-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KdQBr+WT4fIjKN0kdSeN53ZoEq7LaPza7cqbtjD8sd1rgPmW7GjxvcO4Vd21EiLy ap6QF9xw+FHSeh1Kn7jTKw== 0000929624-99-001929.txt : 19991115 0000929624-99-001929.hdr.sgml : 19991115 ACCESSION NUMBER: 0000929624-99-001929 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALKER INTERACTIVE SYSTEMS INC CENTRAL INDEX KEY: 0000883983 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 952862954 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19872 FILM NUMBER: 99747074 BUSINESS ADDRESS: STREET 1: MARATHON PLZ THREE NORTH STREET 2: 303 SECOND ST CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 4144958811 MAIL ADDRESS: STREET 1: MARATHON PLAZA THREE NORTH STREET 2: 303 SECOND STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94107 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-19872 WALKER INTERACTIVE SYSTEMS, INC. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2862954 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 303 Second Street, San Francisco, CA 94107 ------------------------------------------- (Address of principal executive offices including zip code) (415) 495-8811 -------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ----- There were 14,078,019 Shares of $.001 Par Value Common Stock outstanding as of November 8, 1999. WALKER INTERACTIVE SYSTEMS, INC. FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.............................................................3 Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998...............................................................................4 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 1999 and 1998...............................................................................5 Notes to Consolidated Financial Statements...............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................9 Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................18 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................................20 Item 6. Exhibits and Reports on Form 8-K........................................................20 Signatures ........................................................................................21
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WALKER INTERACTIVE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
SEPTEMBER DECEMBER ASSETS 30, 1999 30, 1999 ---------- --------- (unaudited) Current assets: Cash and cash equivalents $ 10,880 $ 15,556 Short-term investments 7,702 5,135 Accounts receivable, net 23,410 30,457 Prepaid expenses 4,636 2,347 ---------- --------- Total current assets 46,628 53,495 Long-term investments 5,431 1,906 Property and equipment, net 4,308 4,962 Capitalized software, net 12,863 18,186 Deferred tax assets, net - 12,501 Other assets 543 4,047 ---------- --------- TOTAL ASSETS $ 69,773 $ 95,097 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 20,326 $ 18,496 Deferred revenue 16,149 14,819 ---------- --------- Total current liabilities 36,475 33,315 Deferred revenue 3,525 1,600 Accrued rent 1,021 954 Other long-term obligations 2,489 2,177 ---------- --------- Total liabilities 43,510 38,046 ---------- --------- Commitments and Contingencies - - Stockholders' equity Common stock, $.001 par value: 50,000,000 shares authorized; issued 14,184,865 shares - September 30, 1999; 14,184,685 shares - December 31, 1998 14 14 Additional paid-in capital 74,116 74,719 Accumulated other comprehensive income 130 232 Accumulated deficit (47,703) (17,662) Treasury stock at cost (106,666 shares - September 30, 1999; 49,207 shares - December 31, 1998) (294) (252) ---------- --------- Total stockholders' equity 26,263 57,051 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 69,773 $ 95,097 ========== =========
See notes to consolidated financial statements 3 WALKER INTERACTIVE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 ------- ------- -------- -------- REVENUES License $ 3,073 $ 3,116 $ 11,241 $ 15,083 Maintenance 7,613 7,857 23,560 23,184 Consulting 10,002 13,739 35,138 35,547 ------- ------- -------- -------- Total revenues 20,688 24,712 69,939 73,814 OPERATING EXPENSES: Costs of revenues: Costs of licenses, maintenance and consulting 9,997 10,711 32,961 30,969 Amortization of capitalized software 1,297 1,474 3,926 3,544 Sales and marketing 5,129 5,760 16,772 17,097 Product development 3,410 3,033 10,872 9,425 General and administrative 3,501 3,496 10,798 9,392 Write-down of capitalized research and development and associated goodwill - - 9,003 - Restructuring charges 559 - 3,693 - ------- ------- -------- -------- Total operating expenses 23,893 24,474 88,025 70,427 Operating income (loss) (3,205) 238 (18,086) 3,387 Interest income, net 273 250 746 834 ------- ------- -------- -------- Income (loss) before income taxes (2,932) 488 (17,340) 4,221 Income tax expense 200 173 12,701 1,517 ------- ------- -------- -------- NET INCOME (LOSS) $(3,132) $ 315 $(30,041) $ 2,704 ======= ======= ======== ======== BASIC NET INCOME (LOSS) PER SHARE $ (0.22) $ 0.02 $ (2,14) $ 0.19 ======= ======= ======== ======== Shares used in computing basic net income (loss) per share 14,126 14,042 14,057 13,998 ======= ======= ======== ======== DILUTED NET INCOME (LOSS) PER SHARE $ (0.22) $ 0.02 $ (2,14) $ 0.18 ======= ======= ======== ======== Shares used in computing diluted net income (loss) per share 14,126 14,973 14,057 14,881 ======= ======= ======== ========
