write down of certain product localization costs and other
assets and $0.6 million for the write down of a minority investment in a
Korean distributor. These charges reduced net income for the nine months
ended January 31, 1999 by $1.9 million or $0.19 per share after income
taxes. The Company estimates that expense savings from the restructuring
charge, on a quarterly basis, to be approximately $250,000.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
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WALL DATA INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this report and elsewhere by management from time to time, the
words "believes," "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Certain important factors could
cause the Company's actual results to differ materially from those expressed in
the Company's forward-looking statements. These factors are detailed in the
Company's Transition Report on Form 10-K for the four month period ended April
30, 1998 and include, but are not limited to, uncertain acceptance of the
Company's new products, risks associated with new markets and longer sales
cycles, fluctuations in quarterly performance, competitive products and pricing
in a rapidly changing market place, dependence on a two product segments, buying
patterns of customers as a result of expenditures to make systems year 2000
compliant, dependence on host computing, dependence on Microsoft Windows, risks
associated with technological change, increasing reliance on resellers and
distributors, increasing reliance on the Internet, uncertainties regarding
international operations, dependence on key personnel, ability to attract and
retain qualified staff, ability to manage growth and risks associated with
intellectual property and proprietary rights. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision to the forward-looking statements that may be made to reflect
subsequent events or circumstances or to reflect the occurrence of unanticipated
events.
RESULTS OF OPERATIONS
THREE-MONTHS ENDED JANUARY 31, NINE-MONTHS ENDED JANUARY 31,
---------------------------------------- ------------------------------------------
1999 CHANGE 1998 1999 CHANGE 1998
- -----------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands) (unaudited) (unaudited) (unaudited) (unaudited)
LICENSE FEES
ENTERPRISE PRODUCTS $ 25,620 (16%) $ 30,515 $ 79,859 (3%) $ 82,658
CYBERPRISE PRODUCTS 8,705 100% -- 16,990 100% --
-------- -------- -------- --------
TOTAL LICENSE FEES 34,325 12% 30,515 96,849 17% 82,658
-------- -------- -------- --------
SERVICES
ENTERPRISE SERVICES 7,105 14% 6,212 21,968 24% 17,680
CYBERPRISE SERVICES 385 100% -- 762 100% --
-------- -------- -------- --------
TOTAL SERVICES 7,490 21% 6,212 22,730 29% 17,680
-------- -------- -------- --------
TOTAL NET REVENUES $ 41,815 14% $ 36,727 $119,579 19% $100,338
======== ======== ======== ========
Revenues
Total net revenue. Net revenues increased 14% in the third quarter of fiscal
1999 to $41.8 million from $36.7 million in the same period in the prior year.
Net revenues increased 19% in the nine months ended January 31, 1999 to $119.6
million from $100.3 million in the same period in the prior year. Revenue
outside North America represented 21% of net revenues in the third quarter of
fiscal 1999 and 42% in the same quarter of the prior year and equaled 26% and
34% for the nine months ended January 31, 1999 and 1998, respectively. Foreign
currency exchange rate changes did not have a significant effect on net revenues
in the third quarter. Revenue from indirect and OEM distribution channels
equaled 62% and 58% of net revenues in
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the third quarter and first nine months of fiscal 1999, respectively, compared
to 70% and 72% of net revenues in the same periods in the prior year.
License fees. License fees increased 12% to $34.3 million in the third quarter
of fiscal 1999 from $30.5 million in the same period in the prior year. Year to
date license fees grew 17% to $96.8 million as compared to $82.7 million in the
prior year. Revenues from the Company's Cyberprise products represented $8.7
million of the third quarter and $17.0 million of the year to date. During the
third quarter and first nine months of fiscal 1999, license fees from all other
products combined decreased by 16% and 3%, respectively. In the third quarter of
the prior year, a license to one customer outside of North America represented
approximately 10% of total revenue.
Service revenue. Service revenues for third quarter of fiscal 1999 increased 21%
to $7.5 million from $6.2 million in the same period in the prior year. Year to
date service revenues totaled $22.7 million in fiscal 1999 and $17.7 million in
the same period in the prior year, representing an increase of 29%. During the
third quarter and the first nine months of fiscal 1999, the Company recorded
Cyberprise services revenues of $0.4 million and $0.8 million, respectively.
