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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19872
WALKER INTERACTIVE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2862954
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
303 Second Street, 3 North, San Francisco, California 94107
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (415) 495-8811
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $114,096,920 based on the closing sale price as
reported by The Nasdaq National Market on March 10, 2000.
Number of shares of Common Stock outstanding as of March 10, 2000: 14,423,342
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement to be used in conjunction with its
2000 Annual Meeting of Stockholders.
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
INDEX
PART I
ITEM 1. BUSINESS............................................................................. 2
ITEM 2. PROPERTIES........................................................................... 10
ITEM 3. LEGAL PROCEEDINGS.................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............. 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................................. 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 41
ITEM 11. EXECUTIVE COMPENSATION............................................................... 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................... 41
SIGNATURES....................................................................................... 45
1
PART I
ITEM 1. BUSINESS
The following discussion of results of operations and financial condition of the
Company should be read in conjunction with the Company's financial statements
and notes thereto included elsewhere in this Form 10-K. The report on this Form
10-K contains forward-looking statements, including statements related to
industry trends and demand for mainframe products, expected resolution of legal
proceedings, cash commitments, working capital requirements, and possible
expansion in international markets. Discussions containing such forward-looking
statements may be found in the material set forth under "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", generally and specifically therein under the captions "Liquidity
and Capital Resources," and "Additional Risk Factors" as well as elsewhere in
this Annual Report on Form 10-K. Actual events or results may differ materially
from those discussed herein. The Company disclaims any obligation to update
these forward-looking statements as a result of subsequent events. The risk
factors on pages 17 through 21, among others, should be considered in evaluating
the Company's prospects and future financial performance.
OVERVIEW
- --------
Introduction
Walker Interactive Systems, Inc. (hereinafter "Walker" or the "Company") was
incorporated in California in 1973 and reincorporated in Delaware in March 1992.
Walker designs, develops, markets and supports, on a worldwide basis, a family
of enterprise financial, operational and analytical software products that
enable large and medium-sized organizations, higher education institutions, and
federal, state and government agencies to optimize their business processes,
reduce business costs, and improve management information needed to run their
business. The Company derives its revenues primarily from software licenses,
software maintenance and professional consulting services. The Company's
Tamaris, Horizon and IMMPOWER product lines are licensed to large and mid-size
companies and similarly sized governmental organizations worldwide. The
Company's Aptos products are marketed primarily in Europe and are licensed to
mid-sized organizations.
Recent Update
During the second quarter of 1999, Walker changed its strategic direction to
emphasize the Tamaris and Horizon product lines, concentrating on refocusing the
Company as a provider of e-business solutions. In refocusing its resources and
efforts on e-business solutions for the enterprise, the Company incurred
impairment and restructuring charges and commenced the process of divesting its
IMMPOWER and Aptos product lines (see "Management's Discussion and Analysis of
Results of Operations and Financial Condition [MD&A] - Refocusing of Business
and Impairment and Restructuring Charges").
As a part of its strategic redirection, Walker redesigned its software products
specifically for the Internet architecture and business to business ("B2B") e-
business models. During the third quarter of 1999, Walker released a range of e-
business solutions based on the Tamaris and Horizon products (see "Business -
Walker Products and Services"). The Company believes that its architecture is
among the most scalable and adaptable for enterprise-level business software.
The Company's strategy is to offer enterprise financial, operational and
analytical e-business solutions to a variety of industries. Walker's e-business
solutions support and enhance enterprise-wide financial, operational and
analytic processes, including procurement, revenue management, financial
management and insight, business planning, budgeting, forecasting, and financial
consolidation. The Company's software products utilize the Microsoft Windows
operating systems on the desktop, NT, UNIX and S/390 operating systems on the
server and industry-leading On Line Analytical Processing (OLAP), Relational
Database Management Systems (RDBMS) including IBM's DB2, Hyperion Solutions'
Essbase, Microsoft SQL/Server and Oracle Express.
2
The e-business solutions line represents the Company's core suite of business
and financial solutions utilizing the power of the enterprise server for highly
scalable transaction processing and reliability/availability, with the thin
client architecture of the browser based interface. This Internet-based
architecture provides an optimized platform for delivery of B2B e-business
solutions. The Company also develops and markets analytical applications, which
provide financial reporting, budgeting and financial consolidation solutions for
large and mid-sized organizations. These analytic applications integrate with
the e-business solutions and also work on a standalone basis with leading
Enterprise Resource Planning ("ERP") applications.
The Company's software products include productivity tools that allow the
Company's applications to be extensively customized to fit the customer's
particular requirements. The Company complements its software products by
providing specialized consulting services to assist customers with customization
and implementation.
The Company derives its revenues primarily from software licenses, software
maintenance and professional consulting services. The Company's e-business
solutions are licensed primarily to Global 2000 companies and similarly sized
business and governmental organizations worldwide. Its solutions and services
are marketed primarily through direct sales forces located in the United States
and the United Kingdom.
INDUSTRY BACKGROUND
- -------------------
Large, geographically diverse organizations generate enormous amounts of
financial, operational, sales, marketing and other data. The transaction-
oriented information systems used by these organizations are strategic resources
that are critical to their efficiency, productivity and competitiveness,
providing the availability of continuous and simultaneous information to
employees, customers and suppliers. In the day-to-day operations of large
organizations, transactional data needs to be promptly and easily retrieved from
a variety of financial and operational systems, summarized, and organized into
meaningful business information that has a consistent business context. The
process of integrating the data is complex because large organizations employ
multiple accounting systems, operational systems and transactional databases,
spread their business across many different geographies and have different
information requirements by function and across the organization. Furthermore,
the current business climate of deregulation and merger/acquisition activities
in many industries has added additional complications as well as the need for
scalable and adaptable business processes.
Organizations have attempted to collect, summarize, organize and present
information from heterogeneous computer systems and transactional data sources
in various ways. Reports are assembled through entry of data into spreadsheets
and by using data from accounting systems and other operational systems. Many
organizations have tried to automate information systems through the use of
software developed internally or through assistance by outside consultants.
These custom-built systems are becoming increasingly obsolete because they are
rigid in structure, expensive and time consuming to create and maintain, and
difficult to update when business processes and requirements change. Moreover,
growing competition has increased the demand for more timely business
information specific to each function within the organization.
MARKET OPPORTUNITIES
- --------------------
The following market dynamics are important factors shaping Walker's strategy
moving forward:
B2B e-BUSINESS
The term e-business means many things to many people, but is well defined as the
transformation of key business processes through the use of Internet
technologies. The core processes that are the foundation of business are merged
with the standards, simplicity and connectivity of the Internet. This melding
of Internet technologies with key business processes creates opportunities for
powerful interactive, transaction-intensive solutions that let companies do
business in ever more efficient and effective ways. Innovative companies of all
sizes are using the Web to communicate with their suppliers, their customers and
their partners, to connect with their back-end data-systems, and to transact
commerce. The opportunities presented by this new model of business enables
organizations to collaborate more fully with their suppliers, customers and
partners in a seamless manner. This opportunity has now defined itself as B2B e-
business. The market potential for B2B e-business solutions is significant
according to leading analysts such as IDC, Meta Group and Gartner Group.
Walker's B2B e-business solutions will allow current
3
business processes to be streamlined, thereby improving operating efficiencies,
which in turn will strengthen the value to the customer.
ANALYTICAL APPLICATIONS
The need for better business information has created a growing need for analytic
application software to help organizations gain business knowledge from the
large volumes of transactional data available from daily operations. These
software solutions work on a stand-alone basis, or in conjunction with core
financial systems to translate data into business insight and thus to maximize
the value of financial information. Walker's analytical applications, by
integrating financial applications and analytic solutions, deliver a solution
that links business goals to operational data so organizations have deeper
insight into their business operations.
NETWORK COMPUTING and INTERNET ARCHITECTURES
Over the last twelve months the market has seen the rapid adoption of thin
client/large server architecture models, a significant contrast to the
client/server architectures that have been so prevalent since the mid-1990's.
Network computing enables companies to protect their existing information
technology investments while taking advantage of new technologies by dynamically
linking Internet, client/server and legacy systems. The Company believes that
the Internet architecture model has created opportunities for competitive
advantage in its market, and for its customers, through a combination of
business processes optimized for the Internet model, improved collaboration,
browser based interfaces, enhanced services, shared services and lower
transaction costs. Walker e-business solutions are designed to support this
integrated Internet architecture and e-business process model.
SHARED SERVICES
Large organizations can reduce the costs and complexity of information systems
by centralizing many administrative functions. These centralized functions are
now being combined with distributed operational procedures. Walker's high-
volume, e-business solutions support both models for distributing information
when and where it is needed within the extended organization, significantly
enhancing the availability of timely information.
HIGH VOLUME TRANSACTIONS
Large, geographically diverse organizations generate large volumes of
transactions and data. As organizations extend their business beyond traditional
boundaries with B2B e-business, their transaction-oriented systems will require
increasing scalability to handle the increased volume from additional users and
ever-growing transaction volumes. The Company believes that its solutions
provide scalable, cost-effective, high transaction volume capabilities.
WALKER STRATEGY
- ---------------
The Company's objective is to be a leading provider of e-business solutions for
the enterprise. The Company's strategy is as follows:
ENABLE THE TRANSFORMATION OF KEY BUSINESS PROCESSES THROUGH THE USE OF INTERNET
TECHNOLOGIES
The Company believes that the e-business enablement of key business processes
has created opportunities for competitive advantage in its market through
Internet/intranet-enabled solutions. These e-business solutions allow
organizations to transform core business processes utilizing existing
information technology investments while taking advantage of powerful
interactive, transaction-intensive solutions that let companies do business in
ever more efficient and effective ways. Walker customers now have the ability to
extend the reach of their business applications directly to employees, customers
and suppliers worldwide.
DELIVER SOLUTIONS WHICH PROVIDE MANAGEMENT INSIGHT INTO KEY COMPLEX BUSINESS
PROCESSES IN SELECTED VERTICAL MARKETS
The Company has significant experience in certain vertical markets, and has
begun to customize its application suites for key industries including
utilities, retail, education, and transportation. These large, complex
businesses are best understood in a multidimensional context, by key performance
indicators and across business units, time periods, geographies and product
lines. Walker is able to capture and warehouse key business processes and
business information while retaining the business context of the information
through our analytical solutions. These
4
solutions analyze the transactional data within the applications to deliver
information that allow managers to be more informed about their organization's
performance. Empowered by management insight, managers at all levels of the
organization have the opportunity to better run their area of the business,
enhancing competitiveness and bottom-line profitability. The Company's solutions
use OLAP database technology, which was developed specifically for
multidimensional business analysis.
PROVIDE ANALYTIC APPLICATIONS, WHICH COMPLEMENT MULTIPLE TRANSACTION
APPLICATIONS
The Company's focus is on analytic applications for budgeting, consolidation,
and management reporting, which it believes offers the greatest short-term
market potential. These applications provide analytical analysis and reporting
capabilities not available in traditional transaction systems. Most
organizations recognize the need to integrate enterprise-wide financial and
operational data to monitor company-wide performance. To respond to this need,
the Walker series of analytic applications integrate data from both Walker and
non-Walker applications, including leading ERP and best-of-breed applications
vendors.
EXTEND NEW AND EXISTING LONG-TERM RELATIONSHIPS WITH STRATEGIC PARTNERS
The Company has expanded its existing strategic relationships with leading
hardware and software suppliers such as IBM, Microsoft, Hyperion Solutions,
Inc., Commerce One, Inc., Information Builders, Inc., and Showcase Corporation,
as well as with third-party providers including global accounting and consulting
firms. The Company believes that the development of its relationships with these
partners, as well as the expanded scope of the relationships to include e-
business and e-commerce solutions, will contribute to its future revenue growth.
DELIVER LOWER COST/HIGHER PERFORMANCE SOLUTIONS
While many vendors of enterprise software solutions are focusing their
technology efforts on supporting a distributed client/server model, Walker
intends to continue to build and enhance its e-business solutions for the IBM
S/390 as an e-business server. This puts Walker in a position to support a
high-volume network computing environment which the Company believes, with the
growth of B2B collaboration, Internet bandwidth, processes that reflect an e-
business way of working, supporting both shared and distributed service models,
is far more cost effective than other distributed architectures models available
in the market today.