See notes to consolidated financial statements 4 WALKER INTERACTIVE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED) (in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) $(30,134) $2,704 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 6,008 5,351 Tax benefit of nonqualified stock options - 218 Write-down of capitalized research and development and associated goodwill 9,003 - Changes in operating assets and liabilities: Accounts receivable, net 7,047 (5,518) Prepaids & other assets (2,289) (295) Accounts payable & accrued liabilities 2,308 (2,175) Deferred tax asset 12,501 1,517 Deferred revenue 3,255 (1,365) Other 65 558 -------- -------- Net cash provided by operations 7,764 995 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from employee stock purchase plan issuances and stock options exercised 381 1,997 Treasury stock acquired (1,026) (2,114) Capital lease and loan payments (109) (59) Repayment of borrowings - (1,422) -------- -------- Net cash used by financing activities (754) (1,598) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short- and long-term investments (12,042) (3,706) Maturities of short-term investments 4,375 10,200 Sales of short-term investments 1,507 5,510 Purchases of property (1,148) (1,962) Additions to capitalized software (4,377) (5,659) Other (1) 10 -------- -------- Net cash provided (used) by investing activities (11,686) 4,393 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,676) 3,790 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,556 7,646 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 10,880 $ 11,436 ======== ========
See notes to consolidated financial statements 5 WALKER INTERACTIVE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results for the entire year. These consolidated financial statements and any notes thereto, should be read in conjunction with the audited consolidated financial statements included in the Walker Interactive Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1998. 2. EARNINGS PER SHARE ------------------ The Company calculates basic earnings per share ("EPS") and diluted EPS in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following is a summary of the calculation of the number of shares used in calculating basic and diluted EPS (in thousands):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Shares used to compute basic EPS 14,126 14,042 14,057 13,998 Add: effect of dilutive securities - 931 - 883 ------ ------ ------ ------ Shares used to compute diluted EPS 14,126 14,973 14,057 14,881 ====== ====== ====== ======
6 3. COMPREHENSIVE INCOME -------------------- SFAS No. 130 requires disclosure of total non-stockholder changes in equity, which include unrealized gains and losses on securities classified as available-for-sale under SFAS No. 115, foreign currency translation adjustments accounted for under SFAS No. 52, and minimum pension liability adjustments made pursuant to SFAS No. 87. The reconciliation of net income (loss) to comprehensive income (loss) for the three and nine months ended September 30, 1999 and 1998 is as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss) $(3,132) $ 315 $(30,041) $2,704 Other comprehensive income (loss) 128 160 (102) 150 ------- ----- -------- ------ Total comprehensive income (loss) $(3,004) $ 475 $(30,143) $2,854 ======= ===== ======== ======
4. RESTRUCTURING CHARGES --------------------- During the quarter ended June 30, 1999, the Board of Directors approved a plan to realign Walker's focus on its core financial and analytic applications. Associated with this change in strategy, the Board of Directors approved steps to restructure its operations to increase operating efficiencies. The Company will focus on the Tamaris and Horizon product lines, specifically investing in Web-enabled functionality. The Company will continue to support its Aptos and IMMPOWER customers, focusing sales and marketing on certain geographic regions, but will limit its investment in these applications. During the quarter ended June 30, 1999, the Company recorded a pretax charge of $12.1 million in connection with the change in strategic direction and the related cost restructuring. The Company evaluates capitalized research and development carrying amounts, and associated goodwill, against related estimated undiscounted cashflows. During the second quarter of 1999 the evaluation, based on the change of strategic direction, indicated that the future undiscounted cashflows were not sufficient to recover the carrying values of some assets. These assets were adjusted to net realizable value resulting in a second quarter charge of $5.3 million associated with IMMPOWER and Aptos capitalized research and development costs and $3.2 million related to goodwill. The Company additionally wrote-off $0.5 million in capitalized research and development costs which had no future value in the same period. Costs associated with office consolidations in Europe and North America resulted in a second quarter pretax charge of $3.1 million which was required to cover costs of reducing certain areas of the workforce and facilities to levels more appropriate to current and expected business requirements. A charge of $2.0 million was recognized to cover costs associated with excess facilities. The Company intends to continue to search for tenants to sublet any vacant excess facilities. The Company also recognized a charge of $1.1 million due to the reduction in workforce; 40 employees were terminated in the quarter ended June 30, 1999 or will be terminated as a result of the Company's realignment strategy. Of the total, 14 were in product development, 13 were in administrative and finance positions, nine were engaged in sales and marketing, and four were in customer support. All terminated employees were informed of their terminations by June 30, 1999. During the quarter ended September 30, 1999, the Company recorded an additional charge of $0.6 million associated with an additional five percent reduction in its workforce and further consolidation of its facilities. 7 Restructuring charges taken during the second and third quarter of 1999 and related charges against respective liabilities as of September 30, 1999 are as follows (in thousands):
