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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
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 July 1, 1999 was approximately $94,165,481
The number of shares of the registrant's Common Stock outstanding at July
1, 1999 was 10,152,287.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its annual meeting
of shareholders to be held on September 22, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year, are incorporated by reference in Part III of this Form
10-K to the extent stated herein.
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WALL DATA INCORPORATED
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.................................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 4A. Executive Officers.......................................... 15
PART II................................................................... 16
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters..................................................... 16
Item 6. Selected Five-Year Financial Data........................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosure's About Market
Risk........................................................ 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Disagreements With Accountants on Accounting and Financial
Disclosure.................................................. 26
PART III.................................................................. 26
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV................................................................... 27
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................... 27
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IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS. THE WORDS "EXPECTS," "BELIEVES," "ANTICIPATES,"
"INTENDS" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS WHICH ARE
BASED UPON INFORMATION CURRENTLY AVAILABLE TO THE COMPANY AND SPEAK ONLY AS OF
THE DATE HEREOF. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
AND THE COMPANY'S, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED
"BUSINESS -- IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS." THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. READERS
SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I.
ITEM 1. BUSINESS
OVERVIEW
Wall Data Incorporated ("Wall Data" or the "Company") is an enterprise
software company providing products and services that allow organizations to
integrate and deploy applications over corporate intranets, extranets and the
Web. Using Wall Data solutions, organizations can extend their enterprise
information systems to allow internal users, remote users, third-party partners
and customers to access information and applications.
Wall Data operates two principal businesses: the RUMBA* business and the
Cyberprise business. The RUMBA business consists of products that provide access
to legacy corporate computer systems, and the Cyberprise business consists of
products and services that enable companies to develop Enterprise Information
Portals ("EIPs") that integrate applications, data and content within a Web
browser interface.
Wall Data's RUMBA products were introduced in 1989 and have been sold to
over 10,000 customers worldwide. The RUMBA product line was recently upgraded to
take advantage of the emerging Web-to-host market by allowing users to access
legacy systems from industry-leading browsers. The RUMBA family of host
connectivity products operates in Microsoft's Windows 3.x, Windows 95 and
Windows NT environments and supports the exchange of information between
personal computer ("PC") applications and IBM compatible mainframe computing
environments, including those manufactured by IBM, Hewlett Packard and Digital
Equipment as well as a variety of client-server database applications.
The Company's Cyberprise products and services allow companies to build
EIPs that provide their employees, customers, partners and suppliers with
uniquely relevant enterprise information, applications, data and Internet
content at a single point of access. The unique advantage Cyberprise brings to
the market is the ability to link organizations' current information systems to
the Web. The Cyberprise portal products incorporate rapid transformation
technologies and include Web-to-host and business intelligence products. The
first Cyberprise products were released in March of 1998.
Wall Data was incorporated in Washington in 1982 and has a 15-year history
of extending corporate computing systems to users on new platforms and providing
business solutions to customers worldwide.
CHANGE IN FISCAL YEAR END
On April 22, 1998, the Company's Board of Directors approved a change in
the Company's fiscal year from a calendar year to a year beginning May 1 and
ending April 30. The four-month transition period from January 1, 1998 through
April 30, 1998 (the "1998 Four-Month Period") preceded the start of the fiscal
year ended April 30, 1999 which will be referred to in this Form 10-K as Fiscal
1999. The prior periods ended
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* "Wall Data," "RUMBA" and "ONESTEP" are registered trademarks of the Company
and "Cyberprise" is a trademark of the Company. All other trademarks are the
property of their respective owners.
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December 31, 1997, 1996 and 1995 will be referred to herein as Fiscal 1997,
Fiscal 1996 and Fiscal 1995 respectively.
RECENT DEVELOPMENTS
During the fourth quarter of fiscal 1999, the Company restructured its
RUMBA host access business and its Cyberprise corporate portal business into two
separate businesses, each with its own sales, service, development and marketing
organizations to enable each business to address its own unique market dynamics,
sales processes, growth rates and operating priorities. The Company continues to
utilize centralized administrative and support organizations for both businesses
to reduce costs and for efficiency purposes. There can be no assurance that the
restructuring will improve the Company's performance or that the Company will be
able to operate two separate business organizations successfully.
The Company also announced that it has engaged the investment banking firm
of Bear Stearns & Company to evaluate strategic alternatives for the Company's
two businesses. There can be no assurance that the Company will be able to
identify or implement successful strategic alternatives for either the RUMBA
business or the Cyberprise business. See "Important Factors Regarding
Forward-Looking Statements."
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 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 LAN/WAN systems,
intranets, extranets and the Web.
CYBERPRISE
OVERVIEW
Wall Data's Cyberprise business (www.cyberprise.com) focuses on integrating
and managing enterprise information assets through the Cyberprise Portal, a
corporate portal for creating multiple online communities across a company's
customers, partners and vendors. Cyberprise solutions have been sold to more
than 180 customers in 18 industries.
Cyberprise solutions allow corporations to build EIPs that provide their
employees, customers, partners and suppliers with uniquely relevant enterprise
information, applications, data and Internet content at a single point of
access. Wall Data's Cyberprise solutions accomplish this by creating virtual
applications accessed through an EIP.
A virtual application integrates elements from multiple existing
applications, data warehouses and the Internet and delivers the integrated
information to the user through the EIP. Corporations use Cyberprise Rapid
Transformation Technologies to create these virtual applications. Cyberprise
Rapid Transformation Technologies allow customers to migrate existing solutions
to the Web more rapidly and at a substantially lower cost than if they created
new applications. The resulting virtual applications deliver integrated user-
specific views of a broad range of corporate applications, information, and
data, managed through the Cyberprise Corporate Portal. The breadth, integrated
functionality and scalability of the Cyberprise solution uniquely differentiate
the Company's position in this emerging market.
INDUSTRY BACKGROUND
Increasingly, business users rely on corporate intranets for basic
information. These users are unable to take full advantage of the
mission-critical data that reside in enterprise applications and databases due
to the complexity of existing systems. Employees are expected to navigate by
themselves through a number of other applications to access this information.
Although they are mission-critical, legacy applications are often too
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complex to be broadly accessible, too focused on narrow business functions and
may be too difficult to learn. Moreover, legacy applications normally present
single-purpose views, and rarely integrate with other relevant business
information, whether from internal or external sources.
Wall Data's Cyberprise strategy addresses the emerging technology market
now known as EIPs. There are three factors driving the growth of this market:
(i) the corporate realization of the wealth of information currently stored in
diverse enterprise information systems; (ii) the emergence of packaged
information applications playing into the buy-versus-build trend; and (iii) the
availability of affordable, ubiquitous information distribution channels in the
form of intranets and extranets. Organizations are rapidly beginning to
understand that the Internet represents an inexpensive and reliable distribution
channel to provide their constituencies with essential business information.
There can be no assurance that organizations will adopt solutions that are
suitable for application of the Cyberprise technologies, or that the Cyberprise
strategy will be successful.
PRODUCTS
The Company sells a number of products under the Cyberprise product family
that enable its customers and partners to implement EIP solutions. Cyberprise
EIP solutions allow organizations to access internally and externally stored
information at a low cost, increase operational efficiency, lengthen the useful
lives of legacy applications and maximize resource deployment.
Cyberprise Portal Server
The platform of the EIP solution is the Company's Cyberprise Portal Server.
The Cyberprise Portal Server provides a single point of access and a common user
interface across the enterprise, as well as rich functionality for content
management and organization for each user, information publishing, Web-based
administration, user license management, user load balancing across multiple
servers, domain security and password management. These products run on the
leading Web servers and operating systems including Microsoft NT and Unix
systems from Sun and Hewlett-Packard.
The Cyberprise Portal Server allows browser users to access existing
enterprise computing applications and information, as well as public
information, through an easy-to-use channel interface that can be easily
customized. The Cyberprise Portal Server also provides centralized management,
security and scalability to permit IT to manage the delivery of the correct
information and applications to each user.
Rapid Transformation Technologies
In support of the Cyberprise Portal Server, the Company sells a number of
Rapid Transformation Technology products that are used to convert existing
legacy applications, corporate data and information assets into virtual
applications, delivering personalized information accessed over the Web. This is
done automatically or with reduced development resources when customized
solutions are required. There are two categories of Rapid Transformation
Technologies: Automatic Web Enablement and Web Development Tools.
AUTOMATIC WEB ENABLEMENT includes Web-to-host products such as Cyberprise
Host, Enterprise Edition available for both Microsoft Windows NT and the Sun and
HP Unix Platforms, that automatically provide direct, persistent, browser-based
access to host systems. Automatic Web Enablement also includes Business
Intelligence products such as Cyberprise InfoPublisher to publish database
queries, reports, data analysis cubes, and all forms of standard PC documents.
WEB DEVELOPMENT TOOLS enable internal developers, consultants and business
users to extend the automatic capabilities of Cyberprise products to customized
business solutions. Products such as Cyberprise Host Developer and Cyberprise
DBApp Developer allow developers to build Web applications that connect host
transaction applications, migrate client/server applications to the Web, create
custom database queries and reports and customize user information presentation.
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Cyberprise Rapid Transformation Technologies are a combination of DCOM,
ActiveX, CORBA, Java and Java Bean components and tools that automatically
transform applications and information to the World Wide Web or accelerate the
transformation process for developers.
RUMBA BUSINESS -- HOST CONNECTIVITY SOFTWARE PRODUCTS
OVERVIEW
The RUMBA family of host connectivity software products (www.rumba.com)
provides host connectivity in the PC-to-host, Web-to-host and server-based
computing market. RUMBA products allow business users to access mission-critical
applications and data by supporting the exchange of information between PC
applications and host applications operating on IBM and IBM-compatible mainframe
computers. RUMBA products implement PC-to-enterprise connections using an array
of network and communication configurations over a wide range of communication
hardware, multiple LAN operating systems and a broad range of communications
servers and gateways. RUMBA software is designed for enterprise-wide
implementation while leveraging customers' prior investments in host computers,
applications, PCs, intranets, the Internet and a wide range of private networks.
The Company has sold its RUMBA products to over 10,000 customers.
INDUSTRY BACKGROUND
The PC-to-host and Web-to-host industry is a successor to the terminal
emulation market of the 1980's. The terminal emulation market developed due to
users' needs to access mainframe computer applications without an additional
terminal on the desktop. The computing industry changed with the introduction of
the PC and the introduction of Microsoft Windows in 1989. These two events led
the computer to spread throughout the business environment as well as to the
consumer. However, much corporate data was still locked within the
user-unfriendly mainframe. As a result, a new market for Windows-based
PC-to-host connectivity software emerged to enable users to access this
information easily through a familiar user interface.
PRODUCTS
Today's corporate workforce has come to expect computer applications to
have the look and feel that is consistent with the Microsoft Windows
environment. However, traditional host applications are still written to a
dedicated terminal user interface instead of the graphical user interface of a
Windows environment. Wall Data overcomes this difficulty with its RUMBA
products. RUMBA products allow corporate users to operate existing applications
through a Windows interface.
RUMBA software products fall into two categories: RUMBA client software
products and RUMBA tool products. In 1989, the Company 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. The component-based architecture of RUMBA products ensures robust,
optimal performance and fast, flexible application development.
RUMBA Client Software Products
The Company recently released its latest generation of RUMBA client
software products, the RUMBA 2000 product line, a full line of PC-to-host,
Web-to-host and server-based computing solutions. In addition to traditional
PC-to-host connectivity, the RUMBA 2000 product also includes a range of
ActiveX, Java and Java Bean based Web-to-host technologies. The RUMBA 2000
product line was developed for organizations that are seeking to reduce the
total cost of PC ownership that require robust host access functionality within
their LAN/WAN infrastructure, and that have plans to adopt a Web-based computing
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model. All RUMBA 2000 products include a browser-interface option allowing users
to work with RUMBA software within their Microsoft Internet Explorer or Netscape
Navigator browser environment using Active Document technology. By centrally
installing RUMBA 2000 on a LAN server, an organization reduces the IT workload
associated with supporting and maintaining multiple desktops. The RUMBA 2000
product also adds significant functionality and options that include: (i)
TN5250E support that provides AS/400 users with printing and unique device names
capabilities; (ii) AS/400 File Transfer which supports native TCP/IP; (iii) MPE
Native File Transfer which provides HP3000 users with the ability to transfer
files to a Windows application; and (iv) multi-file transfer to HP/UNIX hosts to
increase user productivity.
RUMBA Office 2000, the successor to RUMBA Office, is a full, multi-host
suite of solutions for users needing to access enterprise server or host systems
that provides access to a vast range of character-based and client-server
applications on business-critical systems and includes Web-to-host capabilities.
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. Wall Data has also introduced
versions of its RUMBA products that support Citrix WinFrame and Microsoft
Terminal Server environments providing customers with cost-efficient host access
in server-based computing models.
With the 1998 introduction of RUMBA Office, Cyberprise Edition, the Company
also added browser-based host access within the extranet and Internet
environments. RUMBA Office, Cyberprise Edition incorporates portions of the
Company's Cyberprise Host technology to address the growing Web-to-host market.