RETAIN AND EXTEND LONG-TERM CUSTOMER RELATIONSHIPS
The Company intends to continue to focus on generating additional revenues from
existing customers through software licenses, the introduction of new e-business
solutions and services, and warranty maintenance. In addition, providing
consulting and support services to existing customers represents a significant
portion of the Company's total revenues. Follow-on revenues create efficiencies
for deployment of sales and marketing resources and strengthen the Company's
relationships with its customers.
WALKER PRODUCTS AND SERVICES
- ----------------------------
The Company's e-business solutions for the enterprise are designed to improve
core business processes and to provide the functionality to create competitive
advantage in an ever-changing global marketplace. Walker achieves this by
offering solutions that combine flexible e-business solutions, analytic
applications, deep industry knowledge and best practices expertise.
The Walker family of products and services include:
. e-business solutions for Global 2000 organizations
. Walker Horizon/TM/ Series of analytic applications for better managing
company performance
. Aptos/TM/ suite of client/server financial applications
. IMMPOWER enterprise asset management system
5
PRODUCTS
e-Business Solutions for the Enterprise
Walker's e-business solutions assist businesses in mission critical areas:
. By turning massive amounts of transactional data into powerful business
information and intelligence; and
. By allowing organizations to exploit the new business processes that have
changed as a result of greater business collaboration through the use of
Internet technologies and the Web.
These highly scalable applications are designed to adapt quickly and easily to
changing business conditions such as deregulation, technology innovations, and
structural reorganizations including mergers and acquisitions. The Company also
broadens the scope of its e-business offerings with the addition of analytic
solutions that work with transactional data to provide in-depth insight into the
enterprise. This combination of e-business solutions and analytic applications
allows Walker customers the opportunity to better manage company-wide
performance.
Walker's e-business solutions are organized into five key operational areas:
. e-procurement - B2B based procurement, covering all aspects of the
procurement cycle from requisition through payment.
. e-revenue - B2B based revenue, covering all aspects of electronic billing
through collections and cash application.
. e-insight - delivery of management insight on company-wide performance
through a portal.
. e-technology - consists of the architecture, technologies and components that
enable and support e-business. This technology is designed for large-scale,
e-business environments.
. e-services - knowledgeable resources with a tried and proven approach to plan
and implement our e-business solutions efficiently and cost effectively.
Walker Horizon Series of Analytic Applications
The Horizon suite of analytic applications includes the planning, forecasting,
financial consolidation and reporting solutions that organizations need to
better manage company performance. By significantly reducing the time and
effort expended on the budgeting and consolidation process, Horizon allows
companies to focus on the analysis of financial data, instead of the
preparation.
The Horizon suite employs a flexible architecture that leverages a single OLAP
engine for all its applications. This provides companies with a solution that
ensures data integrity and is easy to deploy and maintain. As a result,
organizations can gain the ability to make fast, informed business decisions and
continually monitor performance improvement at all levels of the organization.
Additionally, Horizon's architecture allows companies to be more forward
thinking and to preview the effect of potential business decisions.
Horizon is available for multiple operating systems and OLAP databases. It
allows companies to track performance metrics that are specific to their
organization. Any combination of these applications complements Walker's e-
business solutions as well as non-Walker financial and operational solutions.
6
The Horizon suite includes:
. Planning and Forecasting: Automates the planning, forecasting, and budgeting
processes - reducing planning cycles, facilitating continuous planning and
enabling the prediction of company performance.
. Consolidated Reporting: Manages the collection, adjustment and reporting of
consolidated results for enterprise-wide statutory, management and tax
reporting.
. OLAP Reporting & Analysis: A powerful reporting and analysis solution for
enabling financial reports and analysis using any OLAP technology.
Aptos/TM/ suite of client/server financial applications and IMMPOWER enterprise
asset management system
In refocusing its resources and efforts on e-business solutions for the
enterprise, the Company has begun the process of divesting its Aptos/TM/ and
IMMPOWER product lines. Revenues associated with these product lines aggregated
$13.6 million in 1999, $15.7 million in 1998, and $ 4.4 million in 1997. Aptos
is an integrated suite of client/server financial applications developed by
Walker for medium sized companies which uses an advanced architecture to deliver
best practices in finance and procurement. Walker's IMMPOWER solution offers an
enterprise asset management system that combines the latest in advanced asset,
materials and cost management with powerful analytic tools.
PRODUCT DEVELOPMENT
- -------------------
The Company continually enhances its existing products and develops new products
to meet its customers' ever-changing requirements. The Company's success will
depend in part on its ability to develop product enhancements and new products
that keep pace with technological changes and changes in customers' business
practices. Software development expenditures were 22% of total revenues in
1999, 20% in 1998, and 26% in 1997.
Due to the layered architecture of the Company's e-business solutions, and the
Company's efforts to continually enhance its products to respond to evolving
technologies, the Company believes that its core products have long life cycles.
As operating systems, databases and presentation software technologies evolve,
the Company is able to modify its e-business solutions through an upgrade and by
changing only the corresponding layer of software without having to change the
other components of the system. Therefore, the Company's customers do not have
to completely replace the Company's products in response to technological
change. The Company works closely with its customers and prospective customers
to determine their requirements and to define the functionality of the Company's
new products and enhancements to its existing products.
SERVICES
- --------
PROFESSIONAL SERVICES AND IT CONSULTING SERVICES
Organizations are increasingly leveraging information technology to accomplish
their business objectives. Large, global organizations rely heavily on their
software investments to remain competitive.
Walker provides a full range of services to support these needs. The Company's
professional services organization adds significant incremental value, offering
implementation, customization, migration, training and related services to its
customers. Walker has suites of reusable tools and utilities that enable
customers to complete customizations efficiently and cost effectively.
7
Some of the areas addressed by Walker services include:
. Integration - to integrate the customers existing applications into the e-
business solution.
. Performance tuning - to increase computer throughput, reduce processing time
and otherwise improve performance.
. Migration - assistance in making cost-effective migrations to a new release
or from one platform to another.
. Conversion and integration - to integrate third-party applications into the
Walker framework or convert these products to Walker applications through
Walker's re-usable components, methodologies and e-technology.
. IT consulting and outsourcing - shortening time-to-benefit and reducing costs
for large-scale computing environments and applications.
CUSTOMER SUPPORT AND MAINTENANCE
The Company's customer support and maintenance program includes 24-hour hotline
telephone support for problem determination and resolution, account management,
ongoing functional and technical enhancements for installed products, and
membership in the Company's user group, which meets annually and holds periodic
regional conferences throughout the year.
REPORTABLE SEGMENTS
- -------------------
The Company's products and services are considered a single reportable segment.
Information regarding domestic and international revenues and assets are
contained in Note 11 to the Consolidated Financial Statements.
SALES AND MARKETING
- -------------------
Walker sells its products primarily through its direct sales force in North
America and the United Kingdom. In support of its sales force, the Company
conducts marketing programs, which include direct mail, public relations,
advertising, seminars, trade shows, and ongoing customer communication programs.
The sales cycle begins with the generation of a sales lead, or often the receipt
of a request for proposal ("RFP") from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to an
RFP (one or more presentations to the customer), customer internal sign-off
activities and contract negotiation and finalization. While the sales cycle
varies by product and from customer to customer, the sales cycle has
historically required three to twelve months.
Walker markets its products primarily to large or complex organizations with e-
business collaboration requirements, and intensive data processing and
information management requirements. In each of the last three fiscal years, a
substantial portion of the Company's product revenue arose from additional
licensing by existing customers of either new products or products for
additional sites. In 1999, the Company introduced and has increased its
commitments to the development and marketing of its e-business solutions and
analytical applications.
The Company regards its professional services and product development
organizations as integral parts of its marketing strategy because of the length
and technical nature of the sales process. Professional services and product
development employees participate directly in the sales cycle and educate
prospective customers on the advantages of using the Company's solutions rather
than those developed internally or by other third parties.
COMPETITION
- -----------
The business and financial applications software market for large complex
organizations is intensely competitive. The Company's principal competitors
with the e-business solutions are SAP AG, Oracle Corporation and PeopleSoft,
Inc. The Company primarily competes with Hyperion Software Corporation, Oracle
Corporation and Comshare, Inc. with its analytical applications.
8
The Company also competes to a lesser extent with other independent software
application vendors. Some of the Company's current and potential competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. Some of these competitors also offer business application
products not offered by the Company, primarily in the areas of human resources
and manufacturing. However, Walker remains one of the few companies committed
to providing and enhancing applications for the IBM S/390 e-business server.
Most of Walker's competitors offer UNIX-based applications.
The Company encounters competition from a broader range of firms in the market
for professional services. These competitors include the consulting divisions
of the major accounting firms, which possess greater resources than the Company,
and small independent firms that compete primarily on the basis of price of
services provided.
PROPRIETARY RIGHTS
- ------------------
The Company regards its products as proprietary and attempts to protect them
with a combination of trade secret, copyright and trademark laws, its license
agreements with customers and its internal security systems, confidentiality
procedures and employee agreements. Although the Company takes steps to protect
its trade secrets, there can be no assurance that misappropriation will not
occur. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States.
The Company typically provides its products to users under non-exclusive, non-
transferable perpetual licenses. Under the general terms and conditions of the
Company's standard product license agreement, the licensed software may be used
only for internal operations on designated computers at specific sites. The
Company makes source code for some of its products available to its customers
under agreements which restrict access to and use of the source code.
The Company seeks to protect its software, documentation and other written
materials under copyright laws, which afford only limited protection. It also
asserts trademark rights in its product names. The Company has not sought to
protect its products under patent laws. The Company believes that the rapid
pace of technological change in the computer industry makes patent or copyright
protection of less significance than such factors as the knowledge and
experience of management and personnel, name recognition, maintenance and
support of software products and the Company's ability to develop, enhance,
market and acquire software products and services.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products or that any such assertions will not
require the Company to enter into royalty arrangements or result in costly
litigation.
For a description of certain proprietary risks factors, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Additional Risk Factors."
EMPLOYEES
- ---------
As of December 31, 1999, the Company had 400 employees, of which 260 were based
in the United States and 140 were based internationally. Of the total, 48 of
such employees were engaged in sales and marketing, 64 were in customer support,
143 were in professional services, 98 were in product development and 47 were in
data processing, administration and finance positions.
9
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in San Francisco, California,
in a leased facility consisting of approximately 55,000 square feet of office
space. The Company occupies all 55,000 square feet governed by a lease that
expires in September 2007. Additionally, the Company leases office space
aggregating approximately 91,000 square feet in the metropolitan areas of
Atlanta, Georgia; Birmingham, Alabama; Boston, Massachusetts; Chicago, Illinois;
Aylesbury, England; Singapore, Republic of Singapore; Santon, South Africa; and
Toronto, Canada. The Company believes that it has adequate facilities to
accommodate the Company's operations in the near term and that additional space
will be available at commercially reasonable terms as needed.
Approximately 15,200 square feet of office space in Toronto, Canada; Aylesbury,
England; and Santon, South Africa is considered excess capacity. Of the excess,
approximately 9,150 square feet is sublet. The difference of approximately $2.4
million between the Company's total lease commitments for its excess capacity
and the total expected sublease income is included in accrued liabilities and
other long term obligations at December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than ordinary routine
litigation incidental to the Company's business. The following sentence is a
forward-looking statement. The Company believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1999.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Walker Interactive Systems, Inc. common stock is traded on The Nasdaq National
Stock Market under the symbol "WALK." As of March 10, 2000, there were
approximately 4,850 stockholders of record of the Company's common stock. The
Company has not paid any cash dividends and does not anticipate paying any cash
dividends in the foreseeable future. Furthermore, the Company has a line of
credit with a financial institution which restricts the Company's ability to pay
dividends if borrowings are outstanding under the line of credit.
The high and low, daily closing prices per share, for the periods set forth
below, are as reported by The Nasdaq National Stock Market System.
QUARTER ENDING
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
PRICE RANGE PER COMMON SHARE 1999 1999 1999 1999
- --------------------------------- --------- -------- ------------- ------------
Price range per common share:
High $ 6 25/32 $ 4 1/4 $ 3 3/16 $ 9 1/2
Low 3 27/32 2 5/8 2 5/8 2 1/2
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
PRICE RANGE PER COMMON SHARE 1999 1999 1999 1999
- --------------------------------- --------- -------- ------------- ------------
Price range per common share:
High $20 1/16 $20 $15 5/16 $ 8 1/2
Low 13 13 1/8 6 3 1/2
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table should be read in conjunction with the financial statements
of the Company and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
WALKER INTERACTIVE SYSTEMS, INC.