Remaining expected Restructuring Balance at charges to liability Charges Charges to liability September 30, 1999 in 1999 ------------- -------------------- ------------------ -------------------- Termination payments to employees $ 1,547 $ (919) $ 628 $ (236) Facility closures 2,146 (357) 1,789 (277) Write-down of capitalized research and development 5,788 (5,788) - - Goodwill impairment 3,215 (3,215) - - ------------------------------------------------------------------------------------ $12,696 $(10,279) $2,417 $ (513) ------------------------------------------------------------------------------------ Expected balance at Dec. 31, 1999 ------------- Termination payments to employees $ 392 Facility closures 1,512 Write-down of capitalized research and development - Goodwill impairment - -------------- $ 1,904 --------------
Subsequent to December 31, 1999, the remaining expected charges against liabilities will be attributable to remaining termination payments to employees and future lease payments on excess facilities. 8 WALKER INTERACTIVE SYSTEMS, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The report on this Form 10-Q contains forward-looking statements, including statements related to prospects associated with certain product lines, working capital requirements and Year 2000 related issues. Discussions containing such forward-looking statements may be found in the material set forth in this section, generally and specifically herein under the captions "Restructuring Charges", "Liquidity and Capital Resources", "Year 2000 Readiness" and "Additional Risk Factors." Actual events or results may differ materially from those discussed herein. The Company disclaims any obligation to update these forward-looking statements as a result of subsequent events. The risk factors on pages 13 through 18, among others, should be considered in evaluating the Company's prospects and future financial performance. Walker Interactive Systems, Inc. (hereinafter "Walker" or the "Company") was incorporated in California in 1973 and reincorporated in Delaware in March 1992. Walker designs, develops, markets and supports, on an international basis, a family of network computing and client server based enterprise wide financial, operational and analytic application software products and related services. These products and services enable organizations to improve profitability through the availability of timely and accurate information, reflect new business processes as a result of organizational change and exploit the latest technological advances in order to reduce costs. Walker designs its software products specifically for the network computing and client/server models and believes that its architecture is among the most scalable and adaptable available for enterprise-level financial and analytical applications software. The Company's strategy is to offer enterprise wide financial, operational and analytical application software solutions, and related services, to a variety of industries with best-of-breed software products utilized in a wide variety of cross-industry solutions. The Walker applications support and enhance enterprise-wide financial, operational and analytic processes, including planning, budgeting, forecasting, consolidation, financial management, performance measurement, revenue and procurement management. The Company's software products utilize the Microsoft Windows operating systems on the desktop, NT, UNIX and OS/390 operating systems on the server and industry-leading On Line Analytical Processing ("OLAP"), Relational Database Management Systems ("RDBMS") including Hyperion Solutions Essbase, IBM's DB2, Oracle Express and Microsoft SQL/Server. The Tamaris product line represents the Company's core suite of business and financial solutions utilizing the power of the enterprise server, while the Aptos suite of financial applications runs on UNIX and Windows NT servers. The Company also develops and markets Horizon best-of-breed analytic applications which provide financial reporting, budgeting and financial consolidation solutions. The Horizon analytic applications products integrate with Tamaris and also work standalone with leading Enterprise Resource Planning ("ERP") applications. The Company's software products include productivity tools that allow the Company's applications to be customized to fit the customer's particular requirements. The Company complements its software products by providing specialized professional consulting services to assist customers with customization and implementation of financial, analytical and operational solutions to fuel business advantage. The Company derives its revenues primarily from software licenses, software maintenance and professional consulting services. RESTRUCTURING CHARGES - --------------------- During the quarter ended June 30, 1999, the Board of Directors approved a plan to realign Walker's focus on its core financial and analytic applications. Associated with this change in strategy, the Board of Directors approved steps to restructure its operations to increase operating efficiencies. The Company will focus on the Tamaris and Horizon product lines, specifically investing in Web-enabled functionality. The Company will continue to support its Aptos and IMMPOWER customers, focusing sales and marketing on certain geographic regions, but will limit its investment in these applications. During the quarter ended June 30, 1999, the Company recorded a pretax charge of $12.1 million in connection with the change in strategic direction and the related cost restructuring. 