These Web-to-host features are now incorporated in the RUMBA product line. These
products allow employees to access host applications using industry standard
Internet browsers running the Microsoft Windows operating system.
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
applications making use of host information. By supplying enterprise information
access technology and implementing industry-standard architectures for custom
solution development, including Microsoft's ActiveX component architecture,
RUMBA tools give developers the ability to easily produce custom software
solutions that meet specific user and enterprise needs.
RUMBA tools deliver a range of capabilities for enhancing the presentation
of enterprise information on PCs and the Web and are designed for users and
developers of varying proficiency. Developers can use RUMBA application tools in
connection with industry-standard application programming interfaces and
computer-aided software engineering tools to develop sophisticated applications
and transaction programs interfacing with host applications. Advanced
application users or developers can use RUMBA application tools to customize or
develop specific applications designed to incorporate enterprise information.
Advanced application users can use RUMBA application tools to present enterprise
information in the format of familiar Windows applications on the Web.
SERVICE
Wall Data is committed to responsive, high-quality product support and
timely upgrades for the Company's software products. In the RUMBA business,
these services are marketed under the ONESTEP(R) brand, and in the Cyberprise
business these services are marketed under the Cyberprise services brand.
RUMBA SERVICES -- ONESTEP. The Company's ONESTEP program is an optional
annual subscription service program for the Company's RUMBA products, providing
responsive, priority product support at predictable costs augmenting customers'
support staff and maximizing 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 support information
database, and the ability to download
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current product updates and fixes; and upgrade subscription, which keeps the
customer's software current with the latest upgrades and updates.
CYBERPRISE SERVICES. Cyberprise Services include maintenance, support,
consulting and specialized programs to facilitate moving corporate information
and applications, including mission-critical systems to the Cyberprise
environment.
Cyberprise Services are marketed under the Cyberprise Service brand in the
form of a flexible annual maintenance program which provides responsive,
priority product support at predictable costs, augments customers' support staff
and maximizes user productivity.
The Company also offers consulting services for implementation of
Cyberprise solutions. The Company has a small group of employees in the
Cyberprise Services group to oversee implementation engagements using existing
systems engineers as well as contracting with third party consulting partners to
fulfill consulting engagements. As of July 1, 1999, the Company had 40
consulting partners available to serve as primary contractors or subcontractors
on consulting engagements on deployments of Cyberprise solutions. To date,
consulting revenue from customer engagements has not been significant. The
Company recently assigned 24 additional people to the Cyberprise Consulting
Group to further support customer implementation of Cyberprise solutions.
SALES, MARKETING AND DISTRIBUTION
OVERVIEW
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 this range of sales and marketing opportunities, Wall Data uses a
combination of direct sales, telesales, resellers, distributors and OEMs.
The direct sales force focuses on large enterprises and markets to the
executive, management information systems, department/division and user levels
within these organizations. 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 staff. In addition, the Company relies on resellers and
distributors to market and support its products in certain geographic 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. 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. 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 recorded for estimated sales returns and
exchanges. 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.
CYBERPRISE
The Company markets its Cyberprise products worldwide through a dedicated
direct sales force. The Cyberprise direct sales force focuses on large
enterprises and markets to the executive, management information systems,
department/division and user levels within these organizations. The Company also
sells its Cyberprise products through indirect channels, primarily consisting of
the Cyberprise Partner Network and
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other distributors and national and regional resellers addressing the business
market. Sales efforts for Cyberprise products emphasize delivery and deployment
of business solutions, rather than technology implementations or product sales.
RUMBA
The Company markets its RUMBA products worldwide, primarily to
multinational and national business organizations with installed enterprise
information systems. These organizations vary in size, complexity and
purchasing-decision structures. To address this range of sales and marketing
opportunities, the RUMBA business uses a combination of direct sales, telesales,
resellers, distributors and OEMs.
The Company relies on its RUMBA direct sales force to generate demand by
focusing on large enterprises and marketing to the executive, management
information systems, department/division and user levels within these
organizations. Fulfillment is completed by the Company or its resellers and
distributors. The Company also sells its RUMBA products through indirect
channels, primarily consisting of distributors and national and regional
resellers addressing small and midsize organizations.
Wall Data has entered into OEM agreements with certain companies, pursuant
to which these companies market derivatives of RUMBA products under various
names. The OEM agreements generally provide nonexclusive licenses of specific
versions of software and allow the OEMs to combine the specific version of
software with their product-specific software and to distribute and market the
derivative of the 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 the software distributed to end users or used internally. Sales
pursuant to OEM agreements accounted for approximately 3.4% of the Company's net
revenues in the Fiscal 1999. There can be no assurance, however, that OEMs will
be able to market the Company's products effectively or that OEM revenues will
continue at such levels.
INTERNATIONAL
The Company's international sales and marketing staff are located in
Brazil, Canada, England, France, Germany, Ireland, Japan and Mexico. Currently,
the Company's sales in Europe are made on both a direct basis and through local
resellers and distributors. Agreements with local resellers and distributors
generally provide for non-exclusive rights to sell the Company's products in a
specified geographic area.
Approximately 26%, 35%, 30% and 29% of the Company's net revenues in Fiscal
1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996, 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 with 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 and Spain. 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 are
required to pay license fees for all products shipped to them and 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 13 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."
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MARKETING
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.
PRODUCT DEVELOPMENT
The Company intends to enhance and expand its product lines in connection
with evolving customer requirements, industry standards and technologies. 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. 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 $25.8
million, $9.0 million, $26.6 million and $30.7 million in Fiscal 1999, the 1998
Four Month Period, Fiscal 1997 and Fiscal 1996, respectively.
COMPETITION
The enterprise software market is intensely competitive and subject to
rapidly changing technology and standards incorporated into PCs, the Internet,
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.
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 RUMBA business competes with providers of PC-to-host and Web-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"),
NetManage, Inc. and Hummingbird Communications, Limited.
In general, customers and prospective customers of the Company's RUMBA
products also have competitors' connectivity products installed, and the Company
competes with these vendors for customer orders. 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 capability in its future products and
product enhancements. The introduction by Microsoft of a client software
connectivity product or formation of a significant
8
11
relationship with a competitor of the Company could materially adversely affect
sales of the Company's products.
The Cyberprise business competes with providers of software products for
Internet and corporate intranet information publishing products, including IBM.
In addition, a significant number of competitors offer products that compete
directly with the Cyberprise EIP solutions. Moreover, many potential customers
may choose to build their own EIPs or engage consulting firms to build
customized EIPs. There can be no assurance that the Company's EIP solutions will
be able to compete successfully in the EIP market.
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
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.
In September 1998, the Company filed an action for declaratory judgment in
Federal District Court for the Western District of Washington against
OpenConnect Systems ("OCS") of Dallas, Texas seeking a judicial determination
that the Company does not infringe on Patent No. 5,754,830 (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
judgment 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; however, an adverse outcome could have a
material adverse impact on the Company's liquidity, operating
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12
results or financial condition. The Company intends to defend against the action
vigorously. See "Legal Proceedings."
No other material claims have been made against the Company for
infringement of proprietary rights of third parties. There can be no assurance,
however, that other 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 have occurred in the fourth
calendar quarter, and in each of the last five years, the first calendar quarter
revenues have been down sequentially compared with revenues for the immediately
preceding fourth calendar quarter. In addition, the third calendar 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. The change in the Company's fiscal year end was made to improve
the Company's ability to manage operations in light of seasonal buying patterns.
There can be no assurance, however, that the change in the fiscal year end will
improve the Company's ability to manage its operations.
EMPLOYEES
As of April 30, 1999, the Company's headcount totaled 758 persons,
including employees and contractors. The Company believes that its future
success continues to depend on its ability to attract and retain skilled
technical, marketing and management personnel. Competition for such personnel in
the computer industry is intense, and the Company has experienced periods of
significant turnover. The Company believes its relations with its employees are
good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following important factors, among others, could cause the Company's
actual results to differ materially from those expressed in the forward-looking
statements in this Form 10-K and presented elsewhere by management from time to
time.
Recent Restructuring. During the fourth quarter of fiscal 1999, the Company
restructured its RUMBA business and its Cyperprise business into two separate
businesses, each with its own sales, service, development and marketing
organizations to enable each business to address its own unique market dynamics,
sales processes, growth rates and operating priorities. The Company experienced
significant disruptions in sales in connection with the restructuring. There can
be no assurance that such disruptions will not occur in the future. The
Company's future success depends on its ability to operate the two businesses
independently. There can be no assurance that the Company will successfully be
able to operate the two businesses independently.
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. 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
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13
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."
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. 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. 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
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 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 expending funds
to be year 2000 compliant 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 in the months of
March, June, September and December due to customer buying patterns. 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.
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. In
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general, customers and prospective customers of the Company's products also have
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 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. The market for
the Company's products is also characterized by significant price competition,
and the Company expects that it will face increasing price 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. 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.
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. Some of the features of the Company's
Cyberprise products deliver, through a Web browser, similar access to enterprise
information and applications to the access delivered by RUMBA Web-to-host and
client software products. As a result, acceptance of the Company's Cyberprise
products may have a negative impact on RUMBA sales. 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 materially
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 materially adversely affect the Company's
results of operations. See "-- Products" and "-- Competition."
Dependence on Microsoft Windows. Substantially all 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. The Company expects to continue to
rely, in part, 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
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15
resellers or distributors 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 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 engages in some foreign currency hedging
transactions, although it does not hedge all of its foreign currency positions.
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 adverse impact to the Company. Accordingly, the
Company plans to continue to devote the necessary resources to resolve
significant year 2000 issues in a timely manner. In addition, prospective
customers for the Company's products may delay purchase decisions as they assess
the impact of the year 2000 on their systems, or as they are required to
dedicate all available IT budgets to year 2000 remediation. Such delays may have
a material adverse impact on the Company's sales and, consequently, on the
Company's results of operations.
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 Chief Executive Officer, John R. Wall, and the President of the
RUMBA business, Kevin B. Vitale. The loss of the services of these key persons
would have a material adverse effect on the Company. The Company has employment
agreements with Messrs. Wall and Vitale. The Company's success also depends 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. 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 grow 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 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
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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 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."
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 3,000 square feet of office space in
Dublin, Ireland and leases space for its other national and international
offices.
ITEM 3. 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 ("OCS") of Dallas, Texas seeking a judicial determination
that the Company does not infringe on Patent No. 5,754,830 (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
judgment 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 outcome in
the litigation; however, an adverse outcome could have a material adverse impact
on the Company's liquidity, operating results 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 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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ITEM 4A. EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of April 30, 1999
are as follows:
John R. Wall................ 41 Mr. Wall has been a Director of the Company since May 1994
and Chief Executive Officer since August 1997. Mr. Wall is
the founder of the Company, was its Executive Vice President
from June 1991 to May 1996 and served as Secretary from
January 1993 to May 1994. Mr. Wall was a Director of the
Company from its inception to May 1991 and Chairman of the
Board of Directors from 1985 to 1991. He has been the chief
technologist and an officer of the Company since its
inception, serving as President from 1982 to 1985 and Vice
President, Research and Development from 1985 to 1991. Mr.
Wall served as chairman of the Washington Software
Association from January 1994 to December 1995 and is a
former co-chair of the Washington Software Association
Education Committee. Mr. Wall also serves as a founding
Trustee and Chairman of the Washington Software Foundation.
He is also on the Board of Trustees of the Corporate Council
for the Arts.
Kevin B. Vitale............. 41 Mr. Vitale has been a Director and Chief Operating Officer
of the Company since July 1997. He served as Executive Vice
President of the Company from April 1996 to July 1997 and
Vice President, Operations and Services from July 1993 to
April 1996. Prior to joining the Company, Mr. Vitale was
Vice President, Corporate Quality and Customer Service of
NetFRAME Systems Incorporated from July 1989 to July 1993.
Mr. Vitale also serves as a director and the chairman of the
Long Range Planning Committee for the Washington Software
Association and as a director of DataChannel, Inc., an
Internet technology company. He is also a founding member of
the Technical Support Alliance Network, where he served as a
board member and Treasurer for the past five years.
Richard P. Fox.............. 51 Mr. Fox has been Vice President Finance, Chief Financial
Officer and Treasurer of the Company since April 1998.
Immediately prior to joining the Company, Mr. Fox was Senior
Vice President of PACCAR Inc. from March 1997 to January
1998. Prior to that, he was with Ernst & Young LLP, becoming
a partner in 1979. His last position was managing partner of
the firm's Seattle office. Mr. Fox is a certified public
accountant and serves on the Board of Trustees of the
Seattle Repertory Theatre and the Seattle Repertory
Foundation.
Craig E. Shank.............. 40 Mr. Shank joined the Company as General Counsel in March
1998 and was elected Vice President, General Counsel and
Secretary of the Company in May 1998. Prior to joining the
Company, he was a lawyer with the Perkins Coie LLP law firm
from November 1986 to May 1998, becoming a partner in
January 1993.