Cost of Revenue
Cost of license fees. Cost of revenues derived from license fees increased 24%
to $5.3 million in the third quarter of fiscal 1999 as compared to $4.3 million
in the same period in the prior year. Year to date cost of revenues for license
fees for fiscal 1999 was $15.9 million as compared to $14.8 million in the prior
year representing a 7% increase. The increase in cost of license fees is
due to increases in royalty fees related to Cyberprise products and other
miscelleanous items. Cost of license fee revenues as a percentage of license
fee revenues was flat at approximately 15% and 14% for the third quarter of
fiscal 1999 and the same period in the prior year, respectively. Cost of
license fee revenues as a percentage of license fee revenues declined to 16%
for the first nine months of fiscal 1999 as compared to 18% in the same period
in the prior year, respectively, due to the fixed nature of certain costs.
Cost of service revenues. Cost of service revenues consists primarily of
technical support, post-sales engineering and consulting services. Cost of
service revenues increased 30% to $2.9 million in the third quarter of fiscal
1999 from $2.2 million in the same quarter in the prior year. Cost of service
revenues increased 46% to $8.9 million for the nine months ended January 31,
1999 as compared to $6.1 million in the same period in the prior year. Costs as
a percentage of service revenues increased to 39% for both the third quarter and
first nine months of fiscal 1999 from 36% and 34% in comparable periods in the
prior year. Cost of service revenues grew primarily due to increases in staffing
levels related to technical support and consulting associated with increased
service. In addition, the Company has built additional service capabilities in
Europe.
Operating Expenses
Product development expenses decreased 12% to $4.9 million, or 12% of total net
revenues, in the third quarter of fiscal 1999, from $5.6 million, or 15% of
total net revenues, in the same period in the prior year. The decline in product
development expenses is primarily due to reduced occupancy costs as a result of
relocating some development to less expensive locations. For the first nine
months, product development declined 1% to $15.2 million, or 13% of total net
revenues, in fiscal 1999 as compared to $15.3 million, or 15% of total net
revenues, in same period in the prior year.
Sales and marketing expenses increased 6% to $20.6 million, or 49% of total net
revenues, in the third quarter of fiscal 1999 from $19.5 million, or 53% of
total net revenues, in the same period
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in the prior year. On a year to date basis, sales and marketing expenses
increased 13% to $59.4 million, or 50% of total net revenues, in fiscal 1999
from $52.6 million, or 52% of total net revenues, in the same period in the
prior year. The increase in sales and marketing expenses was principally due to
the Company's investments in the Cyberprise brand, the Cyberprise Partner
Network announced in the second quarter of fiscal 1999 and increases in
commissions and other incremental costs directly related to increased revenue.
General and administrative expenses increased 19% to $3.9 million, or 9% of
total net revenues, in the third quarter of fiscal 1999, from $3.2 million, or
9% of total net revenues, in the same period in the prior year. In the first
nine months of fiscal 1999, general and administrative expenses increased 17% to
$11.3 million, or 9% of total net revenues, in fiscal 1999 from $9.6 million, or
10% of total net revenues, in the same period in the prior year. The increase
resulted primarily from administrative expenses from Software Development Tools,
Inc. (SDTI), acquired in November 1997, and First Service Computer
Dienstleistungs-GmbH (First Service), acquired in March 1998, and legal costs
related to the defense of the Company's technologies.
Amortization of intangibles from acquisitions increased to $0.6 million in the
third quarter of fiscal 1999 from $0.2 million in the same period in the prior
year due to the amortization of intangibles related to the acquisitions of First
Service and SDTI.
At the end of the second quarter of fiscal 1999, the Company recorded a $2.4
million charge to restructure operations in Asia-Pacific and Latin America
(APLA) markets. The restructuring charge includes $0.8 million severance and
lease termination costs, $1.0 million for the write down of certain localization
costs and other assets and $0.6 million for the write down of a minority
investment in a Korean distributor. As of January 31, 1999, the Company has made
cash payments totaling $0.4 million in connection with the $0.8 million accrued
severance and lease termination costs.
During the nine months ended January 31, 1998, the Company recorded
non-recurring charges totaling $11.5 million, of which approximately $9.1
million represents the settlement of a shareholders'class action lawsuit and
related expenses. Approximately $1.0 million represents the write-off of
inventories, technology investments and severance payments resulting from the
restructuring of the SALSA business line. The Company recorded non-recurring
charges of $0.7 million for the write-off of in-process research and development
resulting from the acquisition of SDTI. The remaining $0.7 million represents a
retirement payment to the Company's former chairman and Chief Executive Officer
of Wall Data who retired July 31, 1997.