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
1999 (1) 1998 1997 (2) 1996 (3) 1995
-------- -------- -------- -------- --------
Income Statement Data:
Total revenues $ 87,978 $101,413 $ 71,409 $ 62,834 $ 58,566
Income (loss) before income taxes (24,887) 7,266 (2,179) 86 (10,198)
Net income (loss) (37,788) 4,525 (3,477) (116) (9,357)
Per Share Data:
Basic net income (loss) per share (4) ($2.67) $ 0.32 ($0.26) ($0.01) ($0.72)
Diluted net income (loss) per share (4) ($2.67) $ 0.31 ($0.26) ($0.01) ($0.72)
Shares:
Shares utilized to compute basic net
income (loss) per share 14,154 14,012 13,291 13,223 12,998
Shares utilized to compute diluted net
income (loss) per share 14,154 14,688 13,291 13,223 12,998
Balance Sheet Data:
Cash, cash equivalents and investments $ 22,014 $ 22,597 $ 27,690 $ 38,170 $ 42,318
Total assets 57,950 95,097 91,334 82,319 82,498
Stockholders' equity 19,119 57,051 51,689 46,772 48,734
(1) Includes a $10.4 million charge for the impairment of certain capitalized
software and goodwill and a $4.5 million restructuring charge in connection
with the change in strategic direction of the Company (see Note 3 to the
consolidated financial statements).
(2) Includes a $4.6 million charge for the write-off of in-process research and
development from the acquisition of Revere, Inc. and a $1.3 million charge
for the termination of an exclusive distribution agreement.
(3) Includes a $2.8 million charge for the write-off of in-process research and
development from the acquisition of Hunt Systems, Inc.
(4) The per share amounts for 1996 and 1995 have been restated to conform to
the requirements of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition of the
Company should be read in conjunction with the Company's financial statements
and notes thereto included elsewhere in this Form 10-K. The report on this Form
10-K contains forward-looking statements, including statements related to
industry trends and demand for mainframe products, expected resolution of legal
proceedings, cash commitments, working capital requirements, and possible
expansion in international markets. Discussions containing such forward-looking
statements may be found in the material set forth under "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", generally and specifically therein under the captions "Liquidity
and Capital Resources," and "Additional Risk Factors" as well as elsewhere in
this Annual Report on Form 10-K. Actual events or results may differ materially
from those discussed herein. The Company disclaims any obligation to update
these forward-looking statements as a result of subsequent events. The risk
factors on pages 17 through 21, among others, should be considered in evaluating
the Company's prospects and future financial performance.
REFOCUSING BUSINESS
- -------------------
During the second quarter of 1999, Walker changed its strategic direction to
emphasize the Tamaris and Horizon product lines, concentrating on refocusing the
Company as a provider of e-business solutions. In refocusing its resources and
efforts on e-business solutions for the enterprise, the Company incurred
impairment and restructuring charges and commenced the process of divesting its
IMMPOWER and Aptos product lines. Impairment and restructuring charges are
discussed under Results of Operations below. In February 2000, the Company
announced its intention to sell the IMMPOWER and Aptos product lines. Revenues
associated with the IMMPOWER and Aptos product lines were $13.6 million, $15.7
million, and $4.4 million in 1999,1998, and 1997, respectively.
During the third quarter of 1999, Walker released its software products designed
specifically for the Internet architecture and B2B e-business models and
believes that its architecture is among the most scalable and adaptable
available for enterprise-level business software. The Company's strategy is to
offer enterprise financial, operational and analytical e-business solutions to a
variety of industries. Walker's e-business solutions support and enhance
enterprise-wide financial, operational and analytic processes, including
procurement, revenue management, financial management and insight, business
planning, budgeting, forecasting, and financial consolidation. The Company's
software products utilize the Microsoft Windows operating systems on the
desktop, NT, UNIX and S/390 operating systems on the server and industry-leading
On Line Analytical Processing (OLAP), Relational Database Management Systems
(RDBMS) including IBM's DB2, Hyperion Solutions Essbase, Microsoft SQL/Server
and Oracle Express.
ACQUISITION
- -----------
On December 2, 1997, the Company acquired all the outstanding share capital of
Revere, Inc. ("Revere") in exchange for $7.7 million of the Company's common
stock (634,022 shares) and $0.6 million for various transaction-related costs
and fees. The acquisition was accounted for as a purchase transaction. The
Company allocated $4.1 million to goodwill, $4.6 million to in-process research
and development, and the remaining amounts were allocated primarily to working
capital. The amount of the purchase price allocated to in-process research and
development was charged to the Company's 1997 results of operations, as
technological feasibility had not been established and no alternative future
uses existed at the acquisition date. The Company markets the acquired software
products as its IMMPOWER product line.
RESULTS OF OPERATIONS
- ---------------------
1999 compared to 1998
13
REVENUES
Total revenues in 1999 were $88.0 million, a decrease of $ 13.4 million, or
13.2%, as compared to 1998.
License revenues in 1999 were $14.6 million, a decrease of $7.7 million, or
34.7%, as compared to 1998. The Company believes the decrease in license
revenues is primarily attributable to a continued softness in the enterprise
application software market as potential customers utilized available resources
to ensure existing applications were Year 2000 compatible rather than acquiring
and implementing new software applications.
Maintenance revenues in 1999 were $31.3 million, an increase of $0.1 million, or
0.2%, as compared to 1998 as customers continued to utilize the Company's
support capability.
Consulting revenues in 1999 were $42.1 million, a decrease of $5.8 million, or
12.1%, as compared to 1998. The Company believes the decrease in consulting
revenues is attributable to a reduction in implementation engagements as a
consequence of the decreased license revenues and a decrease in non-
implementation related projects (e.g., Year 2000, migration and best practice
solutions engagements).
COSTS OF LICENSES, MAINTENANCE AND CONSULTING
Costs of licenses, maintenance and consulting were $41.9 million in both 1999
and 1998 and represented 47.6% and 41.4% of total revenues in 1999 and 1998,
respectively.
The costs of licenses as a percentage of license revenues increased in 1999 as
compared to 1998. The increase in 1999 results from a greater proportion of
license revenues generated from the Company's products that utilize technology
licensed from third parties.
The cost of maintenance, as a percentage of related revenue, was relatively
unchanged in 1999 compared to 1998.
The costs of consulting, as a percentage of related revenue, increased in 1999
as compared to 1998. The increase in 1999 is primarily attributable to lower
than expected consulting revenues, lower profit margins associated with fixed
fee consulting engagements and an increase in the use of outside contractors.
SALES AND MARKETING
Sales and marketing costs in 1999 were $21.9 million, a decrease of $1.1
million, or 4.7%, as compared to 1998. As a percentage of total revenues, sales
and marketing expenses were 24.9% and 22.7% in 1999 and 1998, respectively. The
1999 sales and marketing expenses increased as a percentage of revenue because,
while 1999 revenues declined, costs associated with marketing promotions for
existing customers and marketing costs associated with efforts to promote the
Company, its multiple product lines and its consulting services were ongoing.
PRODUCT DEVELOPMENT
Product development related expenses, excluding amortization of capitalized
software, were as follows (in thousands):
1999 1998
--------- ---------
Product development expenditures $19,262 $20,261
Less:
Additions to capitalized software (5,052) (7,391)
------- -------
Product development expense $14,210 $12,870
======= =======
Product development expenditures decreased $1.0 million, or 5.0%, in 1999 as
compared to 1998 and were 21.6% and 20.0% of total revenues in 1999 and 1998,
respectively. Additions to capitalized software decreased $2.3 million, or 31.6%
in 1999 as compared to 1998 and were 26.2% and 36.5% of product development
expenditures in 1999 and 1998, respectively. The decrease in software costs
capitalized in 1999 is primarily attributable to product development resources
being allocated to projects that did not meet the criteria for capitalization.
AMORTIZATION OF CAPITALIZED SOFTWARE
Capitalized software amortization in 1999 was $5.4 million, an increase of $0.4
million, or 8.6%, as compared to 1998. The increase in 1999 was due to
additional amortization associated with the Company's ongoing practice of
14
evaluating the useful lives of capitalized software products, offset by a
decrease in software amortization associated with products written off as part
of the Company's restructuring actions during 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses in 1999 were $15.6 million, an increase of
$3.1 million, or 25.3%, as compared to 1998. As a percentage of total revenues,
general and administrative expenses were 17.7% and 12.3% in 1999 and 1998,
respectively. The absolute dollar increase in 1999 is due primarily to an
increase of $3.1 million in the allowance for doubtful accounts provision in
1999. In addition, in 1999 the Company had increased compensation costs, in part
resulting from the increased use of outside contractors, partially offset by the
effect on compensation and facilities costs of the Company's restructuring
actions during the second half of 1999.
IMPAIRMENT AND RESTRUCTURING CHARGES
In 1999 the Company recorded charges of $14.9 million in connection with its
change in strategic direction and the related restructuring costs. The charges
include $7.2 million for impairment of IMMPOWER and Aptos capitalized software
costs and $3.2 million of goodwill impairment. In addition, restructuring
charges of $4.5 million include $2.5 million for office consolidations and $2.0
million for workforce reductions. No impairment or restructuring charges were
recorded in 1998.
INCOME TAX EXPENSE
In 1999, the Company provided $12.9 million for income taxes on a pretax loss of
$24.9 million. The 1999 provision for income taxes includes additions of $12.5
million to the deferred tax valuation allowance, fully reserving the Company's
previously recorded net deferred tax assets. The increase in the valuation
allowance is a result of management's assessment of the effect of the change in
strategic direction and the timing of expiration of certain tax operating loss
carryforwards and credits. In 1998, the Company provided income taxes equal to
38% on pretax income of $7.3 million. The Company's tax provisions for both
years include the generation, expiration, and true up of tax credits and net
operating losses.
1998 compared to 1997
REVENUES
Total revenues in 1998 were $101.4 million, an increase of $30.0 million, or
42.0%, as compared to 1997.
License revenues in 1998 were $22.3 million, an increase of $5.8 million, or
35.3%, as compared to 1997. License revenues in 1998 include a full year of
Revere operations, representing $2.1 million of the increase. The remaining
increase in license revenues is attributable to the Horizon and Aptos products,
which the Company believes resulted from increased sales and marketing efforts,
and increased product offerings.
Maintenance revenues in 1998 were $31.2 million, an increase of $3.6 million, or
13.0%, as compared to 1997, of which $1.9 million is attributable to the full
year of Revere operations and the increased license revenues.
Consulting revenues in 1998 were $47.9 million, an increase of $20.6 million, or
75.5%, as compared to 1997. Consulting revenues in 1998 include a full year of
Revere operations, representing $4.1 million of the increase. The Company
believes the remaining increase in consulting revenues can be attributed to non-
implementation related projects (e.g., Year 2000 readiness, migration and best
practice consulting engagements), primarily in North America and Europe.
COSTS OF LICENSES, MAINTENANCE AND CONSULTING
Costs of licenses, maintenance and consulting in 1998 were $41.9 million, an
increase of $13.1 million, or 45.4%, as compared to 1998. The increased costs
primarily related to the increased revenues in 1998 as costs of licenses,
maintenance and consulting represented 41.4% and 40.4% of revenues in 1998 and
1997, respectively.
The costs of licenses and maintenance, as a percentage of related revenue, were
relatively unchanged in 1998 compared to 1997.
The costs of consulting, as a percentage of related revenue, decreased in 1998
as compared to 1997. The decrease in 1998 is primarily attributable to a change
in consulting revenue mix which included a greater proportion of higher
15
margin consulting engagements during the year, partially offset by certain North
American fixed fee consulting engagements.
SALES AND MARKETING
Sales and marketing costs in 1998 were $23.0 million, an increase of $6.0
million, or 35.7%, as compared to 1997. As a percentage of total revenues,
sales and marketing expenses were 22.7% and 23.7% in 1998 and 1997,
respectively. The absolute dollar increase in the 1998 sales and marketing
expenses reflects the increased revenues while, as a percentage of revenue,
sales and marketing costs decreased slightly as the expenditures were spread
over a larger revenue base.