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BOARD OF DIRECTORS AT APRIL 30, 1999
The directors of the Company at April 30, 1999 are as follows:
Robert J. Frankenberg....... 52 Chairman of the Board of Wall Data; President and Chief
Executive Officer of Encanto Networks, Inc.
Jeffrey A. Heimbuck......... 52 Former President and Chief Executive Officer of Inmac
Corporation
Henry N. Lewis.............. 60 Managing Director and Principal of Computer Ventures Group
Limited
David F. Millet............. 54 Managing Director of Gemini Investments
Steve Sarich, Jr............ 78 President of 321 Investment Co. and President of C.S.S.
Management Co.
Bettie A. Steiger........... 65 President and Founder of Steiger Associates
Kevin B. Vitale............. 41 Chief Operating Officer of Wall Data
John R. Wall................ 41 Chief Executive Officer of Wall Data
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
July 1, 1999 was 316.
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 Fiscal 1997, the 1998 Four Month Period, and Fiscal 1999 are as follows:
STOCK PRICE
--------------
YEAR HIGH LOW
---- ----- -----
FISCAL 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
1998 FOUR MONTH PERIOD...................................... 18.25 13.50
FISCAL 1999
First Quarter............................................. 16.00 10.13
Second Quarter............................................ 15.50 10.63
Third Quarter............................................. 24.25 13.25
Fourth Quarter............................................ 22.31 13.50
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ITEM 6.SELECTED FIVE-YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
FOUR MONTHS
YEAR ENDED ENDED APRIL 30, YEAR ENDED DECEMBER 31,
APRIL 30, ------------------ -----------------------------------------
1999 1998 1997 1997 1996 1995 1994
---------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
STATEMENT OF OPERATIONS
Net revenues......................... $139,729 $39,106 $ 46,386 $140,851 $139,364 $110,741 $101,240
Gross margin......................... 111,614 30,899 37,906 115,925 112,766 88,653 86,610
Operating expenses................... 122,322 36,675 34,214 116,234 107,705 93,868 65,582
Income (loss) from operations........ (10,708) (5,776) 3,692 (309) 5,061 (5,215) 21,028
Net income (loss).................... (8,924) (4,648) 2,673 2,251 4,193 7,251 14,184
Earnings (loss) per share -- assuming
dilution, as applicable............ (0.89) (0.47) 0.27 0.23 0.43 0.72 1.40
Pro forma net income (loss)*......... (6,519) (4,648) 2,673 9,581 6,145 2,766 16,664
Pro forma earnings (loss) per
share -- assuming dilution, as
applicable......................... (0.65) (0.47) 0.27 0.97 0.63 0.28 1.65
Average shares
outstanding -- assuming dilution,
as applicable...................... 9,999 9,805 9,780 9,886 9,721 10,027 10,124
BALANCE SHEET
Cash and cash equivalents and
marketable securities.............. $ 65,464 $57,490 $ 82,384 $ 70,814 $ 62,483 $ 51,969 $ 48,927
Working capital...................... 56,580 56,477 74,874 72,849 71,798 60,720 56,308
Total assets......................... 126,795 140,205 130,585 136,576 127,154 109,339 105,626
Shareholders' equity................. 86,401 92,768 92,951 94,887 90,803 83,702 81,206
KEY RATIOS
Current ratio........................ 2.5 2.3 3.0 2.7 3.0 3.3 3.3
Pro forma return on net revenues*.... (4.7)% (11.9)% 5.8% 6.8% 4.4% 2.5% 16.5%
Pro forma return on average total
assets*............................ (4.9)% (3.4)% 2.2% 7.3% 5.2% 2.6% 18.5%
Pro forma return on average
stockholders' equity*.............. (7.3)% (5.0)% 3.0% 10.3% 7.0% 3.4% 23.2%
- ---------------
* Excludes non recurring gain in 1995 of $14.0 million ($8.7 million, or $0.87
per share on a diluted basis, after income taxes) and restructuring and other
non recurring charges in 1999, 1997, 1996, 1995 and 1994 of $2.4 million
($0.24 per share), $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), $6.8 million ($4.2 million, or
$0.42 per share on a diluted basis, after income taxes) and $4.0 million ($2.5
million, or $0.25 per share on a diluted basis, after income taxes),
respectively. See Notes 7 and 12 of Notes to Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Wall Data is an enterprise software company providing products and services
that allow organizations to integrate and deploy applications over corporate
intranets, extranets and the Internet. Since its inception in 1982, Wall Data
has enabled more than 10,000 companies to extend their enterprise systems to new
platforms, while maximizing their technology investments. Wall Data products
support platforms from leading technology companies including Microsoft,
Hewlett-Packard, SUN Microsystems, Informix, Sybase, Oracle, IBM and Netscape.
Effective April 30, 1998, the Company changed its fiscal year end from
December 31 to April 30. As a result, the Company has reported a transition
period of four months ended April 30, 1998 (the "1998 Four Month Period") in its
previous filing. The fiscal year ended April 30, 1999 will be referred to as
Fiscal 1999, and prior periods ended December 31, 1997 and 1996 will be referred
to as Fiscal 1997 and Fiscal 1996, respectively. The 1998 Four Month Period will
be compared to the unaudited results for the four months ended April 30, 1997
(the "1997 Four Month Period").
The results of operations for Fiscal 1999 reflect a loss. During Fiscal
1999, operating expenses increased to $122.3 million as compared to the prior
period of $118.3 million due to the launch of the Cyberprise business. In the
fourth quarter revenues fell, as compared to the previous quarters, to a level
that did not support the operating expenses. The Company believes that the
revenue decline to be primarily a result of the disruptions associated with the
restructuring of Wall Data into separate RUMBA and Cyberprise businesses.
However, market conditions, including customer deferment of purchases as
attention and resources are dedicated to year 2000 preparedness, are also
believed to be factors. In the fourth quarter, the Company determined that the
RUMBA and Cyberprise businesses had differing sales processes and other
operational aspects. The Company separated all of the line functions of the
business including technical support, services, product development, field sales
and marketing in order to increase the focus on the specific needs of each
business. In May 1999, the Company announced that it has engaged the
investment-banking firm of Bear Stearns & Co. to assist in evaluating strategic
alternatives for the RUMBA and Cyberprise businesses.
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 are dependent
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 expending funds to be year 2000 compliant
and changes in general economic conditions. Products generally are shipped as
orders are received and, accordingly, the Company historically has operated with
little or no backlog. The Company's operating expenses are relatively fixed in
the short term. In addition, a significant portion of revenues for each quarter
typically is received in the last month of each fiscal quarter due to customer
buying patterns and sales incentives. As a result, variations in timing of
revenues can cause significant variations in quarterly results of operations.
The Company expects to experience fluctuations in future net revenues and
operating income that may be caused by the competitive nature of its industry
and market acceptance of the Company's new Cyberprise products, among other
factors. As a result, the Company believes that period-to-period comparisons of
its financial results are not necessarily meaningful and should not be relied
upon 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 last quarter
of the calendar year. Since 1991, the Company has frequently incurred higher
operating expenses in each sequential quarter primarily due to an increase in
the
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number of employees. Operating expenses declined in the fourth quarter of Fiscal
1999 as the Company has reduced the number of employees to 758 at April 30, 1999
from a high of 886 at October 31, 1999.
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation (see Note 1 of Notes to Consolidated
Financial Statements).
REVENUES
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
------------------------------- ------------------------------ -------- --------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
-------- ------ ----------- ------- ------ ----------- -------- ------ --------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
License fees
RUMBA products....... $ 90,858 (16)% $108,732 $29,799 (25)% $39,972 $118,905 (5)% $124,815
Cyberprise
products........... 18,925 N/M 426 426 N/M -- -- -- --
Total license fees..... 109,783 1% 109,158 30,225 (24)% 39,972 118,905 (5)% 124,815
Services
RUMBA services....... 28,789 18% 24,413 8,881 38% 6,414 21,946 51% 14,549
Cyberprise
services........... 1,157 N/M -- -- -- -- -- -- --
Total Services......... 29,946 23% 24,413 8,881 38% 6,414 21,946 51% 14,549
Total net revenues..... $139,729 5% $133,571 $39,106 (16)% $46,386 $140,851 1% $139,364
TOTAL NET REVENUE. Net revenues increased 5% in Fiscal 1999 to $139.7
million from $133.6 million in the prior comparable period. The increase was
primarily due to a 23% increase in service revenues. Net revenues decreased 16%
in the 1998 Four Month Period to $39.1 million from $46.4 million in the 1997
Four Month Period. The decrease was primarily due to declining license fees,
principally for RUMBA for the Mainframe and RUMBA OFFICE. Net revenues in Fiscal
1997 of $140.9 million were flat as compared to Fiscal 1996 of $139.4 million.
Net international revenues related to sales of the Company's products and
services represented $36.0 million, or 26% of net revenues, during Fiscal 1999
compared to $45.2 million, or 34% of net revenues, in the prior comparable
period. Revenue in Europe decreased $8.7 million in Fiscal 1999 as compared the
same period in the prior comparable period. This decline in Europe was impacted
by a large transaction during the prior comparable period and a late launch of
the Company's Cyberprise products in Europe. Net international revenues related
to sales of the Company's products and services represented $13.5 million, or
35% of net revenues during the 1998 Four Month Period, $42.4 million, or 30% of
net revenues in Fiscal 1997 and $40.0 million, or 29% of net revenues in Fiscal
1996. The increases in international net revenues in the 1998 Four Month Period
and Fiscal 1997 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 the 1998 Four Month
Period, Fiscal 1997 and Fiscal 1996 were generated through its indirect
distribution channels. In Fiscal 1999, international revenues derived from
direct sales to end users increased to 37% of total international revenues from
14% in the prior year. The increase in direct sales is primarily attributed to
the purchase of First Service Computer Dienstleistungs-GmbH (First Service), a
German distribution company. 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 Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal
1996, but exchange rate fluctuations could have an adverse effect on future net
revenues. The Company has experienced difficulties in hiring, training and
retaining management-level staff abroad and in selecting international resellers
with technological and sales personnel to distribute the Company's products. In
Fiscal 1999, the Company has experienced higher employee turnover in Germany
primarily as a result of merger integration issues related to the First Service
acquisition. 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
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managing international operations, potentially adverse tax consequences,
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws.
In January 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position (SOP 97-2), "Software Revenue
Recognition," as amended. SOP 97-2 provides guidance on recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's current licensing or revenue recognition practices.
LICENSE FEES. License fees for Fiscal 1999, the twelve months ended April
30, 1998, the 1998 Four Month Period, the 1997 Four Month Period, Fiscal 1997
and Fiscal 1996 were $109.8 million, $109.2 million, $30.2 million, $40.0
million, $118.9 million and $124.8 million, respectively. Total license fees
were relatively flat in Fiscal 1999 as compared to the prior comparable period.
Fiscal 1999 was the first full year of revenue from the Company's Cyberprise
products which represented $18.9 million or 17% of the total license fees. The
Company's Cyberprise products are designed to enable companies to move existing
mission-critical systems and public information to the Web and extend those
systems to remote users, vendors and customers. In Fiscal 1999, all products
that are Web enabled were reported as Cyberprise revenue. License fees for RUMBA
products declined 16% in Fiscal 1999 to $90.9 million from $108.7 million in the
prior comparable period. RUMBA license fees represent all revenue from PC to
host products. Most of the decrease in license fees in Fiscal 1999 compared to
the prior year resulted from decreased sales of RUMBA OFFICE, RUMBA AS/400 and
OEM products. Approximately 87% and 13% of the RUMBA license fees in Fiscal 1999
related to products containing 32-bit technology and 16-bit technology,
respectively.
License fees for the 1998 Four Month Period declined to $30.2 million as
compared to $40.0 million in the 1997 Four Month Period as a result of decreased
sales of RUMBA for the Mainframe and RUMBA OFFICE. A RUMBA license to one
customer accounted for approximately 18% of the net revenues in the 1997 Four
Month Period. Approximately 82% and 18% of license fees in the 1998 Four Month
Period related to products containing 32-bit technology and 16-bit technology,
as compared to 65% and 35% of license fees in the 1997 Four Month Period related
to products containing 32-bit technology and 16-bit technology, respectively.
License fees in Fiscal 1997 declined 5% from Fiscal 1996. The Company believes
that the license fees revenues in Fiscal 1997 were 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 67% and 33% of license fees in Fiscal 1997 related to products
containing 32-bit technology and 16-bit technology, respectively. 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 32% and 68% of net revenues
in Fiscal 1996 related to products containing the 32-bit technology and 16-bit
technology, respectively.
The Company has derived the majority of its net revenues to date from
licenses of its RUMBA client software products, which accounted for 65%, 76%,
84% and 90% of net revenues in Fiscal 1999, the 1998 Four Month Period, Fiscal
1997 and Fiscal 1996, respectively. The RUMBA product line and related
enhancements are expected to account for a majority of the Company's net
revenues during the next year. 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. As the Cyberprise
products have certain similar functionalities as RUMBA products, the acceptance
of the Company's Cyberprise products will have a negative effect on RUMBA sales.