Other Income, Net
Other income, net of other expenses, was flat in the third quarter of fiscal
1999 compared with the same period in the prior year at approximately $0.7
million. Other income for the first nine months of fiscal 1999 and 1998 was $2.2
million and $2.7 million, respectively. Of the $0.5 million decrease, $0.3
million resulted from lower interest income as a result of lower average cash
and cash equivalent balances during the first quarter of fiscal 1999 as compared
to the prior year. Additional expenses in the first quarter of fiscal 1999
related to a loss on the sale of fixed assets.
Income Taxes
The Company's effective income tax rate in the third quarter of fiscal 1999
equaled 29%. The effective rate increased compared to prior quarters in fiscal
1999 due to changes in the geographic mix of operating profits. The tax rate in
the three months ended January 31, 1998 was 115% due to the change in the
Company's year-end from a calendar year to a fiscal year.
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Because of this change in year-end, the Company was unable to offset losses from
January 1998 against taxable profits in the months of November and December
1997.
The effective income tax rate for the first nine months of fiscal 1999 equaled
25% compared to 20% in the same period in the prior year. The increase in the
effective rate is due primarily to changes in the geographic mix of operating
profits.
The Company's effective tax rate for the fourth quarter may change from the
third quarter rate depending on the geographic mix of operating profits.
Net Income
Net income equaled $3.1 million in the third quarter of fiscal 1999 compared to
a net loss of $0.3 million in the same period in the prior year. On a year to
date basis, net income was $5.4 million in fiscal 1999 as compared to a net loss
of $5.7 million in the prior year. Excluding the restructuring charges and other
non-recurring expenses, net income for the first nine months of fiscal 1999 was
$7.3 million, or 6% of net revenues, as compared to $1.6 million, or 2% of net
revenues, in the same period in the prior year. Earnings per share, excluding
restructuring charges and other non-recurring expenses, were $0.72 per share for
the first nine months of fiscal 1999 and $0.17 per share for the same period in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $64.7 million, or 42% of total
assets, at January 31, 1999, compared to $57.5 million, or 41% of total assets,
at April 30, 1998.
Net cash provided by operating activities totaled $13.6 million in the first
nine months of fiscal 1999 compared to a use of cash of $6.5 million in the same
period in the prior year. The change was primarily due to higher net income in
the first nine months of fiscal 1999 compared to the same period in the prior
year, increased non-cash expenses, including depreciation, amortization and
restructuring charges in fiscal 1999, and changes in certain operating
liabilities. Expenditures for property and equipment totaled $4.8 million in the
first nine months of fiscal 1999 compared to $3.5 million in the prior year.
In October 1997, the Company acquired a 15% percent interest in Suntek
Information System Co. Ltd. for approximately $0.9 million. In November 1997,
the Company acquired a ten percent equity interest in DataChannel, Inc. for
approximately $1.7 million. Also in November 1997, the Company acquired SDTI for
$2.0 million. In connection with the acquisition of SDTI, the Company paid
additional contingent consideration of $1.0 million in November 1998. In March
1998, the Company acquired First Service for $11.0 million. Of the $11.0 million
cash payment, $2.0 million remains in escrow for one year to cover claims, if
any.
Stockholders' equity increased to $101.0 million at January 31, 1999, from $92.8
million at April 30, 1998. The change primarily resulted from net income and
shares issued under stock plans.
Management believes that existing cash and cash equivalents together with funds
from operations will be sufficient to finance the Company's operations over the
near term.
YEAR 2000
The Year 2000 problem arises from the common practice in software development in
the past of using two digits rather than four to designate the calendar year
(e.g., DD/MM/YY). This practice can lead to incorrect results whenever computer
systems, software or microchips perform
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arithmetic operations, comparisons or data field sorting involving years later
than 1999. The Company has been assessing the impact of the Year 2000 issues for
some time and has developed plans to address these issues related to its
products, its internal business systems and its distributors and partners.