PRODUCT DEVELOPMENT
Product development related expenses, excluding amortization of capitalized
software, were as follows (in thousands):
1998 1997
---------- ----------
Product development expenditures $20,261 $18,259
Less:
Additions to capitalized software (7,391) (7,497)
------- -------
Product development expense $12,870 $10,762
======= =======
Product development expenditures increased $2.0 million, or 11.0%, in 1998 as
compared to 1997 and were 20.0% and 25.6% of total revenues in 1998 and 1997,
respectively. Additions to capitalized software decreased $0.1 million, or 1.4%,
in 1998 as compared to 1997 and were 36.5% and 41.1% of product development
expenditures in 1998 and 1997, respectively. The increase in product development
expenditures in 1998 is primarily attributable to inclusion of a full year of
Revere operations.
AMORTIZATION OF CAPITALIZED SOFTWARE
Capitalized software amortization in 1998 was $5.0 million, an increase of $0.5
million, or 10.8%, as compared to 1997. The increase in 1998 was due primarily
to inclusion of a full year of Revere operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses in 1998 were $12.4 million, an increase of
$3.9 million, or 46.2%, as compared to 1997. As a percentage of total revenues,
general and administrative expenses were 12.3% and 11.9% in 1998 and 1997,
respectively. The absolute dollar increase in 1998 is partially due to
inclusion of a full year of Revere operations together with increased
professional fees and facilities costs.
INCOME TAX EXPENSE
In 1998, the Company provided income taxes equal to 38% on pretax income of $7.3
million. In 1997, the Company provided income taxes of $1.3 million on pretax
losses of $2.2 million reflecting the write off of in-process research and
development costs of $4.6 million for which no tax benefit is recorded. The
Company's tax provisions for both years include the generation, expiration, and
true up of tax credits and net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 1999, the Company's principal sources of liquidity included
cash, cash equivalents and short- and long-term investments aggregating $22.0
million.
The Company's operating activities provided cash of $6.8 million in 1999, $5.9
million in 1998 and used cash of $1.4 million in 1997. The net loss in 1999 of
$37.8 million includes $22.9 million of non-cash charges related to impairment
of certain capitalized software and goodwill and increases in valuation
allowances for net deferred tax assets. Also, in 1999, improved cash management
and collections contributed to the improvement in cash flows from operations.
In 1998, the Company's net income was the primary reason for the increase in
cash provided for the year as compared to 1997, partially offset by increases in
accounts receivable associated with the increased revenue in 1998. Increases in
accounts receivable balances reduced cash flows from operations in 1997.
16
Financing activities used cash of $0.2 million and $1.1 million in 1999 and
1998, respectively, and provided $0.3 million in 1997. In 1999, 1998 and 1997,
proceeds from the issuance of stock under the Company's employee stock purchase
plan and proceeds from stock options exercised provided $1.1 million, $2.8
million and $2.3 million in cash, respectively. The Company used cash in the
amount of $1.0 million, $2.4 million and $2.0 million for the purpose of
repurchasing Company stock. All stock repurchases were made pursuant to
resolutions of the Company's Board of Directors in 1995 authorizing the
repurchase of the Company's outstanding shares of common stock, not to exceed a
total cost of $17.5 million. Through December 31, 1999, the Company had acquired
1,059,500 shares of its common stock at an aggregate cost of $11.1 million. As
of December 31, 1999, the Company had reissued 1,048,462 of the repurchased
shares in connection with the Company's employee stock purchase plan, one of its
employee stock option plans, and the acquisition of Revere.
The Company has a line of credit in the amount of $6.0 million, secured by
marketable securities. The line of credit expires on March 31, 2000. The Company
has no outstanding borrowings under this line of credit at December 31, 1999.
In connection with the December 1997 acquisition of Revere, the Company assumed
a line of credit with an outstanding balance of $1.5 million. The outstanding
balance on the assumed line of credit was subsequently paid in full in January
1998.
The Company believes that its principal sources of liquidity, together with
funds expected from operations, will satisfy the Company's currently anticipated
working capital and capital expenditure requirements for at least the next
twelve months. There can be no assurance that the Company will not need to raise
additional capital to fund operations within this period. The Company may seek
additional funding through public or private equity or debt financing. There can
be no assurance that additional financing can be obtained on acceptable terms,
or at all. If additional funds are raised by issuing equity securities, dilution
to stockholders may result. If adequate funds are not available our business may
be harmed.
ADDITIONAL RISK FACTORS
- -----------------------
The Company operates in a rapidly changing environment that involves numerous
risks and uncertainties which could have a material adverse effect on the
Company. The following discussion details some, but not all, of these risks and
uncertainties.
FLUCTUATION IN OPERATING RESULTS
The Company's operating results fluctuate as a result of a variety of factors
including:
(i) the execution of new license agreements;
(ii) the shipment of software products;
(iii) customer acceptance criteria for services performed;
(iv) completion of milestone or other significant development requirements
pursuant to the Company's license agreements;
(v) the financial terms of consulting agreements and the inclusion of fixed
as opposed to variable pricing;
(vi) third-party royalty payments for licensed software;
(vii) the demand for the Company's products and services;
(viii) changes in the Company's product mix;
(ix) the development and launch of new products, and the life cycles of the
Company's existing products;
(x) research and development expenditures required to update and expand the
Company's product portfolio and related third-party consulting costs;
(xi) sales and marketing expenses generally related to the entry into new
markets with new or existing products and maintenance of market share in
existing markets;
(xii) acquisitions and the integration and development of acquired entities or
products;
(xiii) competitive conditions in the industry; and
(xiv) general economic conditions.
17
As a result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
The Company's quarterly operating results are particularly dependent on the
number of license agreement bookings executed in each quarter. The amount of
quarterly bookings has varied substantially from quarter to quarter due to a
variety of reasons including:
(i) a high proportion of license agreements are negotiated during the latter
part of each quarter and these negotiations may not be completed before
the quarter end ;
(ii) the sales cycles for some of the Company's products are relatively long
due to the Company's focus on "enterprise solutions" as opposed to
individual products, which adds complexity to the customer's selection,
negotiation and approval process;
(iii) the amount related to each booking may vary significantly due to the
need for different solutions for different customers;
(iv) procurement procedures may vary from customer to customer, which may
affect the timing of the bookings;
(v) a customer may forego or delay software purchases due to increased
attention and spending on Year 2000 related projects;
(vi) the period for a customer to complete product evaluations and to
complete any subsequent purchase approval may be delayed due to resource
limitations; and
(vii) economic, political and industrial conditions can adversely affect
business opportunities without notice.
In addition, bookings that are executed during a particular quarter may not be
recognized as revenue during such quarter because such bookings may not have met
the Company's revenue recognition criteria. No assurance can be given that the
Company will be able to effect new bookings in accordance with historical
results or management's expectations, and the inability of the Company to do so
could have a material adverse effect on the Company's operating results.
While the Company typically sells its software under a standard license
agreement, license agreements associated with large enterprise solutions often
require the negotiation of terms and conditions that differ substantially from
the Company's standard license agreement terms. The negotiation of these
agreements may extend the sales cycle. The Company may not always obtain terms
and conditions that permit the recognition of revenue upon shipment of the
licensed product or under the percentage of completion method of contract
accounting rules. Accordingly, revenue may not be recognized after shipment of a
product because specified milestones have not been met or because applicable
services have not been completed.
The Company has and expects to enter into fixed-price consulting agreements,
particularly in response to increased competition in the industry. The Company
has recognized lower profit margins on certain fixed-price service agreements
when compared to variable agreements. No assurance can be given that the Company
will be able to conclude fixed-price agreements on terms that will allow the
Company to retain its historical operating margins.
The Company has historically generated a majority of its consulting revenue from
pre- and post-implementation services. The Company has provided services that
include, but are not limited to, Year 2000 readiness engagements, best practice
solution engagements and other hardware and software solutions. The Company
intends to continue its pursuit of consulting engagements for which the Company
believes it is qualified. There can be no assurances that these engagements will
result in profit margins equal to or greater than those engagements that are
specific to a customer's product implementation. Also, there can be no
assurances that consulting revenue generated from non-implementation related
projects will continue in the future.
Employee and facility related expenditures comprise a significant portion of the
Company's operating costs and expenses, and are therefore relatively fixed over
the short term. In addition, the Company's expense levels are based, in
significant part, on the Company's forecasted revenue. If revenue levels fall
below expectations, operating results are likely to be adversely affected.
There can be no assurance that the Company will be able to achieve profitability
on a quarterly or annual basis in the future. Any of the foregoing factors could
cause the Company's future operating results to fall below the expectations of
public securities market analysts, which could have an adverse effect on the
trading price of the Company's common stock. See "Volatility of Stock Price."
18
RELIANCE ON THIRD PARTY TECHNOLOGY
The Company generates revenue from internally developed software products, some
of which utilize technology licensed from third parties. The Company expects to
continue utilizing third party technology and may enter into agreements with
additional business partners. If sales of software utilizing third party
technology increase disproportionately, gross margins may be below historical
levels due to third party royalty obligations. There can be no assurances that
the third parties will renew existing agreements with the Company or will not
require financial conditions that are unfavorable to the Company. In addition,
there can be no assurances that existing third party agreements will not be
terminated.
INDUSTRY
Certain software companies, including the Company, have experienced significant
economic downturns as a result of technological shifts and competitive
pressures. These downturns are characterized by decreased product demand, price
erosion, work slowdowns and layoffs. The Company's operations may, in the
future, experience substantial fluctuations from period to period because of
such industry patterns and general economic and political conditions which could
affect the timing of orders from customers. There can be no assurance that such
factors will not have a materially adverse effect on the Company's business,
operating results or financial condition.
INTERNATIONAL
The Company will continue its presence in international markets by marketing its
B2B e-business solutions for the enterprise to Global 2000 organizations. Risks
associated with such pursuits include, but are not limited to, the following:
changing market demands, economic and political conditions in foreign markets,
foreign exchange fluctuations, longer collections cycles, difficulty in managing
a geographically dispersed organization and changes in international tax laws.
The downturn in the Asia Pacific business climate had an adverse effect on some
market opportunities. Operating results are likely to be adversely affected if
the Company's operations in international markets are not successful.
COMPETITION
The business and financial applications software market for large, complex
organizations is intensely competitive. The Company's principal competitors
with Tamaris and e-business solutions are SAP AG, Oracle Corporation and
PeopleSoft, Inc. With Aptos solutions, the Company principally competes with
Oracle Corporation, Lawson Software, Inc., Platinum Software, Inc., Systems
Union Group Ltd and Agresso AS. With the Horizon suite of products, the Company
principally competes with Hyperion Solutions Corporation, Oracle Corporation and
Comshare, Inc. With the IMMPOWER suite of products, the Company principally
competes with Datastream/SQL, Indus International, Marcam, Mincom, PSDI and SAP
AG.
The Company also competes to a lesser extent with other independent software
application vendors. Some of the Company's current and potential competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. Some of these competitors also offer business application
products not offered by the Company, primarily in the areas of human resources
and manufacturing. However, Walker remains one of the few companies committed
to providing and enhancing applications for the mainframe environment. Most of
the competitors listed above compete with Walker by offering UNIX-based
applications.
The Company encounters competition from a broader range of firms in the market
for professional services. Principal competitors include consulting firms
Andersen Consulting and IBM Global Services, the consulting divisions of the
major accounting firms, all of which possess greater resources than the Company,
and niche-consulting firms that specialize in the Company's products and compete
primarily on the basis of price of services provided.
The principal competitive factors in the market for business and financial
applications software and services include product functionality, flexibility,
portability, integration, reliability, performance, product availability, speed
of implementation, quality of customer support and user documentation, vendor
reputation, experience, financial stability, cost effectiveness and price. The
Company believes that it competes favorably with respect to these factors.
There can be no assurance, however, that the Company will be able to compete
successfully in the future.
19
RAPID TECHNOLOGICAL CHANGE
The software industry is characterized by rapid technological change. The pace
of change has accelerated due to advances in mainframe and client/server
technology and the growth in Internet, Intranet and extranet utilization. The
Company expects to evaluate potential opportunities and may invest in those that
are compatible with the Company's strategic direction. However, there can be no
assurance that any such investments will be profitable. The Company's products
are also designed primarily for use with certain mainframe and client/server
systems. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete.
Accordingly, the Company's future success depends in part upon its ability to
continue to enhance its current products and to develop and introduce new
products that respond to evolving customer requirements and keep pace with
technological development and emerging industry standards, such as new operating
systems, hardware platforms, interfaces and third party applications software.