With the evolution of the Cyberprise vision, management plans to differentiate
the Cyberprise business from RUMBA as an EIP solution beginning in Q1 of FY2000.
As a result, prior periods will be restated to eliminate all RUMBA/Cyberprise
edition revenues from Cyberprise and reflect it as RUMBA business. In Fiscal
1999, the Company reported approximately $8.9 million of RUMBA/Cyberprise
edition revenue as Cyberprise license fees. There can be no assurance that the
Cyberprise strategy will be successful. See "Important Factors Regarding
Forward-Looking Statements."
SERVICE REVENUE. Service revenues for Fiscal 1999, the 1998 Four Month
Period, Fiscal 1997 and Fiscal 1996 were $29.9 million, $8.9 million, $21.9
million and $14.5 million, respectively. Increases in revenue from ONESTEP
customer support contracts is correlated with license fees to new customers and
renewal contracts of previous license customers. As license fees of RUMBA
products decline, the Company expects that the
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service revenues will be flat or decline in the future. Cyberprise service
revenue in Fiscal 1999 was $1.2 million and represented 4% of the total service
revenue.
COST OF REVENUE
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
------------------------------ ------------------------------ -------- --------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------- ------ ----------- ------- ------ ----------- -------- ------ --------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Cost of license fees......... $16,454 (6)% $ 17,569 $ 5,027 (16)% $ 5,995 $ 17,276 (12)% $ 19,598
Percentage of license fees... 15% 16% 17% 17% 15% 15% 15% 16%
Cost of services............. 11,661 56% 7,481 3,180 28% 2,485 7,650 9% 7,000
Percentage of services....... 39% 31% 36% 36% 39% 39% 35% 48%
Total gross margin........... $11,614 3% $108,521 $30,899 (18)% $37,906 $115,925 3% $112,766
Percentage of net revenues... 80% 81% 79% 79% 82% 82% 82% 81%
COST OF LICENSE FEES. Cost of license fees consists primarily of software
publishing costs, which include labor, product media, packaging and
documentation, publishing, royalties and licensing costs, amortization of
product localization costs and provisions for obsolete inventory, and reseller
rebates. Cost of license fees decreased 6% to $16.5 million in Fiscal 1999 from
$17.6 million in the prior comparable period. The decline in cost of license
fees is a result of reduced expenses related to material costs, amortization of
localization costs and material fulfillment and processing. These declines were
partially offset by increases in royalty expenses of approximately $1.2 million.
Cost of license fees for the 1998 Four Month Period increased as a percentage of
license fees to 17% as compared to 15% in the 1997 Four Month Period primarily
due to increases in amortization of localization costs and product quality
assurance costs. The amortization of localization costs for the 1998 Four Month
Period increased primarily due to third-party localization costs incurred in
Fiscal 1997 relating to certain RUMBA products for various European countries.
The Company amortizes third-party localization costs over a 24-month period.
Software publishing costs decreased in Fiscal 1997 due to the conversion of all
product media from diskettes to compact disks and the adoption of simplified,
uniform product packaging. Royalties and licensing costs decreased in Fiscal
1997 due to lower RUMBA software license revenues and lower costs for
third-party technology. Expenses for royalties and amortization of prepaid
licenses will 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.
COST OF SERVICE REVENUES. Cost of service revenues consists primarily of
technical support, post-sales engineering and consulting services. Cost of
service revenues has increased in absolute dollars from Fiscal 1996 through
Fiscal 1999 primarily due to increases in staffing levels related to technical
support and consulting associated with increased service.
OPERATING EXPENSES
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
------------------------------ ----------------------------- ------- -------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------- ------ ----------- ------ ------ ----------- ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Product development.......... $25,840 (1)% $ 26,075 $8,979 2% $ 8,842 $26,590 (13)% $30,658
Percentage of net revenues... 18% 20% 23% 19% 19% 22%
All internal software development costs are expensed as incurred. Product
development expenses are primarily associated with the enhancement of existing
products, the development of new software products and costs related to quality
assurance and technical publications for all products. During Fiscal 1999 the
Company has released RUMBA 2000, RUMBA Cyberprise Edition and other related web
to host products. In fiscal 1997, Cyberprise Server products, Cyberprise Host
products, Cyberprise Tools products and RUMBA OBJECTX were developed and
released. RUMBA 95/NT, SALSA and ARPEGGIO were developed in Fiscal 1995 and
Fiscal 1996 and released in the first half of Fiscal 1996. Development costs in
absolute dollars were relatively flat in Fiscal 1999 and the 1998 Four Month
Period as compared to the prior periods. In Fiscal 1997, various technologies
were consolidated into the Company's Cyberprise products. In Fiscal 1999 and the
1998 Four Month Period approximately 46% and 44% of the product development
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expenses related to Cyberprise products, respectively. Product development
expenses decreased in Fiscal 1997 due to lower average headcount, arising from
the completion of initial versions of RUMBA 95/NT and SALSA products in Fiscal
1996.
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
------------------------------ ------------------------------ ------- -------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------- ------ ----------- ------- ------ ----------- ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Sales and marketing.......... $77,061 13% $ 68,107 $22,923 8% $ 21,164 $66,260 6% $62,407
Percentage of net revenues... 55% 51% 59% 46% 47% 45%
During Fiscal 1996 through Fiscal 1999, 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 activities.
The increase in sales and marketing in Fiscal 1999 and the 1998 Four Month
Period as compared to the same periods in the prior year is primarily due to
increases in sales management and staff related to the new Cyberprise products.
The number of sales offices maintained by the Company totaled 69, 57, 49 and 57
at April 30, 1999, 1998, December 31, 1997 and 1996, respectively. At April 30,
1999, the total sales offices included ten offices in Europe, two offices in
Canada, two offices in Latin America and one office each in Australia and Japan.
Sales and marketing expenses as a percentage of net revenues increased in Fiscal
1997 compared to Fiscal 1996 primarily due to the lower revenue growth rate in
Fiscal 1997.
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
------------------------------ ----------------------------- ------- -------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------- ------ ----------- ------ ------ ----------- ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
General and
administrative........... $14,846 24% $11,954 $4,342 6% $ 4,087 $11,532 4% $11,128
Percentage of net
revenues................. 11% 9% 11% 9% 8% 8%
Amortization of
intangibles.............. $ 2,170 222% $ 674 $ 431 256% $ 121 $ 364 -- $ 364
Percentage of net
revenues................. 2% 1% 1% -- -- --
General and administrative expenses include general administrative, finance
and accounting, legal and human resources costs. General and administrative
expenses increased 24% to $14.8 million in Fiscal 1999 from the prior comparable
period of $12.0 million. The increase resulted primarily from administrative
expenses from Software Development Tools, Inc. (SDTI), acquired in November
1997, and First Service, acquired in March 1998 (see Note 7 of Notes to
Consolidated Financial Statements), and legal costs related to defense of the
Company's technologies (see "Legal Proceedings"). General and administrative
expenses increased in the 1998 Four Month Period as compared to the 1997 Four
Month Period from increases in staffing related to the SDTI and First Service
acquisitions. The increases in general and administrative expenses in Fiscal
1997 and Fiscal 1996 resulted primarily from increased staffing and associated
expenses necessary to manage and support the Company's growth. The Company
intends to continue to maintain its general and administrative expenses as
necessary to support its operations. The amortization of goodwill and other
intangible assets increased in Fiscal 1999 and the 1998 Four Month Period as a
result of the Company's acquisition of SDTI and First Service.
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
----------------------------- --------------------------- ------- ------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------ ------ ----------- ---- ------ ----------- ------- ------ ------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Restructuring charges and other
nonrecurring charges......... $2,405 (79)% $11,488 -- -- -- $11,488 265% $3,148
Percentage of net revenues..... 2% 9% -- -- 8% 2%
In October 1998, 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 April 30, 1999, the Company has made cash payments totaling $0.5 million in
connection with the $0.8 million accrued severance and lease termination costs.
The Company estimates that expense savings from the restructuring charge, on an
annual basis, to be approximately $1.0 million. During Fiscal 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
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Company agreed to settle the shareholders' class action lawsuit for $9.1
million, including related legal fees. (See Notes 7 and 12 of Notes to
Consolidated Financial Statements.) The Company also recorded nonrecurring
charges in Fiscal 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 7 of Notes to Consolidated Financial Statements). During
Fiscal 1996, the Company resolved to streamline its business operations and
recorded nonrecurring charges totaling $3.1 million ($2.0 million, or $0.21 per
share on a diluted basis, after tax) primarily relating to the write-off of
technology investments and prepaid royalties no longer relevant to the Company's
ongoing product offerings and programs.
OTHER INCOME (EXPENSE)
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
----------------------------- ----------------------------- ------- -------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------ ------ ----------- ------ ------ ----------- ------- ------ -------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Interest income............. $2,915 (19)% $3,583 $1,106 -- $ 1,103 $ 3,538 21% $ 2,934
Percentage of net
revenues.................. 2% 3% 3% 2% 3% 2%
Other income (expense),
net....................... $ (114) 25% $ (151) $ 139 129% $ (487) $ (735) (2)% $ (748)
Percentage of net
revenues.................. -- -- -- (1)% (1)% (1)%
Interest income decreased in Fiscal 1999 compared to the prior comparable
period due to lower investment balances. Interest income did not fluctuate from
the 1997 Four Month Period to the 1998 Four Month Period. Interest income
increased in Fiscal 1997 compared to Fiscal 1996 due to higher investment
balances. 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 $0.1
million in Fiscal 1999, $0.8 million in Fiscal 1997 and $0.6 million in Fiscal
1996 and a net exchange gain of $0.2 million in the 1998 Four Month Period.
During Fiscal 1999, the Company engaged in currency hedging by purchasing and
selling options on certain foreign currencies. All options are purchased at the
beginning of each quarter and expire at the end of the same quarter. The options
are intended to hedge against foreign exchange positions on intercompany
balances with subsidiaries.
INCOME TAXES
TWELVE MONTHS ENDED APRIL 30, FOUR MONTHS ENDED APRIL 30, FISCAL FISCAL
----------------------------- --------------------------- ------ ------
1999 CHANGE 1998 1998 CHANGE 1997 1997 CHANGE 1996
------ ------ ----------- ---- ------ ----------- ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Provision for income taxes....... $1,017 180% $(1,275) $117 (93)% $1,635 $243 (92)% $3,054
Percentage of net revenues....... 1% (1)% -- 4% -- 2%
Effective tax rate............... (13)% 20% (3)% 38% 10% 42%
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
income tax provision for Fiscal 1999 and the 1998 Four Month Period relates
primarily to taxes payable on income in the Company's foreign subsidiaries. No
tax benefit has been recognized for tax purposes for U.S. losses. Such benefits
are available to offset future taxable income in the U.S. The decrease in the
Company's effective tax rate in Fiscal 1997 as compared to Fiscal 1996 resulted
primarily 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. As of April 30, 1999, the
Company reviewed its current risks and uncertainties regarding the ultimate
realizability of its deferred tax assets and believes that it is more likely
than not that future operations and tax planning relating to the strategic
alternatives that are currently being considered would allow for the recognition
of its deferred tax assets. The Company will review the realizability of these
deferred tax assets each quarter to determine if operating results and business
conditions have changed such that the carrying value of the assets requires
adjustment.
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR FOUR MONTHS DECEMBER 31,
ENDED ENDED ------------------
APRIL 30, 1999 APRIL 30, 1998 1997 1996
(DOLLAR AMOUNTS IN THOUSANDS) -------------- -------------- ------- -------
Cash, cash equivalents......................... $17,728 $57,490 $70,814 $62,483
Marketable securities.......................... $47,736 -- -- --
Working capital................................ $56,580 $56,477 $72,849 $71,798
Net cash flow provided by operating
activities................................... $16,828 $(1,897) $19,970 $18,256
The Company's cash, cash equivalents and marketable securities totaled
$65.5 million, or 52% of total assets at April 30, 1999, $57.5 million, or 41%
of total assets, at April 30, 1998, $70.8 million, or 52% of total assets, at
December 31, 1997, and $62.5 million, or 49% of total assets, at December 31,
1996. The increase in cash, cash equivalents and marketable securities is
primarily a result of collection of accounts receivable and reduced balances.
The reduction on cash, cash equivalents and marketable securities from December
31, 1997 to April 30, 1998 resulted primarily from the acquisition of First
Service for $9.8 million, net of cash acquired. Cash, cash equivalents and
marketable securities are expected to decline in the first quarter of Fiscal
2000 as a result of the operating loss in the fourth quarter of Fiscal 1999.