The Company has tested its products for Year 2000 compliance and has made
modifications to certain of its products to make them Year 2000 compliant. Year
2000 compliant means that neither performance nor functionality of the products
or services is materially affected by dates prior to, during and after the year
2000. The Company believes that all of its Cyberprise products are Year 2000
compliant and that nearly all of its supported RUMBA, ARPEGGIO and R&R Report
Writer products are Year 2000 compliant as is or with available patches, except
those which are outdated and no longer supported. Because most of the work
associated with testing and modification of the Company's products has occurred
in the ordinary course of product development, the cost of Year 2000 compliance
for the Company's products has not been material.
The Company is assessing its internal systems, including financial and
operational systems, for Year 2000 compliance. The Company is currently in the
process of reviewing all affected Information Technology ("IT") processes,
applications, hardware, operating systems and databases, as well as critical
non-IT areas (such as facilities and building equipment) where Year 2000 issues
may exist. The assessment of the Company's critical internal IT systems was
completed on or before December 31, 1998. The Company continues to assess all
remaining internal systems and external relationships. The Company's goal is to
complete all assessment and mitigation tasks for all internal systems and
external relationships by September 1, 1999. The Company has incurred
approximately $160,000 in costs to date related to the assessment and mitigation
of internal system Year 2000 issues and estimates that total related costs will
approximate $500,000. These costs are primarily fees paid to third-party
consultants and contractors and exclude internal costs, which the Company does
not track separately and which the Company does not believe will be material.
The Company believes that the costs required to remedy internal Year 2000 issues
will not have a material effect on the Company's operations or financial
results.
The Company is also evaluating external relationships with distributors,
resellers, vendors and partners for Year 2000 issues. The Company is currently
in the process of surveying its external vendors and partners. None of the
Company's resellers or distributors is individually responsible for a material
amount of the Company's total revenues.
Although the Company is not aware of material operational issues or costs
associated with preparing for the Year 2000, the Company may experience serious
adverse impacts or material costs if the Company or its vendors or distributors
fail to resolve Year 2000 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. The Company has not yet completed all
contingency plans to address problems that may result if the Company, it
vendors, or its distributors fail to achieve Year 2000 readiness. The Company's
goal is to complete all contingency plans by September 1, 1999. The Company
plans to continue to devote the necessary resources to resolve significant Year
2000 issues and develop contingency plans.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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WALL DATA INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1998, the Company filed an action for declaratory judgment in
Federal District Court for the Western District of Washington against
OpenConnect Systems, Inc. ("OCS") of Dallas, Tex. seeking a judicial
determination that the Company does not infringe on patent No. 5754,830 (the
"830 Patent") held by OCS. Also in September 1998, OCS filed suit in Federal
District Court for the Eastern District of Texas against the Company claiming
that the Company infringes the '830 Patent. The OCS complaint seeks unspecified
damages. The Company has answered the OCS complaint by denying infringement and
asserting that the '830 patent is invalid and unenforceable. The Federal
District Court for the Western District of Washington has stayed the action for
declaratory judgement pending a ruling from the Federal District Court for the
Eastern District of Texas on a motion by the Company to transfer the action.
Because the complaint seeks unspecified damages, it is impossible to predict the
impact of a negative outcome in the litigation on the Company's operations or
financial condition. The Company intends to defend against the action
vigorously.
The Company may be subject to other 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 such legal matters will have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Employment Agreement, dated January 21, 1999, between
the Company and John R. Wall.
(10.2) Employment Agreement, dated January 21, 1999, between
the Company and Richard P. Fox.
(10.3) Employment Agreement, dated January 21, 1999, between
the Company and Kevin B. Vitale.
(10.4) Employment Agreement, dated January 21, 1999, between
the Company and Craig E. Shank.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended January 31, 1999.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wall Data Incorporated
Date: March 16, 1999 By: /s/ RICHARD P. FOX
------------------------------------
Richard P. Fox,
Chief Financial Officer
(Duly Authorized Officer and Chief
Financial and Accounting Officer)
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WALL DATA INCORPORATED
INDEX TO EXHIBITS
Exhibit Description
------- -----------
(10.1) Employment Agreement, dated January 21, 1999, between the
Company and John R. Wall.
(10.2) Employment Agreement, dated January 21, 1999, between the
Company and Richard P. Fox.
(10.3) Employment Agreement, dated January 21, 1999, between the
Company and Kevin B. Vitale.
(10.4) Employment Agreement, dated January 21, 1999, between the
Company and Craig E. Shank.
(27) Financial Data Schedule
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