There can be no assurances that:
(i) the Company will be successful in developing and marketing product
enhancements or new products that respond to technological change,
changes in customer requirements or emerging industry standards;
(ii) the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of such products
and enhancements; or
(iii) any new products or enhancements that it may introduce will achieve
market acceptance.
PRODUCT DEVELOPMENT
The Company's continued success is dependent on its continued ability to
introduce, develop and market new and enhanced versions of its software
products, although there can be no assurance that such ability can be
maintained. The Company plans to continue its investment in product development
in future periods. However, there can be no assurance that revenues will be
sufficient to support the future product development that is required for the
Company to be competitive. Although the Company may be able to release new
products in addition to enhancements to existing products, there can be no
assurance that the Company's new or upgraded products will be accepted, will not
be delayed or canceled, or will not contain errors or "bugs" that could affect
the performance of the product or cause damage to users' data.
PROPRIETARY RIGHTS
The Company regards its products as proprietary. Through its license agreements
with customers and its internal security systems, confidentiality procedures and
employee agreements, the Company has taken steps to maintain the trade secrecy
of its products. However, there can be no assurances that misappropriation will
not occur. In addition, the laws of some countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the confidentiality of any proprietary information will
provide any meaningful competitive advantage. The Company has no patents
relating to its products. The Company believes that, because of the rapid pace
of technological change in the computer software industry, that patents and
copyrights are less significant than factors such as the knowledge, ability and
experience of the Company's employees, frequent product enhancements and the
timeliness and quality of support services. There can be no assurance that the
Company's current efforts to retain its products as proprietary will be
adequate.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products or that any such assertions will not
require the Company to enter into royalty arrangements or result in costly
litigation.
PRODUCT LIABILITY
The Company's license agreements with its customers contain provisions designed
to limit the Company's exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in such
license agreements may not be enforced as a result of international, federal,
state and local laws or ordinances or unfavorable judicial decisions. The
license and support of the Company's software for use in mission critical
applications creates the risk of product liability claims against the Company.
Damage liability or injunctive relief resulting from such a claim could cause a
materially adverse impact on the Company's business, operating results and
financial condition.
20
EMPLOYEES
The Company believes that its continued success will depend in large part upon
its ability to attract, train and retain highly skilled technical, sales,
marketing and managerial personnel. The Company continues to hire a significant
number of sales, marketing, services and technical personnel. Because of the
high level of demand, competition for such personnel is intense and the Company
sometimes experiences difficulty in locating candidates with appropriate
qualifications or within desired geographic locations. Revenue growth is
dependent on the Company's ability to attract, train, retain and productively
manage such personnel.
EXPANSION OF FACILITIES
Commercial building vacancy rates are very low in San Francisco, California,
where the Company has its headquarters. The Company's San Francisco office lease
expires in 2007. However, the Company may experience difficulty obtaining
additional space if the Company's space requirements in San Francisco
significantly exceed the quantity of space the Company currently has under
lease. In addition, the increased demand for office space has caused commercial
rental rates to increase substantially. Failure to either obtain additional
space, or obtain it on reasonably attractive commercial terms, may inhibit the
Company's ability to grow or otherwise adversely affect the Company's operations
and financial results.
ACQUISITION-RELATED RISKS
The Company has acquired and may continue to acquire complimentary businesses,
products or technology. The process of integrating an acquired company's
business into the Company's operations may result in unforeseen operating
difficulties and expenditures and may require significant management attention
that would otherwise be available for the ongoing development of the Company's
business. There can be no assurance that any anticipated benefits of an
acquisition will be realized. Future acquisitions by the Company could result
in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and amortization related to goodwill and other
intangible assets, which could materially affect the Company's operating results
and financial condition. Acquisitions involve numerous risks, including
difficulties in the assimilation of operations, technologies and products of the
acquired company, risks associated with entering markets in which the Company
has no or limited direct prior experience and the potential loss of key
employees of the acquired company.
VOLATILITY OF STOCK PRICE
Technology companies, including the Company, frequently experience volatility in
their common stock prices. Factors such as quarterly fluctuations in results of
operations, announcements of technological innovations by the Company or its
competitors or the introduction of new products by the Company or its
competitors and macroeconomic conditions in the computer hardware and software
industries generally may have a significant adverse impact on the market price
of the Company's stock. If revenues or earnings in any quarter fail to meet the
expectations of the investment community, there could be an immediate impact on
the Company's stock price. In addition, the Company has issued shares and stock
options, which, if sold directly or exercised and sold on the open market in
large concentrations, could cause the Company's stock price to decline in the
short term. Furthermore, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market price for many technology companies, in some cases unrelated to the
operating performance of those companies. These broad market fluctuations may
materially adversely affect the market price of the stock of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has U.S. dollar interest-bearing investments that are subject to
interest rate risk. The Company analyzed its investments at year-end to
determine the sensitivity to interest rate changes. The fair values of these
instruments were determined by net present values. The Company's sensitivity
analysis used the same change in interest rates for all maturities. All other
factors were held constant. If interest rates increased by 10 percent, the
expected effect on net income related to the Company's investments would be
immaterial.
The majority of the Company's revenues are denominated in the U.S. dollar. The
Company does not engage in interest rate swaps or enter into foreign currency
forward contracts.
21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................................... 23
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998............................ 24
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997............ 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.. 26
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............ 27
Notes to Consolidated Financial Statements............................................................ 28
22
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Walker Interactive Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Walker
Interactive Systems, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audit also included the consolidated financial statement schedule listed in item
14(a)2. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Walker Interactive Systems, Inc.
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 7, 2000
23
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
DECEMBER 31, DECEMBER 31,
1999 1998
ASSETS
Current assets:
Cash and equivalents $ 9,187 $ 15,556
Short-term investments 6,642 5,135
Accounts receivable, net of allowance for doubtful
accounts of $4,554 in 1999 and $1,378 in 1998 17,368 29,009
Prepaid expenses 2,471 2,347
Other receivables 812 1,448
----------------- ------------------
Total current assets 36,480 53,495
Long-term investments 6,185 1,906
Property and equipment, net 4,169 4,962
Capitalized software, net of accumulated amortization
of $47,379 in 1999 and $34,555 in 1998 10,653 18,186
Deferred tax assets, net - 12,501
Other assets 463 4,047
----------------- ------------------
Total assets $ 57,950 $ 95,097
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,203 $ 5,435
Accrued liabilities 12,788 13,061
Deferred revenue 17,168 14,819
----------------- ------------------
Total current liabilities 34,159 33,315
Deferred revenue 1,697 1,600
Other long-term obligations 2,975 3,131
----------------- ------------------
Total liabilities 38,831 38,046
----------------- ------------------
Commitments and contingencies (see Note 10)
Stockholders' equity:
Common stock, $.001 par value: 50,000 shares authorized;
issued 14,257 shares - December 31, 1999;
14,185 shares - December 31, 1998 14 14
Additional paid-in capital 74,566 74,719
Accumulated other comprehensive income 33 232
Accumulated deficit (55,450) (17,662)
Treasury stock, at cost (26 shares and 49 shares at December 31,
1999 and 1998, respectively) (44) (252)
----------------- ------------------
Total stockholders' equity 19,119 57,051
----------------- ------------------
Total liabilities and stockholders' equity $ 57,950 $ 95,097
================= ==================
See notes to consolidated financial statements
24
WALKER INTERACTIVE SYSTEM , INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- ----------
REVENUES:
License $14,565 $22,291 $16,478
Maintenance 31,322 31,248 27,658
Consulting 42,091 47,874 27,273
---------- ---------- -----------
Total revenues 87,978 101,413 71,409
OPERATING EXPENSES:
Costs of revenues:
Costs of licenses, maintenance and consulting 41,864 41,944 28,856
Amortization of capitalized software 5,388 4,963 4,479
Sales and marketing 21,895 22,973 16,929
Product development 14,210 12,870 10,762
General and administrative 15,581 12,439 8,511
Write-off of purchased in-process
research and development - - 4,600
Impairment of capitalized
software and goodwill 10,427 - -
Distributor termination charge - - 1,291
Restructuring charge 4,518 - -
---------- ---------- -----------
Total operating expenses 113,883 95,189 75,428
Operating income(loss) (25,905) 6,224 (4,019)
Interest income, net 1,018 1,042 1,840
---------- ---------- -----------
Income (loss) before income taxes (24,887) 7,266 (2,179)
Provision for income taxes 12,901 2,741 1,298
---------- ---------- -----------
NET INCOME (LOSS) ($37,788) $4,525 ($3,477)
========== ========== ===========
BASIC NET INCOME (LOSS) PER SHARE ($2.67) $0.32 ($0.26)
=========== ========== ===========
Shares utilized to compute basic net income (loss) per share 14,154 14,012 13,291
=========== ========== ===========
DILUTED NET INCOME (LOSS) PER SHARE ($2.67) $0.31 ($0.26)
=========== ========== ===========
Shares utilized to compute diluted net income (loss) per share 14,154 14,688 13,291
=========== ========== ===========
See notes to consolidated financial statements
25
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK TREASURY STOCK PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY
------ ------ -------- -------- ----------- ------------- ----------- -------------
Balance at January 1, 1997 13,494,487 $13 (397,194) ($4,753) $70,008 $214 ($18,710) $46,772
Common stock issued under
stock option and employee
stock purchase plans 300,442 1 86,700 993 1,335 2,329
Common stock issued for
Revere acquisition 178,528 455,494 5,748 1,979 7,727
Treasury stock acquired (145,000) (1,988) (1,988)
Tax benefit from exercise
of stock options 300 300
Comprehensive income (loss):
Currency translation
adjustment (15)
Unrealized gain on
investments 41
Net loss for 1997 (3,477)
Total comprehensive
(loss) (3,451)
---------- ----- --------- -------- --------- ------------ ---------- ----------
Balance at December 31, 1997 13,973,457 14 - - 73,622 240 (22,187) 51,689
Common stock issued under
stock option and employee
stock purchase plans 211,594 160,703 2,165 626 2,791
Treasury stock acquired (200,000) (2,417) (2,417)
Tax benefit from exercise
of stock options 475 475
Other (366) (9,910) (4) (4)
Comprehensive income (loss):
Currency translation
adjustment (21)
Unrealized gain on
investments 13
Net income for 1998 4,525
Total comprehensive
income 4,517
------------- ----- ---------- -------- ----------- ------------ ---------- ------
Balance at December 31, 1998 14,184,685 14 (49,207) (252) 74,719 232 (17,662) 57,051
Common stock issued under
stock option and employee
stock purchase plans 72,500 245,616 1,260 (153) 1,107
Treasury stock acquired (222,500) (1,052) (1,052)
Comprehensive income (loss):
Currency translation
adjustment (116)
Unrealized (loss) on
investments (83)
Net loss for 1999 (37,788)
Total comprehensive
income (37,987)
------------- ----- ---------- -------- ----------- ------------- ---------- -------
Balance at December 31, 1999 14,257,185 $14 (26,091) ($44) $74,566 $33 ($55,450) $19,119
============= ===== ========== ======== =========== ============= ========== =======
26
WALKER INTERACTIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($37,788) $4,525 ($ 3,477)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 8,282 8,446 6,922
Provision for losses on accounts receivable 3,176 2 (208)
Deferred tax provision 12,501 1,131 557
Impairment of capitalized software and goodwill 10,427 - -
Write-off of purchased in-process research and development - - 4,600
Changes in operating assets and liabilities:
Accounts receivable 9,101 (7,351) (8,358)
Prepaids and other assets (124) (346) (691)
Accounts payable (1,232) (523) 2,129
Accrued liabilities (134) 336 (2,236)
Deferred revenue 2,446 (327) (1,206)
Other 103 32 575
---------- --------- ---------
Net cash provided (used) by operations 6,758 5,925 (1,393)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan
issuances and stock options exercised 1,107 2,787 2,329
Treasury stock acquired (1,052) (2,417) (1,988)
Capital lease payments (295) (74) (2)
Repayment of borrowings - (1,422) -
---------- ------- ---------
Net cash provided (used) by financing activities (240) (1,126) 339
---------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short- and long-term investments (14,771) (4,449) (29,444)
Maturities of short-term investments 7,375 10,950 12,916
Sales of short-term investments 1,507 6,506 21,125
Purchases of property (2,031) (2,533) (2,192)
Additions to capitalized software (5,052) (7,391) (7,497)
Cash acquired from Revere acquisition - - 222
Other 85 28 95
---------- ------- ---------
Net cash provided (used) by investing activities (12,887) 3,111 (4,775)
---------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,369) 7,910 (5,829)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,556 7,646 13,475
---------- -------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,187 $ 15,556 $ 7,646
========== ======== =========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash paid for income taxes $1,334 $ 299 $ 102
Non-cash activities:
Common stock issued for Revere acquisition $ - $ - $7,727
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
DESCRIPTION OF THE COMPANY. Walker Interactive Systems, Inc. (hereinafter
"Walker" or the "Company") was incorporated in California in 1973 and
reincorporated in Delaware in March 1992. Walker designs, develops,
markets and supports, on a worldwide basis, a family of enterprise
financial, operational and analytical software products that enable large
and medium-sized organizations, higher education institutions, and federal,
state and government agencies to optimize their business processes, reduce
business costs, and improve management information needed to run their
business. The Company derives its revenues primarily from software
licensing, software maintenance and professional consulting services. The
Company's Tamaris, Horizon and IMMPOWER product lines are licensed to large
and mid-size companies and similarly sized governmental organizations
worldwide. The Company's Aptos products are marketed primarily in Europe
and are licensed to mid-sized organizations. The Company's products and
services are marketed primarily through its direct sales forces located in
the United States and the United Kingdom. The Company licenses software
products directly to customers and occasionally to distributors for resale.