The Company's expenditures for property and equipment for Fiscal 1999, the
1998 Four Month Period, Fiscal 1997 and Fiscal 1996 totaled $5.7 million, $1.8
million, $3.9 million and $5.1 million, respectively. The decrease in
expenditures in Fiscal 1997 compared to Fiscal 1996 primarily resulted from
reduced growth in average staffing levels. The Company does not currently have
any specific commitments with regard to capital expenditures. Because the
Company has reduced the number of employees, it expects to acquire less capital
equipment in Fiscal 2000 than in Fiscal 1999. Purchases of prepaid software
technology totaled $3.3 million, $1.3 million, $2.4 million and $1.3 million in
Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996,
respectively. Capitalized third-party localization expenditures totaled $1.5
million in Fiscal 1999, $0.2 million in the 1998 Four Month Period and $3.0
million in both Fiscal 1997 and Fiscal 1996. The decrease in capitalized
localization costs in Fiscal 1999 as compared to Fiscal 1997 and Fiscal 1996
resulted from the significant increase in the volume of new product
introductions in Fiscal 1997 and Fiscal 1996 compared to Fiscal 1999 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 have been
repurchased since Fiscal 1995.
On March 12, 1998, the Company acquired First Service for $11.0 million. Of
the $11.0 million cash payment, $2 million remains in escrow to cover claims, if
any. 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 SDTI for approximately $3.0 million. Also, in November 1997, the
Company acquired a ten percent 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 7 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 Fiscal 2000.
During the first half of Fiscal 2000, the Company will be evaluating its
operations after the significant decline in sales experienced during the fourth
quarter of Fiscal 1999. Planned reductions of the number of employees have
already been made and it is possible that further reductions will be necessary
if the fourth quarter sales declines in Fiscal 1999 are not viewed as temporary.
It is possible that the Company may elect to record a restructuring charge in
the future in connection with employee reductions and other downsizing
activities. The Company's business has been and will be impacted by
uncertainties as they relate to restructuring of the Company's business into two
separate businesses. See "Business -- Important Factors Regarding
Forward-Looking Statements."
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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 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 and implemented 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 currently supported RUMBA, ARPEGGIO and R&R
Report Writer products are Year 2000 compliant as is or with available patches.
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 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 $178,000 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 vendors 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, its
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE'S ABOUT MARKET RISK
INTEREST RATE RISK. The Company has exposure to changes in interest rates
in its marketable securities which consist primarily of corporate bonds. The
Company's exposure to market risk for changes in interest rates relates
primarily to its short-term investments and short-term obligations, thus,
fluctuations in interest rates would not have a material impact on the fair
value of these securities. The Company does not use derivative financial
instruments in its investment portfolio to manage interest rate risk. The
Company does, however, limit its exposure to interest rate and credit risk by
establishing and strictly monitoring clear policies and guidelines for its fixed
income portfolios. The guidelines also establish credit quality standards,
limits on exposure to one issue, issuer, as well as the type of instrument. Due
to the limited duration and credit risk
25
28
criteria established in the Company's guidelines, the exposure to market and
credit risk is not expected to be material.
FOREIGN CURRENCY RISK. Approximately 26%, 35%, 30% and 29% of the Company's
net revenues in Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal
1996, respectively, were attributable to sales made to customers outside North
America. Because the Company invoices certain of its foreign sales in local
currency (British Pound Sterling, German Marks, and other currencies) and does
not hedge these transactions, fluctuations in exchange rates could adversely
affect the translated results of operations of the Company's foreign subsidiary.
Therefore, foreign exchange fluctuation could have a material adverse effect on
the Company's future international sales and, consequently, on the Company's
results of operations.
The Company also maintains intercompany balances with subsidiaries with
different local currencies. These intercompany balances are at risk of foreign
exchange losses if exchange rates fluctuate. To hedge against foreign exchange
losses on intercompany balances, the Company engaged in currency hedging in
Fiscal 1999 by purchasing and selling options on certain foreign currencies. All
options are purchased at the beginning of each quarter and expire at the end of
the same quarter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in Item 14 of this Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the Company's directors is
incorporated by reference to the Company's definitive Proxy Statement for its
1999 Annual Meeting of Shareholders to be held on September 22, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement.
26
29
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) The following financial statements are filed as a part of this report:
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 29
Consolidated Statement of Operations -- Fiscal Year ended
April 30, 1999, four months ended April 30, 1998 and years
ended December 31, 1997 and 1996.......................... 30
Consolidated Balance Sheets -- April 30, 1999 and 1998 and
December 31, 1997 and 1996................................ 31
Consolidated Statements of Shareholders' Equity -- Fiscal
Year ended April 30, 1999, four months ended April 30,
1998 and years ended December 31, 1997 and 1996........... 32
Consolidated Statements of Cash Flow -- Fiscal Year ended
April 30, 1999, four months ended April 30, 1998 and years
ended December 31, 1997 and 1996.......................... 33
Notes to Consolidated Financial Statements.................. 34
Selected Quarterly Financial Data and Market Information.... 50
(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-13 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
(Incorporated by reference to Registration Statement No.
33-57816)
3.2 Restated Bylaws of Wall Data Incorporated (Incorporated by
reference to Registration Statement No. 33-57816)
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+
10.3 Restated 1993 Stock Option Plan for Non-Employee Directors+
10.4 Restated Employee Stock Purchase Plan+
10.5 Lease between Page Mill Partners I as Lessor and Wall Data
Incorporated as Lessee dated June 1, 1993 and Consent to
Sublease among Leland Stanford University, Page Mill
Partners I and Wall Data Incorporated dated June 1, 1993
(Incorporated by reference to the Company's Form 10-K dated
March 30, 1995, File No. 0-21176)
10.7 Revolving Credit Loan Agreement dated June 6, 1994 between
Comerica Bank-California and Wall Data Incorporated together
with First Amendment to Revolving Credit Loan Agreement
dated August 18, 1995 (Incorporated by reference to the
Company's Form 10-K dated March 31, 1996, File No. 0-21176)
10.8 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Registration Statement No.
33-57816)+
10.9 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 dated March 30, 1995, File No. 0-21176)
27
30
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.10 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, File No. 0-21176)
10.11 Lease between SI Palo Alto, Inc. as Lessor and Wall Data
Incorporated as Lessee dated December 29, 1995 (Incorporated
by reference to the Company's Form 10-K dated March 31,
1996, File No. 0-21176)
10.12 Employment Agreement, dated January 21, 1999, between the
Company and John R. Wall (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
10.13 Employment Agreement, dated January 21, 1999, between the
Company and Richard P. Fox (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
10.14 Employment Agreement, dated January 21, 1999, between the
Company and Kevin B. Vitale (Incorporated by reference to
the Company's Form 10-Q for period ended January 31, 1999,
File No. 0-21176)
10.15 Employment Agreement, dated January 21, 1999, between the
Company and Craig E. Shank (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
*21.1 Subsidiaries of Wall Data Incorporated
*23.1 Consent of Ernst & Young LLP
*27.1 Financial Data Schedule
- ---------------
+ Management contract or compensatory plan
* Included herewith
(b) Reports on Form 8-K: None.
28
31
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 April 30, 1999 and 1998 and December 31, 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for the year ended April 30, 1999, the four months ended April 30, 1998 and for
the years ended December 31, 1997 and 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 April 30, 1999 and 1998 and December 31, 1997, and the
consolidated results of its operations and its cash flows for the year ended
April 30, 1999, the four months ended April 30, 1998 and for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statement taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
May 18, 1999
29
32
WALL DATA INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR FISCAL YEAR
ENDED ENDED DECEMBER 31,
-------------- -------------- -------------------
APRIL 30, 1999 APRIL 30, 1998 1997 1996
-------------- -------------- -------- --------
Net revenues:
License Fees................................ $109,783 $30,225 $118,905 $124,815
Services.................................... 29,946 8,881 21,946 14,549
-------- ------- -------- --------
Total net revenues.................. 139,729 39,106 140,851 139,364
Cost of revenues:
License Fees................................ 16,454 5,027 17,276 19,598
Services.................................... 11,661 3,180 7,650 7,000
-------- ------- -------- --------
Total cost of revenues.............. 28,115 8,207 24,926 26,598
-------- ------- -------- --------
Gross margin.................................. 111,614 30,899 115,925 112,766
Operating expenses:
Product development......................... 25,840 8,979 26,590 30,658
Sales and marketing......................... 77,061 22,923 66,260 62,407
General and administrative.................. 14,846 4,342 11,532 11,128
Amortization of intangibles from
acquisitions............................. 2,170 431 364 364
Restructuring charges....................... 2,405 -- 1,000 --
Other nonrecurring charges.................. -- -- 10,488 3,148
-------- ------- -------- --------
Total operating expenses............ 122,322 36,675 116,234 107,705
-------- ------- -------- --------
Operating (loss) income....................... (10,708) (5,776) (309) 5,061
Other income (expense):
Interest income............................. 2,915 1,106 3,538 2,934
Other, net.................................. (114) 139 (735) (748)
-------- ------- -------- --------
Total other income, net............. 2,801 1,245 2,803 2,186
-------- ------- -------- --------
(Loss) income before income taxes............. (7,907) (4,531) 2,494 7,247
Provision for income taxes.................... 1,017 117 243 3,054
-------- ------- -------- --------
Net (loss) income............................. $ (8,924) $(4,648) $ 2,251 $ 4,193
======== ======= ======== ========
(Loss) earnings per share -- basic............ $ (0.89) $ (0.47) $ 0.24 $ 0.46
======== ======= ======== ========
(Loss) earnings per share -- assuming
dilution, as applicable..................... $ (0.89) $ (0.47) $ 0.23 $ 0.43
======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
33
WALL DATA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
APRIL 30, DECEMBER 31,
-------------------- ------------
1999 1998 1997
-------- -------- ------------
Current assets:
Cash and cash equivalents.............................. $ 17,728 $ 57,490 $ 70,814
Marketable securities.................................. 47,736 -- --
Accounts receivable, net of allowances of $4,621,
$4,519 and $3,757................................... 19,866 33,534 35,113
Deferred income taxes.................................. 5,697 5,701 5,701
Prepaid expenses and other current assets.............. 3,317 3,799 2,910
-------- -------- --------
Total current assets........................... 94,344 100,524 114,538
Fixed assets, net........................................ 9,559 10,665 10,597
Deferred income taxes.................................... 400 458 458
Long-term investments.................................... 2,017 2,965 2,836
Intangible assets, net................................... 14,861 16,551 2,281
Other assets............................................. 5,614 9,042 5,866
-------- -------- --------
$126,795 $140,205 $136,576
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 7,531 $ 8,382 $ 8,106
Accrued compensation................................... 6,290 7,659 7,365
Other accrued liabilities.............................. 4,817 9,404 7,167
Income taxes payable................................... 3,249 3,583 3,735
Deferred revenues...................................... 15,877 15,019 15,316
-------- -------- --------
Total current liabilities...................... 37,764 44,047 41,689
-------- -------- --------
Deferred income taxes.................................... 2,630 3,390 --
-------- -------- --------
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 10,151,162 shares
(9,905,245 and 9,312,480 in 1998 and 1997,
respectively)....................................... 62,145 58,882 56,771
Retained earnings........................................ 24,382 33,306 37,954
Accumulated other comprehensive (loss) income............ (126) 580 162
-------- -------- --------
Total shareholders' equity..................... 86,401 92,768 94,887
-------- -------- --------
$126,795 $140,205 $136,576
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
34
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK OTHER
-------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS (LOSS) INCOME) TOTAL
---------- ------- -------- --------------- -------
Balance at January 1, 1996................ 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
Comprehensive income:
Net income for the year.............. -- -- 4,193 --
Unrealized gain on investment........ -- -- -- 88
Foreign currency translation
adjustment......................... -- -- -- 758
Total comprehensive income...... 5,039
---------- ------- ------- ----- -------
Balance at December 31, 1996.............. 9,132,980 54,357 35,703 743 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
Comprehensive income:
Net income for the year ar........... -- -- 2,251 --
Unrealized loss on investment........ -- -- -- (280)
Foreign currency translation
adjustment......................... -- -- -- (301)
Total comprehensive income...... 1,670
---------- ------- ------- ----- -------
Balance at December 31, 1997.............. 9,312,480 56,771 37,954 162 94,887
Exercise of Common Stock options........ 549,705 1,002 -- -- 1,002
Stock issued under stock purchase
plan................................. 43,060 618 -- -- 618
Income tax benefit from exercise of
Common Stock options................. -- 200 -- -- 200
Stock option compensation............... -- 291 -- -- 291
Comprehensive income:
Net loss for the period.............. -- -- (4,648) --
Unrealized gain on investment........ -- -- -- 77
Foreign currency translation
adjustment......................... -- -- -- 341
Total comprehensive loss........ (4,230)
---------- ------- ------- ----- -------
Balance at April 30, 1998................. 9,905,245 58,882 33,306 580 92,768
Exercise of Common Stock options........ 148,149 2,214 -- -- 2,214
Stock issued under stock purchase
plan................................. 97,768 1,049 -- -- 1,049
Comprehensive income:
Net loss for the year................ -- -- (8,924) --
Unrealized loss on investment........ -- -- -- (4)
Foreign currency translation
adjustment......................... -- -- -- (702)
Total comprehensive loss........ (9,630)
---------- ------- ------- ----- -------
Balance at April 30, 1999................. 10,151,162 $62,145 $24,382 $(126) $86,401
========== ======= ======= ===== =======
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35
WALL DATA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEAR ENDED
FISCAL YEAR FOUR MONTHS DECEMBER 31,
ENDED ENDED -------------------
APRIL 30, 1999 APRIL 30, 1998 1997 1996
-------------- -------------- -------- --------
Operating activities Net (loss) income........... $ (8,924) $(4,648) $ 2,251 $ 4,193
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities Deferred income taxes............ (600) -- (2,031) 684
Provision for doubtful accounts............. 634 116 434 455
Depreciation and amortization of long-term
assets.................................... 6,012 1,893 6,003 6,191
Amortization of intangibles from
acquisitions.............................. 2,170 431 364 364
Amortization of prepaid licenses and
localization costs........................ 4,444 1,393 3,268 3,594
Stock option compensation................... -- 291 82 113
Non-recurring charges....................... 1,614 -- 1,639 3,148
Other, net.................................. 1,186 50 102 168
Decrease (increase) in operating assets:
Accounts receivable......................... 12,809 3,953 2,964 (10,794)
Other current assets........................ 483 1,221 (94) 870
Increase (decrease) in operating liabilities:
Accounts payable............................ 2,146 (3,059) 1,169 (302)
Accrued liabilities......................... (5,849) (2,736) 293 4,149
Income taxes payable........................ (313) (152) (587) 2,130
Deferred revenues........................... 1,016 (650) 4,113 3,293
--------- ------- -------- --------
Net cash provided by (used in) operating
activities............................. 16,828 (1,897) 19,970 18,256
--------- ------- -------- --------
Investing activities Acquisition of Software
Development Tools, Inc, net of cash acquired... (1,000) -- (1,906) --
Acquisition of First Service, net of cash
acquired.................................... -- (9,811) -- --
Investments in Suntek Information System Co.