During the second quarter of 1999, Walker changed its strategic direction
to emphasize the Tamaris and Horizon product lines, concentrating on
refocusing the Company as a provider of e-business solutions. In
refocusing its resources and efforts on e-business solutions for the
enterprise, the Company incurred impairment and restructuring charges and
commenced the process of divesting its IMMPOWER and Aptos product lines
(see Note 3: Impairment and Restructuring Charges and Note 4: Acquisitions
and Divestitures). As a part of its strategic redirection , Walker
redesigned its software products specifically for the Internet architecture
and business to business ("B2B") e-business models. During the third
quarter of 1999, Walker released a range of e-business solutions based on
the Tamaris and Horizon products.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Walker Interactive Systems, Inc. and its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those
estimates.
Significant estimates used in the consolidated financial statements include
the estimates of (i) collectability of accounts receivable, (ii)
anticipated future gross revenues from the products for which development
costs have been capitalized, (iii) expense accruals associated with the
termination of exclusive distributor agreements, office consolidations and
sales and use taxes, (iv) provisions for estimated losses on contracts, (v)
the life of identifiable intangible assets from acquisitions and (vi)
realization of deferred tax assets. The amounts that the Company will
ultimately incur or recover could differ materially from the Company's
current estimates. The underlying estimates and facts supporting these
estimates could change in 2000 and thereafter.
CAPITALIZED SOFTWARE. Capitalized software includes certain costs of
purchased and internally developed software, and is stated at the lower of
cost or net realizable value. Capitalization of internally developed
software begins upon the establishment of technological feasibility.
Amortization of capitalized development costs begins when the products are
available for general release to customers, and is computed as the greater
of (i) the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues for the product, or (ii) the
straight-line method over the remaining estimated economic life of the
product. It is possible that these estimates of anticipated future gross
revenues, the remaining estimated economic life of the products, or both,
could be reduced significantly due to either competitive factors or the
rate of technological change.
28
On October 1, 1999, the Company changed its estimated useful life for
capitalized software from three years to two years. The change was
implemented prospectively. This change in estimate did not have a material
impact on the Company's operating results or financial condition for the
year ended December 31, 1999.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is computed primarily utilizing the straight-line method over
the estimated useful lives that range from three to ten years. Leasehold
improvements are amortized utilizing the straight-line method over the
lesser of the estimated useful lives or remaining lease terms.
REVENUE RECOGNITION. The Company licenses software to end users under non-
cancelable license agreements and provides services such as installation,
implementation, training, and software maintenance. Software license
revenue for contracts not requiring significant customization services is
recognized upon meeting each of the following criteria: an executed
agreement has been signed; products have been shipped; the license fee is
fixed and determinable; collection of the resulting receivable is probable;
and vendor-specific objective evidence exists to allocate the total fee to
any undivided elements of the arrangement. Vendor-specific objective
evidence is based on the price generally charged when an element is sold
separately, or if not yet sold separately, is established by authorized
management. Software license revenue from contracts requiring the Company
to perform significant customization services are recognized on the
percentage-of-completion method. Provisions for estimated losses on
contracts are made in the period in which the anticipated losses become
known. Actual costs and gross margins on such contracts could differ from
management's estimates, and such differences could be material to the
financial statements. Maintenance revenue is recognized ratably over the
maintenance period, generally one year. Revenue from consulting and other
services are recognized as the related services are provided.
CONCENTRATION OF CREDIT RISK. The Company's investment portfolio is
diversified and consists of short- and long-term investment grade
securities. The Company's accounts receivable are derived from sales to
customers located in the United States, Canada, Europe and Asia Pacific.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains reserves for potential losses.
TRANSLATION OF FOREIGN CURRENCIES. The functional currency of the Company's
foreign subsidiaries is the respective local currency. Accordingly, assets
and liabilities of the foreign subsidiaries are translated to U.S. dollars
at the exchange rates in effect as of the balance sheet date and results of
operations for each subsidiary are translated using average rates in effect
for the period presented. Gains and losses from translation of foreign
subsidiaries' financial statements are reported as a separate component of
stockholders' equity. Gains and losses from transactions denominated in
currencies other than the functional currencies of the Company or its
subsidiaries are included in general and administrative expense and have
not been significant.
EARNINGS PER SHARE. Basic EPS is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
29
CERTAIN SIGNIFICANT RISKS AND UNCERTAINITIES. The Company operates in the
software industry, and accordingly, can be affected by a variety of
factors. For example, management believes that the Company's inability to
appropriately manage any of the following areas could have a significant
negative effect on the Company's future financial position, results of
operations and cash flows: focusing the Company's strategy around the e-
business market; market acceptance of the Company's products developed and
under development for the B2B e-business market; fundamental changes in the
technology underlying software products; development and management of
strategic alliances; and the hiring and retention of key employees.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998 and June 1999, the
Financial Accounting Standards Board issued Statement of Financial
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". These statements define derivatives, require that all
derivatives be carried at fair value and provide for hedge accounting
when certain conditions are met. SFAS No. 133, as amended, is effective
for the Company for its fiscal year ending 2001. Although the Company has
not fully assessed the implications of SFAS No. 133, the Company does not
believe that adoption of this statement will have a material impact on
the Company's financial position or results of operations.
STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for its fixed cost stock option plans or its
associated stock purchase plan. The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards
No.123, "Accounting for Stock Based Compensation" ("SFAS 123").
RECLASSIFICATIONS. Certain reclassifications have been made to prior
years' amounts in order to conform to the 1999 consolidated financial
statement presentation.
2. COMPREHENSIVE INCOME (LOSS)
---------------------------
The components of comprehensive income(loss) are as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------------- ----------------- -----------------
Net income (loss) ($37,788) $4,525 ($3,477)
Currency translation adjustment (116) (21) (15)
Unrealized gain/(loss) on investments (83) 13 41
----------------- ----------------- -----------------
Total comprehensive income (loss) ($37,987) $4,517 ($3,451)
================= ================= =================
3. IMPAIRMENT AND RESTRUCTURING CHARGES
------------------------------------
During the quarter ended June 30, 1999, the Board of Directors approved a
plan to realign Walker's focus on its core financial and analytic
applications. Associated with this change in strategy, the Board of
Directors approved steps to restructure its operations to increase
operating efficiencies. The Company will focus on the Tamaris and Horizon
product lines, specifically investing in Web-enabled functionality. As part
of refocusing its resources and efforts on e-business solutions for the
enterprise, in February 2000 the company announced its intention to begin
the process of divesting its IMMPOWER
30
and Aptos product lines. During the year ended December 31, 1999, the
Company recorded a pretax charge of $14,945 in connection with this change
in strategic direction and the related costs of restructuring.
The Company evaluates capitalized software carrying amounts and goodwill
against related estimated undiscounted cash flows. During the year ended
December 31, 1999 the evaluation, considering the change of strategic
direction, indicated that the future undiscounted cash flows were not
sufficient to recover the carrying values of certain assets. Capitalized
software costs were adjusted to estimated net realizable value resulting in
a charge of $7,212, of which $5,388 was associated with IMMPOWER and Aptos
capitalized software costs, and an additional $1,824 related to other
capitalized software costs which had no future value. In addition, the
Company wrote off $3,215 of goodwill associated with these products.
Costs associated with office consolidations in Europe, North America and
Asia resulted in a total charge of $4,518 during the year ended December
31,1999. This was required to cover costs of reducing certain areas of the
workforce and facilities to levels more appropriate to current and expected
business requirements. Of this amount, a charge of $2,478 was recognized to
cover costs associated with excess facilities. The Company intends to
continue to search for tenants to sublet any vacant or excess facilities.
The Company also recognized a charge of $2,040 due to the reduction in the
workforce. A total of 79 employees were terminated during the year ended
December 31,1999 as a result of the Company's realignment strategy. Of the
total, 18 were in product development, 14 were in administrative and
finance positions, and 37 were engaged in sales and marketing, and 10 were
in customer support. All terminated employees were informed of their
terminations by December 31, 1999.
Restructuring and impairment charges taken during the year ended December
31,1999 and related charges against respective liabilities as of December
31,1999 are as follows:
Restructuring Expected Expected
and Charges to Balance at charges to balance at
impairment liability December 31, liability December 31,
charges in 1999 1999 in 2000 2000
------------- ---------- ------------ ---------- ------------
Termination payments to employees $ 2,040 $ (1,198) $ 842 $ (781) $ 61
Facility closures 2,478 (751) 1,727 (372) 1,355
Impairment of capitalized software 7,212 (7,212) -- -- --
Goodwill impairment 3,215 (3,215) -- -- --
------- -------- ------ ------- ------
$14,945 $(12,376) $2,569 $(1,153) $1,416
======= ======== ====== ======= ======
Subsequent to December 31, 1999, the remaining expected charges against
liabilities are attributable to remaining termination payments to employees
and future lease payments on excess facilities which expire on various
dates through 2009.
In 1997, the Company terminated an exclusive distributorship agreement in
South Africa that resulted in a charge of $1,291.
4. ACQUISITIONS AND DIVESTITURES
-----------------------------
On December 2, 1997, the Company acquired all the outstanding share capital
of Revere, Inc. ("Revere") in exchange for $7,727 of the Company's common
stock (634,022 shares) and $587 for various transaction related costs and
fees. The Company allocated $4,091 to goodwill, $4,600 was allocated to
in-process software development, and the remaining amounts were allocated
primarily to working capital. The amount of the purchase price allocated to
in-process software development was charged to the Company's
31
1997 results of operations, because technological feasibility had not been
established and no alternative future uses existed at the acquisition date.
The acquisition was accounted for as a purchase transaction.
The following unaudited pro forma information has been presented as if the
Revere acquisition had occurred on January 1997. The unaudited pro forma
information is based on historical results of operations adjusted for
acquisition costs and, in the opinion of management, is not necessarily
indicative of what results would have been if the Company had acquired
Revere, Inc. on January 1, 1997.
1997
-----------
Total revenues $79,869
Net loss (6,517)
Basic and diluted net loss per share ($0.47)
Shares utilized to compute basic and diluted
net loss per share 13,925
In February 2000, as part of refocusing its resources and efforts on e-
business solutions for the enterprise, the Company announced its intentions
to begin the process of divesting its IMMPOWER and Aptos product lines.
Revenues associated with the IMMPOWER and Aptos product lines were $13,627,
$15,674, and $4,359 in 1999,1998, and 1997, respectively.
5. CASH AND CASH EQUIVALENTS AND SHORT- AND LONG-TERM INVESTMENTS
--------------------------------------------------------------
All liquid investments with original maturities of three months or less are
considered cash and cash equivalents. Cash equivalents are stated at cost,
which approximates fair value. The Company classifies those investments
that mature in less than one year as short-term investments. The long-term
marketable securities held at December 31, 1999 have contractual maturities
of three years or less. The Company's short- and long-term investments are
classified as available-for-sale and reported at fair value. Net unrealized
gains and losses are excluded from earnings and reported net of income
taxes as accumulated other comprehensive income in stockholders' equity.
Realized gains and losses are computed based on the amortized cost of each
security. There were no material gross realized gains or losses from the
sale of investments during the three year period ended December 31, 1999.
Short- and long-term investments available-for-sale are summarized as
follows:
Gross Gross
Unrealized Unrealized
December 31, 1999 Amortized Costs Gains Losses Fair Value
- ----------------------------------------------- --------------- ---------- ---------- ----------
Short-term investments $ 6,657 $ -- $(15) $ 6,642
Long-term investments 6,235 -- (50) 6,185
------- ---- ---- -------
Total $12,892 $ -- $(65) $12,827
======= ==== ==== =======
Gross Gross
Unrealized Unrealized
December 31, 1998 Amortized Costs Gains Losses Fair Value
- ----------------------------------------------- --------------- ---------- ---------- ----------
Short-term investments $5,131 $ 5 $(1) $5,135
Long-term investments 1,895 12 (1) 1,906
------ --- --- ------
Total $7,026 $17 $(2) $7,041
====== === === ======
32
6. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at December 31, 1999 and 1998 includes the
following:
DECEMBER 31,
1999 1998
-------- --------
Equipment $ 21,169 $ 20,032
Furniture and fixtures 2,534 2,580
Leasehold improvements 1,668 1,787
Property under capital leases:
Equipment 2,182 2,189
Furniture 1,760 1,760
-------- --------
29,313 28,348
Less:
Accumulated depreciation (25,144) (23,386)
-------- --------
Property and equipment, net $ 4,169 $ 4,962
======== ========
Depreciation expense totaled $2,615, $2,552 and $2,444 for 1999, 1998 and
1997, respectively.
7. LIABILITIES
-----------
Accrued liabilities are comprised of the following:
DECEMBER 31,
1999 1998
-------- --------
Salaries, commissions, and other
compensation $ 3,964 $ 5,022
Federal, state, foreign and other taxes 2,297 3,177
Accrued facilities expenses 845 753
Royalties 781 1,272
Current portion of capital leases 156 161
Other accrued expenses 4,745 2,676
------- -------
$12,788 $13,061
======= =======
Other long-term obligations are comprised of the following:
DECEMBER 31,
1999 1998
--------- --------
Accrued facilities expenses $1,533 $ --
Long term portion of capital leases 146 290
Income taxes -- 591
Other 1,296 2,250
--------- --------
$2,975 $3,131
========= ========
Deferred revenue (current) is primarily comprised of deferred software
maintenance of $15,428 and $13,470 at December 31, 1999 and 1998,
respectively.
33
8. INCOME TAXES
------------
The Company's deferred tax balances at December 31, 1999 and 1998 are as
follows:
DECEMBER 31,
1999 1998
-------- --------
Deferred Tax Assets:
Deferred revenue recognized for tax $ 302 $ 225
Excess book depreciation over tax depreciation 594 784
Accrued liabilities and reserves 3,119 2,606
Research and development credits 2,972 3,290
Alternative minimum tax credit carryforwards 491 488
Net operating loss carryforwards 9,538 4,775
Foreign tax credits carryforwards 3,413 3,176
Foreign losses 2,837 3,588
Other 464 304
-------- --------
23,730 19,236
Valuation allowance (21,896) (2,844)
-------- --------
1,834 16,392
Deferred Tax Liabilities:
Capitalized software development costs expensed for tax purposes (1,834) (3,891)
-------- --------
Deferred Tax Assets - net $ -- $12,501
======== ========
At December 31, 1999, the Company's valuation allowance was $21,896,
comprised of all deferred tax assets net of deferred liabilities. At
December 31, 1998, the valuation allowance was $2,844, consisting of tax
credits expected to expire unused and losses from which the Company did
not expect to derive any benefit. The Company is required to reduce the
deferred tax assets by a valuation allowance if based on the weight of
evidence, it is more likely than not, that some portion or all of the
deferred tax asset will not be realized. As of December 31, 1999, the
Company's deferred tax assets included approximately $16,913 of items which
will expire with the passage of time. Realization of these assets is
dependent on generating sufficient taxable income prior to the expiration
of such benefits.
At December 31, 1999, the Company has federal net operating loss
carryforwards of approximately $26,045 which expire in varying amounts from
2008 through 2014, federal research tax credits of $1,275 which expire in
varying amounts from 2000 through 2019, California state research tax
credits of $2,611 and alternative minimum tax credits of $497 which have no
expiration date and foreign tax credits of $3,413 which expire in varying
amounts from 2000 through 2004.
34
Income tax expense consists of:
1999: Current Deferred Total
------- -------- -------
Federal $ 61 $ 8,654 $ 8,715
State 140 2,466 2,606
Foreign 199 1,381 1,580
------- ------- -------
Total $ 400 $12,501 $12,901
======= ======= =======
1998: Current Deferred Total
------- -------- -------
Federal $ (92) $ 1,048 $ 956
State 137 274 411
Foreign 1,565 (191) 1,374
------- -------- -------
Total $1,610 $ 1,131 $ 2,741
======= ======= =======
1997: Current Deferred Total
------- -------- -------
Federal $ -- $ 1,242 $ 1,242
State 46 (247) (201)
Foreign 451 (194) 257
------- -------- -------
Total $ 497 $ 801 $ 1,298
======= ======= =======
The effective income tax rate differs from the amount computed by applying
the federal statutory income tax rate as follows:
1999 % 1998 % 1997 %
------- --- ------ --- ------ ---
Provision (benefit) at statutory rate - Federal $(8,666) (35)% $2,471 34 % $(742) (34)%
State income and capital taxes (1,210) (5)% 358 5 % 97 4 %
Provision at statutory rates of controlled
foreign subsidiaries 259 1 % (35) (1)% 166 7 %
Goodwill 1,173 5 % 232 3 % -- --
Federal research and development credit, net of
expired credits (174) (1)% (164) (2)% $ (217) (10)%
Write-off of purchased in-process research and
development -- -- -- -- 1,564 72 %
Decrease in tax credits resulting from the
true-up of assessments and changes in tax
accounting methods 1,687 7 % 859 12 % 493 22 %
Valuation allowance 19,052 77 % -- -- -- --
Increase in net operating losses resulting from -- -- (828) (11)% -- --
the true-up of assessments
Foreign losses not benefited -- -- -- -- (442) (20)%
Decrease in tax credits carried back as net
operating losses -- -- -- -- 441 20 %
Other, net 780 3 % (152) (2)% (62) (2)%
------- --- ------ --- ------ ---
Total income tax expense $12,901 52 % $2,741 38 % $1,298 59 %
======= === ====== === ====== ===
35
9. STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
---------------------------------------------
401(k) Plan
------------
The Company has a 401(k) tax-deferred savings plan covering all of its
eligible, domestic employees. For eligible international employees, the
Company contributes to the employees' personal pension plans. Company
matching contributions, which are not required by either the domestic or
international plans, totaled $1,482, $1,480 and $1,159 in 1999, 1998 and
1997, respectively.
Stock Option Plans
------------------
Under the Company's statutory employee stock option plans, 5,950 shares of
common stock have been reserved for grant to employees, consultants and
directors. For incentive stock options, the exercise price of each option
granted is 100 % of fair market value on the date of the grant. Non-
statutory options may be granted at prices not less than 85 % of fair
market value at the date of grant. To date, all options have been granted
at fair market value at the date of grant. Options granted under the plans
generally vest over a period of four years and expire ten years from the
date of grant. At December 31, 1999, 1,402 shares of common stock were
available for future option grants.
A summary of the Company's stock option activity follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
------- -------- ------- --------- ------- ---------
Outstanding-beginning of period 3,827 $8.22 2,902 $ 9.78 2,590 $ 8.00
Granted 2,486 3.08 2,716 9.63 791 13.71
Exercised (73) 5.04 (210) 7.29 (305) 4.95
Canceled or expired (1,648) 7.22 (1,581) 13.65 (174) 9.54
------ ----- ------ ------ ----- ------
Outstanding-end of period 4,592 $5.71 3,827 $ 8.22 2,902 $ 9.78
====== ===== ====== ====== ===== ======
Exercisable-end of period 1,982 1,250 1,014
====== ====== =====
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Range of exercise Outstanding at contractual exercise Exercisable at exercise
price Dec. 31, 1999 life price Dec. 31,1999 price
- ----------------- -------------- ----------- -------- -------------- --------
$0.35 to $3.19 1,000 9.0 $ 2.65 351 $ 2.51
3.31 to 4.88 1,153 9.9 3.33 6 4.28
4.94 to 7.00 1,525 6.4 6.27 986 5.97
7.12 to 12.88 568 5.7 9.24 401 9.20
13.12 to 16.00 346 7.1 14.20 238 13.87
----- --- ------ ----- ------
4,592 7.7 $ 5.71 1,982 $ 6.95
===== === ====== ===== ======
36
Stock Purchase Plan
-------------------
The Company has an Employee Stock Purchase Plan, which provides for the
sale of up to 1,500 shares to eligible employees by means of payroll
deductions. Employees may designate up to 10 percent of their earnings, as
defined, to purchase shares at prices not less than 85 percent of fair
market value. From inception through December 31, 1999, 1,007 shares had
been purchased at prices ranging from $2.23 to $11.53 per share.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes option pricing model with the following assumptions:
YEAR ENDED DECEMBER 31,
1999 1998 1997
------ ------ ------
Dividend yield 0.0% 0.0% 0.0%
Volatility 108.0% 65.3% 45.1%
Risk free interest rate 6.1% 4.5% 5.4%
Expected term, in years 0.5 0.5 0.7
The weighted average fair value for shares purchased through the Company's
Employee Stock Purchase Plan during 1999, 1998 and 1997 was $5.55, $4.70
and $3.97, respectively.
Additional Stock Plan Information and Pro forma Results
-------------------------------------------------------
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS No. 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method
in 1995. Under SFAS No. 123, the fair value of the stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum
value method with the following weighted average assumptions for the three
years ended December 31, 1997, 1998 and 1999;
YEAR ENDED DECEMBER 31,
1999 1998 1997
------ ------ ------
Dividend yield 0.0% 0.0% 0.0%
Volatility 108.0% 65.3% 45.1%
Risk free interest rate 6.1% 4.6% 5.7%
Expected term, in years 4.3 4.4 4.4
The weighted average fair value at date of grant for options granted during
1999, 1998 and 1997 was $5.70, $5.25 and $6.02, respectively.
37
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the stock-based awards had been amortized over the vesting period
of the awards, pro forma net income (loss) applicable to common
stockholders would have been approximately as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
--------- ------ --------
Net income (loss):
As reported ($37,788) $4,525 ($3,477)
Pro forma (40,160) 785 (5,763)
Diluted net income (loss) per share:
As reported ($2.67) $ 0.31 ($0.26)
Pro forma ($2.84) $ 0.05 ($0.43)
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company has operating leases for office space with varying expiration
dates through 2016, and for computer equipment with varying expiration
dates through 2003. The leases generally provide for minimum annual rentals
and payment of taxes, insurance and maintenance costs. Rental expense for
operating leases was $4,021, $5,340 and $4,694 in 1999, 1998 and 1997,
respectively.
At December 31, 1999, the Company had office space that was considered
excess capacity. The difference between the Company's total lease
commitments for its excess capacity and the total expected sublease income
is $2,378 and is included in short- and long-term accrued liabilities (see
Note 7).
Future minimum lease payments under noncancelable operating leases are as
follows:
2000 $ 4,253
2001 3,386
2002 2,779
2003 2,529
2004 2,279
Thereafter 11,009
-------
Total $26,235
=======
The Company had a line of credit in the amount of $6,000 secured by
marketable securities. The line of credit expires on March 31, 2000. There
were no outstanding borrowings against this line of credit during 1999 or
1998.
The Company is not party to any legal proceedings other than ordinary
routine litigation incidental to the Company's business. The Company
believes that the ultimate resolution of these matters will not have a
material adverse effect on the Company's consolidated financial statements
taken as a whole.
38
11. GEOGRAPHIC OPERATIONS
---------------------
The Company's products and services are considered a single reportable
segment. The Company primarily operates in three geographic areas, North
America, Europe and Asia Pacific. Corporate assets consist of cash and cash
equivalents, short- and long-term investments, capitalized software and
deferred tax assets. During the three years ended December 31, 1999, no
customer represented in excess of 10% of total revenues.