Ltd. and DataChannel, Inc................... -- -- (2,636) --
Purchase of marketable securities.............. (172,768) -- -- --
Proceeds from maturities of marketable
securities.................................. 125,032 -- -- --
Purchases of fixed assets...................... (5,671) (1,833) (3,857) (5,056)
Purchases of prepaid software technology....... (3,345) (1,347) (2,397) (1,337)
Capitalized localization costs................. (1,458) (221) (2,973) (3,019)
Other.......................................... (427) -- (368) (618)
--------- ------- -------- --------
Net cash used in investing activities..... (59,637) (13,212) (14,137) (10,030)
--------- ------- -------- --------
Financing activities Tax benefit from stock
options exercised.............................. -- 200 271 375
Proceeds from issuances under stock plans...... 3,263 1,620 2,061 1,461
--------- ------- -------- --------
Net cash provided by financing
activities............................. 3,263 1,820 2,332 1,836
--------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (39,546) (13,289) 8,165 10,062
Effect of exchange rate changes on cash.......... (216) (35) 166 452
Cash and cash equivalents at beginning of
period......................................... 57,490 70,814 62,483 51,969
--------- ------- -------- --------
Cash and cash equivalents at end of period....... $ 17,728 $57,490 $ 70,814 $ 62,483
========= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
33
36
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
1. SUMMARY OF 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 access to 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 systems to allow 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
period. Translation adjustments resulting from this process are shown separately
in shareholders' equity. Gains and losses from foreign currency transactions are
included in other income.
Revenue Recognition
In January 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position (SOP 97-2), "Software Revenue
Recognition," as amended. SOP 97-2 provides guidance on recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's licensing or revenue recognition practices.
The Company licenses software under non-cancelable license agreements and
provides post-contract customer services (including maintenance, support and
periodic upgrades/enhancements) and other services (including installation,
training and consulting). License fee revenues are recognized when a
non-cancelable license agreement has been signed, the product has been
delivered, there are no uncertainties surrounding product acceptance, the fees
are fixed, collection is considered probable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Vendor-specific objective evidence is typically based on the price charged when
an element is sold separately, or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services, or consulting
services. The Company's agreements with certain distributors and resellers
permit them to exchange products under certain circumstances and permit returns
form certain resellers subject to specific limitations; an accrual is recorded
for estimated sales returns and exchanges. Revenues from post-contract customer
services are recognized ratably over the related term, which is generally one
year. Other revenues are recognized as performed.
34
37
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
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. Deferred tax benefits
from operating losses are not recognized until they can be used to offset
taxable income.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid instruments 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.
Marketable Securities
The Company accounts for its marketable securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities are classified as available-for-sale and are carried at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity.
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 equity investments in non-public companies are recorded at cost
due to the lack of significant influence and readily determinable fair value.
For investments in companies that are quoted on an exchange, investments are
classified as available-for-sale and carried at market value with unrealized
gains and losses included in shareholders' equity. Investments are regularly
reviewed for possible impairment of value and downward adjustments are made as
deemed appropriate.
Prepaid Software Technology Fees
Prepaid software technology license fees, included in Other Assets on the
Consolidated Balance Sheets, 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
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," under which
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model. To date, costs incurred subsequent to the
establishment of technological feasibility have not been significant, and all
software development costs have been charged to product development expense in
the accompanying statements of operations. 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.
35
38
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
Intangible Assets
Excess of cost over fair market value of net identifiable assets of
acquired companies and other intangible assets are amortized on a straight-line
basis over various periods between four and ten years. The carrying value of
intangible assets is periodically reviewed by the Company based on the expected
future undiscounted operating cash flows of the related business unit. Based
upon its most recent analysis, the Company believes that no material impairment
of intangible assets exists at April 30, 1999.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" 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 $3.5 million, $1.5 million, $5.7 million and $6.9 million in Fiscal
1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996, respectively.
Earnings per Share
Basic earnings per share 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires companies to recognize all derivatives as assets or liabilities
measured at their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Management does not
expect this Statement to have a material impact on our consolidated financial
statements. This Statement is effective for fiscal years beginning after June
15, 1999 and cannot be applied retroactively. The Company will adopt this
accounting standard beginning May 1, 2000.
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. Estimates are used when accounting for allowance for doubtful
accounts, accrued costs, taxes and contingencies.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation. Previously, the Company included
Software Quality and Technical Publications expenses in Cost of Revenue and
Sales and Marketing, respectively. To more closely conform to standard industry
practices, Software Quality and Technical Publications expenses are now
classified as Product Development.
36
39
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
Also, costs for the management information systems were allocated from General
and Administrative to functional areas.
2. CHANGE IN YEAR-END
In April 1998, the Company's Board of Directors approved a change in the
Company's fiscal year-end from December 31 to April 30, beginning with the four
months ended April 30, 1998 ("1998 Four Month Period"). Prior periods ended
December 31, 1997 and 1996 will be referred in these notes to the consolidated
financial statements as Fiscal 1997 and Fiscal 1996, respectively. This change
is being made to improve the Company's ability to manage operations in light of
seasonal customer buying patterns. Comparative information for the four months
ended April 30, 1998 and 1997 is as follows:
APRIL 30,
----------------------
1998 1997
------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues.................................................... $39,106 $ 46,386
Gross margin................................................ 30,899 37,906
Operating (loss) income..................................... (5,776) 3,692
Provision for income taxes.................................. 117 1,635
Net (loss) income........................................... (4,648) 2,673
(Loss) earnings per share -- assuming dilution, as
applicable................................................ $ (0.47) $ 0.27
37
40
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
3. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in
January 1998. This standard requires disclosure of total non-owner changes in
stockholders' equity, which is defined as net income plus direct adjustments to
stockholders' equity such as unrealized gains and losses on equity investments
adjustments and cumulative translation adjustments. The balances of the
components of the Company's total comprehensive income were as follows:
UNREALIZED ACCUMULATED
GAINS (LOSSES) CUMULATIVE OTHER
ON EQUITY TRANSLATION COMPREHENSIVE
INVESTMENTS ADJUSTMENTS INCOME
-------------- ------------ -------------
(IN THOUSANDS)
Balance at January 1, 1996.......................... $ -- $ (103) $(103)
Before-tax amount for the year.................... 133 1,148 1,281
Tax expense....................................... (45) (390) (435)
----- ------ -----
Net-of-tax amount for the year.................... 88 758 846
----- ------ -----
Balance at December 31, 1996........................ 88 655 743
Before-tax amount for the year.................... (424) (456) (880)
Tax benefit....................................... 144 155 299
----- ------ -----
Net-of-tax amount for the year.................... (280) (301) (581)
----- ------ -----
Balance at December 31, 1997........................ (192) 354 162
Before-tax amount for the period.................. 117 517 634
Tax expense....................................... (40) (176) (216)
----- ------ -----
Net-of-tax amount for the period.................. 77 341 418
----- ------ -----
Balance at April 30, 1998........................... (115) 695 580
Before-tax amount for the year.................... (6) (702) (708)
Tax benefit....................................... 2 -- 2
----- ------ -----
Net-of-tax amount for the year.................... (4) (702) (706)
----- ------ -----
Balance at April 30, 1999........................... $(119) $ (7) $(126)
===== ====== =====
4. MARKETABLE SECURITIES
Marketable securities consist primarily of corporate bonds. Unrealized
gains and losses are shown as a component of stockholders' equity. As of April
30, 1999, corporate bonds totaled $47.7 million at estimated fair value and had
an adjusted cost of $47.8 million with gross unrealized losses of $0.1 million.
The corporate bonds will mature by December 2000.
Marketable debt securities with original maturity dates of less than three
months totaled $42 million and $45 million at cost as of April 30, 1998 and
December 31, 1997, respectively, and are included in cash and cash equivalents.
The estimated fair value of the commercial paper approximates cost.
38
41
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
5. FIXED ASSETS
APRIL 30,
-------------------- DECEMBER 31,
1999 1998 1997
-------- -------- ------------
Equipment........................................ $ 32,974 $ 27,937 $ 25,624
Furniture and fixtures........................... 5,568 6,347 6,100
-------- -------- --------
38,542 34,284 31,724
Accumulated depreciation and amortization........ (28,983) (23,619) (21,127)
-------- -------- --------
$ 9,559 $ 10,665 $ 10,597
======== ======== ========
6. OTHER ASSETS
APRIL 30,
------------------ DECEMBER 31,
1999 1998 1997
------- ------- ------------
Prepaid licenses................................... $ 6,336 $ 6,397 $ 3,105
Accumulated amortization........................... (2,891) (399) (1,056)
------- ------- -------
Prepaid licenses, net.............................. 3,445 5,998 2,049
------- ------- -------
Localization costs................................. 1,726 6,351 6,130
Accumulated amortization........................... (606) (3,785) (2,790)
------- ------- -------
Localization costs, net............................ 1,120 2,566 3,340
------- ------- -------
Other.............................................. 1,049 478 477
------- ------- -------
$ 5,614 $ 9,042 $ 5,866
======= ======= =======
Royalties and amortization of prepaid licenses totaled $2.8 million, $0.6
million, $1.7 million and $4.1 million in Fiscal 1999, the 1998 Four Month
Period, Fiscal 1997 and Fiscal 1996, respectively, and are included in cost of
revenues. Amortization of external product localization costs totaled $1.9
million, $1.0 million, $2.2 million and $0.6 million in Fiscal 1999, the 1998
Four Month Period, Fiscal 1997 and Fiscal 1996, respectively, and are included
in cost of revenues.
In April 1999, the Company loaned $860,000 to its Chief Executive Officer
under the terms of a promissory note. The unpaid principal balance accrues
interest at the rate of 5.28%. All principal amounts and unpaid interest are
payable on April 15, 2003 and is included in other assets.
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.
7. INVESTMENTS, DISPOSITIONS AND OTHER NON-RECURRING ITEMS
In October 1998, 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 increased the net loss for Fiscal 1999 by $2.4
million or $0.24 per share.
In March 1998, the Company acquired all of the outstanding shares of First
Service Computer Dienstleistungs-GmbH ("First Service") of Hattingen, Germany
and related companies for $11 million cash. First Service distributes and
supports a range of connectivity software solutions to major corporations
39
42
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
throughout Germany and had been selling and supporting Wall Data's products and
technologies for more than seven years. The acquisition, accounted for using the
purchase method, included a cash payment of $11 million of which $2 million
remains in escrow to cover claims, if any. As a part of this transaction, the
Company recorded approximately $14.3 million of goodwill and other intangible
assets and approximately $3.3 million in long-term deferred taxes. The goodwill
and other intangible assets are being amortized over a ten-year period. Pro
forma information has not been presented due to immateriality.
In October 1997, the Company acquired a fifteen percent equity interest in
Suntek Information Systems Co., Ltd. ("Suntek") for approximately $0.9 million.
Suntek distributes and supports software products in Korea. In October 1998, the
Company evaluated the realizability of the asset and recorded a $0.6 million
restructuring charge (included in the $2.4 million charge discussed above) to
write down its investment in Suntek to the estimated fair value of $0.3 million.
Based on negative changes in the economic and business environments in Korea,
the Company calculated an impairment of its investment in Suntek using estimated
future cash flows.
In November 1997, the Company and Data Channel, Inc. ("DataChannel")
entered into an agreement under which DataChannel licensed its ChannelManager
technology to the Company. DataChannel is a software development company which
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 $5.0 million. The Company paid
$3.0 million and $2.0 million in Fiscal 1999 and in the 1998 Four Month Period,
respectively. In addition, the Company acquired a ten percent equity interest in
DataChannel for approximately $1.7 million.
In November 1997, the Company acquired all of the outstanding shares of
Software Development Tools, Inc. ("SDTI") for $3.0 million. 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 $2.3 million of the total
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.
During the second quarter of 1997, the Company recorded other non-recurring
charges totaling $9.7 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 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. The Company also recorded restructuring charges of approximately
$1.0 million for the write-off of inventories, technology investments and
severance payments relating to the SALSA business line.
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.
40
43
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
8. INCOME TAXES
(Loss) income before income taxes consists of the following:
YEAR ENDED
YEAR ENDED FOUR MONTHS DECEMBER 31,
APRIL 30, ENDED ----------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- ------ ------
(IN THOUSANDS)
U.S. ............................................ $ (30) $(4,824) $ 839 $2,775
International.................................... (7,877) 293 1,655 4,472
------- ------- ------ ------
Total (loss) income before income
taxes................................ $(7,907) $(4,531) $2,494 $7,247
======= ======= ====== ======
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER
YEAR ENDED FOUR MONTHS 31,
APRIL 30, ENDED -------------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- -------- -------
(IN THOUSANDS)
Current tax expense:
U.S. federal..................................... $ 146 $ -- $ 1,375 $ 125
State.......................................... 100 -- 149 52
International.................................. 1,371 117 427 2,203
------ ---- ------- ------
Total current provision................ 1,617 117 1,951 2,380
Deferred tax expense (benefit):
U.S. federal................................... -- -- (1,914) 700
State.......................................... -- -- (139) 87
International.................................. (600) -- 345 (113)
------ ---- ------- ------
Total deferred provision (benefit)..... (600) -- (1,708) 674
------ ---- ------- ------
Total provision for income taxes....... $1,017 $117 $ 243 $3,054
====== ==== ======= ======
In Fiscal 1999, the Company recorded a benefit of approximately $300,000 to
reduce its deferred income tax liability as a result of a tax rate change
affecting one the Company's international subsidiaries.
The effective rate differs from the U.S. federal statutory rate as follows:
YEAR ENDED
YEAR ENDED FOUR MONTHS DECEMBER 31,
APRIL 30, ENDED ---------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- ----- ------
(IN THOUSANDS)
Income tax (benefit) provision at statutory
rate.......................................... $(2,689) $(1,540) $ 848 $2,463
International losses producing no current tax
benefit....................................... 1,165 364 847 312
Tax credits..................................... -- -- (300) (100)
State taxes, net................................ (1) (126) 60 68
Foreign Sales Corporation....................... (274) (89) (715) (215)
Nondeductible expenses.......................... (106) 119 112 246
Effect of lower tax rates in certain foreign
countries..................................... 1,771 (413) (663) --
Domestic losses providing no current benefit.... 1,623 1,859 -- --
Other, net...................................... (472) (57) 54 280
------- ------- ----- ------
$ 1,017 $ 117 $ 243 $3,054
======= ======= ===== ======
41
44
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
The Company received compensation deductions in Fiscal 1999, the 1998 Four
Month Period, Fiscal 1997 and Fiscal 1996 for income tax purposes of $0.7
million, $0.6 million, $0.8 million and $1.0 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 for the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996 of $0.2
million, $0.3 million and $0.4 million, respectively, are reported as additions
to shareholders' equity rather than as a reduction of income tax expense.
Because of the Company's net operating loss, no tax benefit was recorded in
Fiscal 1999.
Net deferred tax assets consist of the following:
APRIL 30,
------------------ DECEMBER 31,
1999 1998 1997
------- ------- ------------
(IN THOUSANDS)
Deferred tax assets:
Tax credits and domestic net operating losses............ $ 5,097 $ 2,428 $ 1,226
Accrued compensation and benefits........................ 885 752 1,057
Other accrued expenses................................... 686 319 943
Reserves for sales returns and doubtful accounts......... 884 1,368 1,196
Cooperative advertising reserves......................... 396 521 655
Depreciation and amortization............................ 484 399 270
Intercompany profit elimination.......................... (2) 12 26
Software localization and R&D write-down................. (46) (373) (298)
Deferred maintenance revenue............................. 643 2,071 209
Net operating losses of international subsidiaries....... 2,351 1,935 1,571
Other, net............................................... 548 521 875
------- ------- -------
11,926 9,953 7,730
Valuation allowance...................................... (5,829) (3,794) (1,571)
------- ------- -------
Total deferred tax assets........................ 6,097 6,159 6,159
------- ------- -------
Deferred tax liabilities:
Basis difference of intangible assets from acquired
Subsidiaries.......................................... (2,630) (3,390) --
------- ------- -------
Net deferred tax assets.................................... $ 3,467 $ 2,769 $ 6,159
======= ======= =======
The Company's deferred tax assets at April 30, 1999 were $6.1 million. The
Company is no longer adding amounts to the deferred tax asset balance because of
its operating losses. As of April 30, 1999, the Company reviewed its current
risks and uncertainties regarding the ultimate realizability of its deferred tax
assets and believes that it is more likely than not that future operations and
tax planning relating to the strategic alternatives that are currently being
considered would allow for the recognition of its deferred tax assets. The
Company will review the realizability of these deferred tax assets each quarter
to determine if operating results and business conditions have changed such that
the carrying value of the assets requires adjustment.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized. The increase in the
valuation allowance in Fiscal 1999, the 1998 Four Month Period and Fiscal 1997
resulted from additional net operating losses and the uncertainty as to the
realization of other deferred tax assets. As of April 30, 1999, the Company and
its foreign subsidiaries have unused net operating
42
45
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
loss carryforwards, for income tax purposes, of $8.7 million and $11.4 million,
respectively. The Company and the foreign subsidiary net operating losses expire
through 2018 and 2002, respectively.
Income taxes paid in Fiscal 1999, the 1998 Four Month Period and Fiscal
1997 totaled $1.2 million, $0.1 million and $0.7 million, respectively. In
Fiscal 1996, the Company received net refunds of $0.5 million.
9. 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 million. As of
December 31, 1995, the Company had repurchased 488,200 shares of Common Stock
for approximately $8.5 million. The Company has not repurchased any shares since
Fiscal 1995.
The Company has a shareholder rights agreement, designed to protect
shareholders from certain 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 Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996. 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
(loss) and earnings (loss) per share in Fiscal 1999, the 1998 Four Month Period,
Fiscal 1997 and Fiscal 1996 would have been $(13.8) million, or $(1.38) per
share, $(5.8) million, or $(0.60) per share, $0.2 million, or $0.02 per share on
a diluted basis, and $2.7 million, or $0.28 per share on a diluted basis,
respectively. The pro forma effects on net income (loss) for these periods 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 Fiscal
1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996, respectively:
risk-free interest rates of 5.3%, 5.7%, 5.9% and 6.5%; volatility factors of
80%, 80%, 79% and 74%; expected life of five years and a zero dividend yield for
each period.
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.
43
46
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
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.
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, 1996............................... 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
Granted.................................................. 254,750 15.32
Exercised................................................ (549,705) 1.83
Canceled................................................. (157,173) 17.58
---------
Balance at April 30, 1998................................ 1,841,521 14.37
Granted.................................................. 842,000 15.18
Exercised................................................ (148,149) 15.11
Canceled................................................. (500,083) 15.97
---------
Balance at April 30, 1999................................ 2,035,289 $15.73
=========
The weighted average fair value of options granted in Fiscal 1999, the 1998
Four Month Period, Fiscal 1997 and Fiscal 1996, as determined under the method
prescribed in SFAS No. 123, is $10.29, $10.45, $11.12 and $11.10, respectively.
Additional information concerning outstanding stock options and exercisable
stock options as of April 30, 1999 is set forth below:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- ---------------- ----------- -----------------
Less than $2.00....... 27,418 2.80 $ 0.48 27,418 $ 0.48
$2.00 to $15.00....... 734,006 8.46 13.57 138,372 13.68
$15.00 to $20.00...... 1,060,269 7.57 16.22 528,670 15.14
Greater than $20.00... 213,596 7.09 22.66 105,686 22.86
--------- -------
2,035,289 7.77 $15.73 800,146 $15.40
========= =======
Approximately 672,000 shares were available for future grants as of April
30, 1999. At April 30, 1998 options for the purchase of approximately 665,000
shares were exercisable at a weighted average exercise price of $15.98 per
share. At December 31, 1997, options for the purchase of approximately 1,148,000
shares were exercisable at a weighted average exercise price of $9.38 per share.
At December 31, 1996, options for the
44
47
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
purchase of approximately 827,000 shares were exercisable at a weighted average
exercise price of $6.33 per share.
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 April 30, 1999,
approximately 278,000 shares had been issued under the plan, and 122,000 shares
are reserved for future issuance.
10. 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):
(LOSS) INCOME AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- ---------
FISCAL 1999
Loss per share -- basic............................... $(8,924) 9,999 $(0.89)
Effect of Dilutive Securities Stock options........... -- --
------- ----- ------
Loss per share -- assuming dilution................... $(8,924) 9,999 $(0.89)
======= ===== ======
1998 FOUR MONTH PERIOD
Loss per share -- basic............................... $(4,648) 9,805 $(0.47)
Effect of Dilutive Securities Stock options........... -- --
------- ----- ------
Loss per share -- assuming dilution................... $(4,648) 9,805 $(0.47)
======= ===== ======
FISCAL 1997
Earnings per share -- basic........................... $ 2,251 9,245 $ 0.24
Effect of Dilutive Securities Stock options........... 641 (.01)
------- ----- ------
Earnings per share -- assuming dilution............... $ 2,251 9,886 $ 0.23
======= ===== ======
FISCAL 1996
Earnings per share -- basic........................... $ 4,193 9,058 $ 0.46
Effect of Dilutive Securities Stock options........... 663 (.03)
------- ----- ------
Earnings per share -- assuming dilution............... $ 4,193 9,721 $ 0.43
======= ===== ======
Certain options to purchase shares of Common Stock were not included in the
computation of diluted EPS in Fiscal 1997 and Fiscal 1996 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 and 1,513,000 in
Fiscal 1997 and Fiscal 1996, respectively.
11. 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. Effective January 1, 1998, the
Retirement Savings Plan was amended to require the Company to make matching
contributions in an amount equal to 100% of employee pretax contributions but
subject to a maximum of 5% of eligible compensation contributed to the plan.
Employees receive vesting credit in the Company's contribution of 25% for each
year of employment. During Fiscal 1999 and the 1998 Four Month Period, the
Company incurred expenses of $2.0 million and $0.7 million, respectively,
related to the Company's contribution to the Retirement Savings Plan. No Company
contributions were made in prior periods.
45
48
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
12. LITIGATION
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, Texas 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
outcome; however, an adverse outcome could have a material impact on the
Company's liquidity, operating results or financial condition. The Company
intends to defend against the action vigorously.
In July 1997, the Company agreed to settle a 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.
13. OPERATING SEGMENT, GEOGRAPHIC SEGMENT AND CONCENTRATION OF CREDIT RISK
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changed the method for determining
and reporting business segment information. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997 and,
therefore, the Company has adopted the new requirements retroactively in Fiscal
1999.
Operating Segment Information
Wall Data is organized based on the products and services that it offers.
Under this organizational structure, the Company has two reportable segments,
RUMBA and Cyberprise. The RUMBA segment consists of products and services that
connect the PC to host systems. RUMBA products include RUMBA OFFICE, RUMBA
Mainframe, RUMBA AS/400 and others. The Company's Cyberprise products are
designed to enable companies to move existing mission-critical systems and
public information to the Web and extend those systems to remote users, vendors
and customers. In Fiscal 1999, all products that are Web enabled were reported
as Cyberprise revenue. Cyberprise products include Cyberprise Server, Cyberprise
Host, RUMBA/Cyberprise edition, Cyberprise Tools DBApp Developer and others.
With the evolution of the Cyberprise vision, management plans to differentiate
the Cyberprise business from RUMBA as an EIP solution beginning in Q1 of FY2000.
As a result, prior periods will be restated to eliminate all RUMBA/ Cyberprise
edition revenues from Cyberprise and reflect it as RUMBA business. In Fiscal
1999, the Company reported approximately $8.9 million of RUMBA/Cyberprise
edition revenue as Cyberprise license fees.