Geographical area data are as follows:
YEAR ENDED DECEMBER 31,
Revenues: 1999 1998 1997
- -------------------------- ------- -------- -------
North America $64,756 $ 71,654 $48,993
Europe 21,048 26,357 18,923
Asia Pacific 2,174 3,402 3,493
------- -------- -------
Total revenues $87,978 $101,413 $71,409
======= ======== =======
DECEMBER 31,
Identifiable assets: 1999 1998 1997
- -------------------------- ------- -------- -------
North America $12,977 $23,156 $19,707
Europe 11,523 12,477 7,146
Asia Pacific 783 2,604 2,973
Corporate 32,667 56,860 61,508
------- ------- -------
Total assets $57,950 $95,097 $91,334
======= ======= =======
12. TREASURY STOCK ACQUISITIONS
---------------------------
In 1995, the Board of Directors authorized the Company to spend up to
$17,500 for the repurchase of the Company's outstanding common stock. As
of December 31, 1999, the Company had acquired 1,060 shares of its common
stock at a cost of $11,100. As of December 31, 1999 the Company had
reissued 1,048 of the repurchased shares in connection with the Company's
employee stock purchase plan, one of its employee stock option plans and
the purchase acquisition of Revere, Inc.
39
13. EARNINGS PER SHARE
------------------
The Company calculates basic earnings per share ("EPS") and diluted EPS in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share". Basic EPS is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments,
such as stock options, and uses the average share price for the period in
determining the number of incremental shares that are to be added to the
weighted average number of shares outstanding. Diluted EPS for 1999 and
1997 excludes any effect of such instruments because their inclusion would
be antidilutive.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS:
YEAR ENDED DECEMBER 31,
1999 1998 1997
------ ------ ------
Shares used to compute basic EPS 14,154 14,012 13,291
Add: effect of dilutive securities - 676 -
------ ------ ------
Shares used to compute diluted EPS 14,154 14,688 13,291
====== ====== ======
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 2000 Annual Meeting of
Stockholders under the captions "Proposal 1 - Election of Directors,"
"Additional Information - Management" and "Additional Information - Section
16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 2000 Annual Meeting of
Stockholders under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 2000 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain Beneficial Owners
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement in connection with its 2000 Annual Meeting of
Stockholders under the caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. Consolidated Financial Statements Page
----
Independent Auditors' Report.............................................. 23
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998................................................... 24
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.................................... 25
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.............................. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................... 27
Notes to Consolidated Financial Statements................................ 28
41
2. Consolidated Financial Statement Schedule Page
----
Schedule II - Valuation and Qualifying Accounts.......................... 46
All other financial statement schedules not listed above are omitted
as the required information is not applicable or the information is
presented in the consolidated financial statements or related notes.
3. Exhibits
The following exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Reorganization dated as of October 29,
1997, among the Registrant, Copper Acquisition Sub, and
Revere, Inc.(6)
3.1 The Company's Amended and Restated Certificate of
Incorporation.(2)
3.2 Bylaws of Registrant.(9)
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.(3)
10.2 * 1992 Employee Stock Purchase Plan, as amended to
date.(11)
10.3 * 1989 Employee Stock Option Plan and related forms of
Incentive Stock Option Grant and Supplemental Stock Option
Grant.(3),(9)
10.4 * 1986 Employee Stock Purchase Plan and related form of
Employee Stock Purchase Agreement.(3)
10.5 Purchase and Sale Agreement between Registrant and Global
Software, Inc., dated as of August 31, 1990.(3)
10.6 Lease between Registrant and Marathon U.S. Realties, Inc.,
dated October 20, 1988 and Amendment No. 1, dated as of
October 31, 1990.(3)
10.7 Lease between Registrant and Chicago Title and Trust Company,
dated as of December 3, 1990.(3)
10.8 Agreement for Lease between Registrant, Walker Interactive
Products International and Alton House Limited, dated as of
March 18, 1991.(3)
10.9 * 1993 Non-Employee Directors' Stock Option Plan, as amended
to date.(12)
10.10 * 1994 Equity Incentive Plan, as amended to date.(13)
10.11 Agreement for the Sale and Purchase of The Solutions Group
Limited by and among Walker Interactive Products
International, and Adrian J. Dixon and Nigel G. Heath,
dated as of June 30, 1995.(1)
10.12 * Form of Executive Employment Agreement entered into between
Registrant and certain of its officers.(5)
10.13 * 1995 Executive Employment Agreement between the Registrant
and Leonard Y. Liu, as amended to date.(4),(7)
10.14 * 1995 Non-Statutory Stock Option Plan for Non-Officer
Employees, as amended to date.
42
10.15 Lease between Registrant and Equitable Assurance Society of the United
States, dated November 25, 1997.(10)
10.15A Lease between Registrant and Equitable Assurance Society of the United
States as amended October 1,1999.
10.16 * 1998 Executive Employment Agreement between the Registrant and Thomas
W. Hubbs.(8)
10.17 * Form of Executive Severance Benefits Agreement entered into between the
Registrant and certain of its employees.(7)
10.18 * Separation agreement with Barbara M. Hubbard and the Registrant.(13)
10.19 * Agreement with Leonard Y. Liu and the Registrant.(14)
10.20 * Form of Executive Severance Benefits Agreement entered into between the
Registrant and certain of its employees.(15)
10.21 * Executive Employment Agreement entered into between the Registrant and
Frank M. Richardson.
10.22 * Executive Severance Benefits Agreement entered into between the
Registrant and Bruce Dawson.
10.23 * Executive Severance Benefits Agreement entered into between the
Registrant and Paul Lord.
10.24 * Agreement with Leonard Y. Liu and the Registrant.
10.25 * Consulting Services Agreement with Yeun H. Lee and the Registrant.
10.26 * Separation Agreement with Mike Shahbazian and the Registrant
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule for fiscal year ended December 31, 1999
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the Company did not file any reports
on Form 8-K.
_______________
(1) Incorporated by reference to the corresponding exhibit to the Current
Report on Form 8-K, filed July 13, 1995.
(2) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1992.
(3) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1, as amended (Registration No. 33-45737).
(4) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30,1995.
(5) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1995.
(6) Incorporated by reference to the corresponding exhibit to the Current
Report on Form 8-K, filed December 11, 1997.
(7) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30, 1998.
43
(8) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending June 30, 1998.
(9) Incorporated by reference to the attachment of the Company's 1998 Proxy
Statement.
(10) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1997.
(11) Incorporated by reference to the attachment of the Company's 1999 Proxy
Statement.
(12) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1998.
(13) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending March 31, 1999.
(14) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending June 30, 1999.
(15) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30, 1999.
* Indicates a management contract or compensatory plan.
44
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WALKER INTERACTIVE SYSTEMS, INC.
(Registrant)
Date: March 28, 2000 By: /s/ Frank Richardson
-----------------------------
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Frank Richardson and Stanley V. Vogler, and each
or any one of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or his or
her substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------ -------------------------------------------- --------------
/s/ DAVID C. WETMORE Chairman of the Board of Directors March 28, 2000
- ------------------------------
David C. Wetmore
/s/ FRANK RICHARDSON Chief Executive Officer, Director March 28, 2000
- ------------------------------
Frank Richardson
/s/ STANLEY V. VOGLER Chief Financial Officer March 28, 2000
- ------------------------------
Stanley V. Vogler (Principal Financial and Accounting Officer)
/s/ RICHARD C. ALBERDING Director March 28, 2000
- ------------------------------
Richard C. Alberding
/s/ TANIA AMOCHAEV Director March 28, 2000
- ------------------------------
Tania Amochaev
/s/ WILLIAM A. HASLER Director March 28, 2000
- ------------------------------
William A. Hasler
/s/ JOHN M. LILLIE Director March 28, 2000
- ------------------------------
John M. Lillie
/s/ LEONARD Y. LIU Director March 28, 2000
- ------------------------------
Leonard Y. Liu
45
SCHEDULE II
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to
Beginning of Costs and Amounts Balance at
Allowance for Doubtful Accounts: Period Expenses Written-Off Other (1) End of Period
- -------------------------------- ------------ ---------- ----------- ---------- -------------
Year Ended December 31, 1999 $1,378 3,605 429 - $4,554
Year Ended December 31, 1998 $1,376 506 504 - $1,378
Year Ended December 31, 1997 $1,584 823 1,381 350 $1,376
(1) Related to the Company's acquisition of Revere.
46
WALKER INTERACTIVE SYSTEMS, INC.
FORM 10-K
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Reorganization dated as of October
29, 1997, among the Registrant, Copper Acquisition Sub,
and Revere, Inc.(6)
3.1 The Company's Amended and Restated Certificate of
Incorporation.(2)
3.2 Bylaws of Registrant.(9)
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.(3)
10.2 * 1992 Employee Stock Purchase Plan, as amended to
date.(11)
10.3 * 1989 Employee Stock Option Plan and related forms of
Incentive Stock Option Grant and Supplemental Stock
Option Grant.(3),(9)
10.4 * 1986 Employee Stock Purchase Plan and related form of
Employee Stock Purchase Agreement.(3)
10.5 Purchase and Sale Agreement between Registrant and
Global Software, Inc., dated as of August 31, 1990.(3)
10.6 Lease between Registrant and Marathon U.S. Realties,
Inc., dated October 20, 1988 and Amendment No. 1, dated
as of October 31, 1990.(3)
10.7 Lease between Registrant and Chicago Title and Trust
Company, dated as of December 3, 1990.(3)
10.8 Agreement for Lease between Registrant, Walker
Interactive Products International and Alton House
Limited, dated as of March 18, 1991.(3)
10.9 * 1993 Non-Employee Directors' Stock Option Plan, as
amended to date.(12)
10.10 * 1994 Equity Incentive Plan, as amended to date.(13)
10.11 Agreement for the Sale and Purchase of The Solutions
Group Limited by and among Walker Interactive Products
International, and Adrian J. Dixon and Nigel G. Heath,
dated as of June 30, 1995.(1)
10.12 * Form of Executive Employment Agreement entered into
between Registrant and certain of its officers.(5)
10.13 * 1995 Executive Employment Agreement between the
Registrant and Leonard Y. Liu, as amended to
date.(4),(7)
10.14 * 1995 Non-Statutory Stock Option Plan for Non-Officer
Employees, as amended to date.
10.15 Lease between Registrant and Equitable Assurance Society
of the United States, dated November 25, 1997.(10)
10.15A Lease between Registrant and Equitable Assurance
Society of the United States as amended October 1,1999.
10.15A Lease between Registrant and Equitable Assurance Society
of the United States as amended October 1, 1999.
10.16 * 1998 Executive Employment Agreement between the
Registrant and Thomas W. Hubbs.(8)
47
10.17 * Form of Executive Severance Benefits Agreement entered
into between the Registrant and certain of its
employees.(7)
11.18 * Separation agreement with Barbara M. Hubbard and the
Registrant.(13)
10.19 * Agreement with Leonard Y. Liu and the Registrant.(14)
10.20 * Form of Executive Severance Benefits Agreement entered
into between the Registrant and certain of its
employees.(15)
10.21 * Executive Employment Agreement entered into between the
Registrant and Frank M. Richardson.
10.22 * Executive Severance Benefits Agreement entered into
between the Registrant and Bruce Dawson.
10.23 * Executive Severance Benefits Agreement entered into
between the Registrant and Paul Lord.
10.24 * Agreement with Leonard Y. Liu and the Registrant.
10.25 * Consulting Services Agreement with Yeun H. Lee and the
Registrant.
10.26 * Separation Agreement with Mike Shahbazian and the
Registrant
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to the signature
page.
27.1 Financial Data Schedule for fiscal year ended December
31, 1999
_______________
(1) Incorporated by reference to the corresponding exhibit to the Current
Report on Form 8-K, filed July 13, 1995.
(2) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1992.
(3) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1, as amended (Registration No. 33-45737).
(4) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30,1995.
(5) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1995.
(6) Incorporated by reference to the corresponding exhibit to the Current
Report on Form 8-K, filed December 11, 1997.
(7) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30, 1998.
(8) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending June 30, 1998.
(9) Incorporated by reference to the attachment of the Company's 1998 Proxy
Statement.
(10) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1997.
(11) Incorporated by reference to the attachment of the Company's 1999 Proxy
Statement.
(12) Incorporated by reference to the corresponding exhibit to the Annual Report
on Form 10-K for the year ending December 31, 1998.
(13) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending March 31, 1999.
(14) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending June 30, 1999.
48
(15) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarter ending September 30, 1999.
* Indicates a management contract or compensatory plan.
49