46
49
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
The Company's chief operating decision maker utilizes revenue and operating
income (loss) information in assessing performance and making overall operating
decisions and resource allocations. Restructuring charges and other nonrecurring
charges are excluded from each segment's operating income (loss). The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies. Information about the Company's
segments is as follows:
YEAR ENDED FOUR MONTHS YEAR ENDED DECEMBER 31,
APRIL 30, ENDED -----------------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- ---------- ----------
(IN THOUSANDS)
NET REVENUES
RUMBA.......................................... $119,647 $38,680 $140,851 $139,364
Cyberprise..................................... 20,082 426 -- --
-------- ------- -------- --------
Total net revenues..................... $139,729 $39,106 $140,851 $139,364
======== ======= ======== ========
OPERATING (LOSS) INCOME
RUMBA.......................................... $ 11,026 $ 1,304 $ 20,417 $ 9,790
Cyberprise..................................... (19,329) (7,080) (9,238) (1,581)
Restructuring charges.......................... (2,405) -- -- --
Other nonrecurring charges..................... -- -- (11,488) (3,148)
-------- ------- -------- --------
Total operating (loss) income.......... (10,708) (5,776) (309) 5,061
Interest income................................ 2,915 1,106 3,538 2,934
Other, net..................................... (114) 139 (735) (748)
-------- ------- -------- --------
(Loss) income before income taxes................ $ (7,907) $(4,531) $ 2,494 $ 7,247
======== ======= ======== ========
The Company does not specifically identify or allocate assets among its
reportable segments. However, for management reporting purposes, depreciation
and amortization expenses for equipment, furniture and fixtures and intangible
assets, respectively, are included with other operating expenses and allocated
to each segment based upon each segment's proportion of operating expenses.
Depreciation and amortization expenses for each reportable segment are as
follows:
YEAR ENDED
YEAR ENDED FOUR MONTHS DECEMBER 31,
APRIL 30, ENDED ---------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- ------ ------
(IN THOUSANDS)
DEPRECIATION AND AMORTIZATION EXPENSES
RUMBA............................................. $6,583 $2,008 $5,941 $6,481
Cyberprise........................................ 1,599 316 426 74
------ ------ ------ ------
Total depreciation and amortization
expense................................. $8,182 $2,324 $6,367 $6,555
====== ====== ====== ======
Geographic Segment Information
Information regarding the Company's operations in different geographic
areas in Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and Fiscal 1996 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%, 5%, 4% and 4% of
consolidated net revenues in Fiscal 1999, the 1998 Four Month Period, Fiscal
1997 and Fiscal 1996, respectively. Total international revenues equaled 26%,
35%, 30% and 29% of consolidated net revenues in Fiscal 1999, the 1998 Four
Month Period, Fiscal 1997 and Fiscal 1996, respectively. Foreign currency
exchange transactions, which are included in other income (expense), resulted in
net exchange gains (losses) of $(0.1) million, $0.2 million, $(0.8) million and
47
50
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
$(0.6) million in Fiscal 1999, the 1998 Four Month Period, Fiscal 1997 and
Fiscal 1996, respectively. During Fiscal 1999, the Company engaged in currency
hedging by purchasing and selling options on certain foreign currencies. All
options are purchased at the beginning of each quarter and expire at the end of
the same quarter. The options are intended to hedge against foreign exchange
positions on intercompany balances with subsidiaries.
YEAR ENDED FOUR MONTHS YEAR ENDED DECEMBER 31,
APRIL 30, ENDED -----------------------
1999 APRIL 30, 1998 1997 1996
---------- -------------- ---------- ----------
(IN THOUSANDS)
NET REVENUES
North America................................. $117,032 $ 30,543 $119,501 $121,657
Europe........................................ 30,075 11,675 36,373 35,140
Eliminations.................................. (7,378) (3,112) (15,023) (17,433)
-------- -------- -------- --------
Total net revenues.................... $139,729 $ 39,106 $140,851 $139,364
======== ======== ======== ========
OPERATING (LOSS) INCOME
North America................................. $ (5,380) $ (6,518) $ (3,935) $ 476
Europe........................................ (5,339) 754 3,283 5,103
Eliminations.................................. 11 (12) 343 (518)
-------- -------- -------- --------
Total operating (loss) income......... $(10,708) $ (5,776) $ (309) $ 5,061
======== ======== ======== ========
IDENTIFIABLE ASSETS
North America................................. $115,717 $118,075 $125,522 $115,252
Europe........................................ 18,809 30,787 19,999 18,915
Eliminations.................................. (7,731) (8,657) (8,945) (7,013)
-------- -------- -------- --------
Total identifiable assets............. $126,795 $140,205 $136,576 $127,154
======== ======== ======== ========
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.
Credit Risk
Sales to any one customer did not exceed 10% of net revenues in Fiscal
1999, the 1998 Four Month Period, Fiscal 1997 or Fiscal 1996.
14. COMMITMENTS
The Company rents office facilities under operating lease agreements.
Future minimum lease payments at April 30 under non-cancelable operating leases
with terms in excess of one year are as follows (in thousands):
Fiscal 2000........................................................ $ 3,697
2001........................................................ 2,693
2002........................................................ 2,200
2003........................................................ 1,646
2004........................................................ 1,426
Thereafter.................................................. 455
-------
Total minimum lease payments................................ $12,117
=======
48
51
WALL DATA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
Rental expenses under operating leases amounted to approximately $5.9
million, $1.5 million, $5.2 million and $5.4 million in Fiscal 1999, the 1998
Four Month Period, Fiscal 1997 and Fiscal 1996, respectively.
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 the year ending April 30, 2000 is approximately $5.1 million.
Annual commitments will increase each year thereafter based on the growth of the
Company and inflation.
49
52
WALL DATA INCORPORATED
SELECTED QUARTERLY FINANCIAL DATA
AND MARKET INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
--------------------------------------
JUL. 31 OCT. 31 JAN. 31 APR. 30 YEAR
------- ------- ------- -------- --------
1999(1)(2)
Net revenues................................... $40,410 $37,354 $41,815 $ 20,150 $139,729
Gross margin................................... 32,902 30,274 34,487 13,951 111,614
Net income (loss).............................. 2,183 86 3,084 (14,277) (8,924)
Net income (loss) per share -- basic........... 0.22 0.01 0.31 (1.41) (0.89)
Net income (loss) per share -- assuming
dilution..................................... 0.22 0.01 0.30 (1.41) (0.89)
Common stock price per share:
High......................................... 16.00 15.50 24.25 22.31 24.25
Low.......................................... 10.13 10.63 13.25 13.50 10.13
TRANSITION PERIOD --
FOUR MONTHS ENDED
APRIL 30, 1998
--------------------
1998
Net revenues................................................ $39,106
Gross margin................................................ 30,899
Net income (loss)........................................... (4,648)
Net income (loss) per share -- basic and assuming
dilution.................................................. (0.47)
Common stock price per share:
High...................................................... 18.25
Low....................................................... 13.50
QUARTER ENDED
-------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 YEAR
------- ------- ------- ------- --------
1997(3)(4)
Net revenues.................................... $37,023 $35,600 $28,564 $39,664 $140,851
Gross margin.................................... 30,926 28,430 22,514 34,055 115,925
Net income (loss)............................... 3,458 (4,654) 19 3,428 2,251
Net income (loss) per share -- basic............ 0.35 (0.50) 0.00 0.37 0.24
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
- - 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 July 1, 1999, there were 316 holders of record of the Company's Common
Stock.
- ---------------
(1) In October 1998, the Company recorded a $2.4 million charge to restructure
its operations in the Asia-Pacific and Latin America (APLA) markets. The
restructuring charge includes $0.8 million for severance and lease
terminations costs, $1.0 million for the write down of certain product
localization
50
53
costs and other assets and $0.6 million for the write down of a minority
investment in a Korean distributor. See Note 7 of Notes to Consolidated
Financial Statements.
(2) In the fourth quarter of Fiscal 1999 revenues fell, as compared to the
previous quarters. The revenue decline is believed to be primarily a result
of the disruptions associated with the restructure of Wall Data into
separate RUMBA and Cyberprise businesses. However, market conditions,
including customer deferment of purchases as attention and resources are
dedicated to year 2000 preparedness, are also believed to be factors. In the
fourth quarter, the Company determined that the RUMBA and Cyberprise
businesses had differing sales processes and other operational aspects. The
Company separated all of the line functions of the business including
technical support, services, product development, field sales and marketing
in order to increase the focus on the specific needs of each business.
(3) 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 7 and
12 of Notes to Consolidated Financial Statements.
(4) 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 7 of Notes to Consolidated
Financial Statements.
51
54
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: July 27, 1999 By: /s/ JOHN R. WALL
------------------------------------
John R. Wall
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 27th day of July, 1999.
SIGNATURE TITLE
--------- -----
/s/ JOHN R. WALL Chief Executive Officer and Director
- -----------------------------------------------------
John R. Wall
/s/ KEVIN B. VITALE President, RUMBA and Director
- -----------------------------------------------------
Kevin B. Vitale
/s/ RICHARD P. FOX Vice President Finance, Chief Financial
- ----------------------------------------------------- Officer and Treasurer
Richard P. Fox
/s/ ROBERT FRANKENBERG Director and Chairman of the Board
- -----------------------------------------------------
Robert Frankenberg
/s/ JEFFREY HEIMBUCK Director
- -----------------------------------------------------
Jeffrey Heimbuck
Director
- -----------------------------------------------------
Henry Lewis
Director
- -----------------------------------------------------
David Millet
/s/ STEVE SARICH, JR. Director
- -----------------------------------------------------
Steve Sarich, Jr.
/s/ BETTIE A. STEIGER Director
- -----------------------------------------------------
Bettie A. Steiger
52
55
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
WALL DATA INCORPORATED
COL. A COL. B COL. C COL. D COL. E
- -------------------------------- ------------------- ------------------------------------------ ----------- --------------
ADDITIONS
------------------------------------------
BALANCE AT CHARGED TO REVENUE, CHARGED TO OTHER DEDUCTIONS BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD COSTS OR EXPENSES ACCOUNTS -- DESCRIBE DESCRIBE(A) OF PERIOD
----------- ------------------- ------------------- -------------------- ----------- --------------
YEAR ENDED APRIL 30, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts, rebates, and sales
returns..................... $4,519,000 $13,411,000 -- $13,309,000 $4,621,000
Valuation allowance for
deferred tax assets......... $3,794,000 $ 1,761,000 -- -- $5,555,000
FOUR MONTHS ENDED APRIL 30, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts, rebates, and sales
returns..................... $3,757,000 $ 4,645,000 -- $ 3,883,000 $4,519,000
Valuation allowance for
deferred tax assets......... $1,571,000 $ 2,223,000 -- -- $3,794,000
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 assets......... $ 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 assets......... $ 411,000 $ 312,000 -- -- $ 723,000
- ---------------
(A) Deductions consist of write-offs of uncollectible accounts, reseller rebates
and product returns.
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56
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Articles of Incorporation of Wall Data Incorporated
(Incorporated by reference to Registration Statement No.
33-57816)
3.2 Restated Bylaws of Wall Data Incorporated (Incorporated by
reference to Registration Statement No. 33-57816)
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+
10.3 Restated 1993 Stock Option Plan for Non-Employee Directors+
10.4 Restated Employee Stock Purchase Plan+
10.5 Lease between Page Mill Partners I as Lessor and Wall Data
Incorporated as Lessee dated June 1, 1993 and Consent to
Sublease among Leland Stanford University, Page Mill
Partners I and Wall Data Incorporated dated June 1, 1993
(Incorporated by reference to the Company's Form 10-K dated
March 30, 1995, File No. 0-21176)
10.7 Revolving Credit Loan Agreement dated June 6, 1994 between
Comerica Bank-California and Wall Data Incorporated together
with First Amendment to Revolving Credit Loan Agreement
dated August 18, 1995 (Incorporated by reference to the
Company's Form 10-K dated March 31, 1996, File No. 0-21176)
10.8 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Registration Statement No.
33-57816)+
10.9 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 dated March 30, 1995, File No. 0-21176)
10.10 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, File No. 0-21176)
10.11 Lease between SI Palo Alto, Inc. as Lessor and Wall Data
Incorporated as Lessee dated December 29, 1995 (Incorporated
by reference to the Company's Form 10-K dated March 31,
1996, File No. 0-21176)
10.12 Employment Agreement, dated January 21, 1999, between the
Company and John R. Wall (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
10.13 Employment Agreement, dated January 21, 1999, between the
Company and Richard P. Fox (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
10.14 Employment Agreement, dated January 21, 1999, between the
Company and Kevin B. Vitale (Incorporated by reference to
the Company's Form 10-Q for period ended January 31, 1999,
File No. 0-21176)
10.15 Employment Agreement, dated January 21, 1999, between the
Company and Craig E. Shank (Incorporated by reference to the
Company's Form 10-Q for period ended January 31, 1999, File
No. 0-21176)
54
57
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*21.1 Subsidiaries of Wall Data Incorporated
*23.1 Consent of Ernst & Young LLP
*27.1 Financial Data Schedule
- ---------------
+ Management contract or compensatory plan
* Included herewith
55