9 The Company evaluates capitalized research and development carrying amounts, and associated goodwill, against related estimated undiscounted cashflows. During the second quarter of 1999, the evaluation, based on the change of strategic direction, indicated that the future undiscounted cashflows were not sufficient to recover the carrying values of some assets. These assets were adjusted to net realizable value resulting in a second quarter charge of $5.3 million associated with IMMPOWER and Aptos capitalized research and development costs and $3.2 million related to goodwill. The Company additionally wrote-off $0.5 million in capitalized research and development costs which had no future value in the same period. Costs associated with office consolidations in Europe and North America resulted in a second quarter pretax charge of $3.1 million which was required to cover costs of reducing certain areas of the workforce and facilities to levels more appropriate to current and expected business requirements. A charge of $2.0 million was recognized to cover costs associated with excess facilities. The Company intends to continue to search for tenants to sublet any vacant excess facilities. The Company also recognized a charge of $1.1 million due to the reduction in workforce; 40 employees were terminated in the quarter ended June 30, 1999 or will be terminated as a result of the Company's realignment strategy. Of the total, 14 were in product development, 13 were in administrative and finance positions, nine were engaged in sales and marketing, and four were in customer support. All terminated employees were informed of their terminations by June 30, 1999. During the quarter ended September 30, 1999, the Company recorded an additional charge of $0.6 million associated with an additional five percent reduction in its workforce and further consolidation of its facilities. Restructuring charges taken during the second and third quarter of 1999 and related charges against respective liabilities as of September 30, 1999 are as follows (in thousands):
Remaining expected Restructuring Balance at charges to liability Charges Charges to liability September 30, 1999 in 1999 ------------- -------------------- ------------------ -------------------- Termination payments to employees $ 1,547 $ (919) $ 628 $ (236) Facility closures 2,146 (357) 1,789 (277) Write-down of capitalized research and development 5,788 (5,788) - - Goodwill impairment 3,215 (3,215) - - ------------------------------------------------------------------------------------ $12,696 $(10,279) $ 2,417 $ (513) ------------------------------------------------------------------------------------ Expected balance at Dec. 31, 1999 ------------- Termination payments to employees $ 392 Facility closures 1,512 Write-down of capitalized research and development - Goodwill impairment - -------------- $ 1,904 --------------
Subsequent to December 31, 1999, the remaining expected charges against liabilities will be attributable to remaining termination payments to employees and future lease payments on excess facilities. The following paragraph contains forward-looking statements. Walker will continue to evaluate its reserves in the future which may result in additional charges associated with the Company's change in strategy or ongoing cost reduction program. There can be no assurance that Walker will or will not dispose of or sell assets, liabilities and/or intellectual property associated with the IMMPOWER or Aptos product lines. RESULTS OF OPERATIONS - --------------------- REVENUES. The Company recorded total revenues of $20.7 million and $24.7 million for the three months ended September 30, 1999 and 1998, respectively. The 16 percent decrease is primarily attributable to a decrease in consulting revenues. For the first nine months of 1999, total revenues for the Company were $69.9 million compared to $73.8 million for the same period last year. The five percent decrease in year-to-date total revenues is primarily a result of lower license revenues in 1999 when compared to the prior year. License revenues for the current quarter remained flat from the prior year at $3.1 million. License revenues generated from North American operations increased over the prior year but were offset by declines in revenues generated in Europe and in the Asia Pacific region. For the first nine months of 1999, license revenues decreased $3.9 million or 25 percent from $15.1 million in 1998 to $11.2 million in 1999. The Company's license revenue decrease is primarily attributable to a decrease in year-to-date license revenues in the European region. The Company believes the decrease in license revenues in 1999 is primarily attributable to a continued softness in the enterprise financial 10 application software industry. The Company believes that potential customers are utilizing resources to ensure that current software applications are Year 2000 compatible instead of purchasing and implementing new software applications. Additionally, continued pressure from the Year 2000 transition and a lengthening of the sales cycle relative to all product lines negatively impacted year-to-date license revenues. The ongoing downturn in the Asia Pacific economy continues to restrict license revenue growth in that region. Consulting revenues are generated from new and existing customers for services related to training, implementation, customization, migration, enhancement, Year 2000 readiness engagements, best practice consulting engagements and other special projects. The Company generates a majority of its consulting revenues from implementation-related projects. Consulting revenues for the third quarter were $10.0 million, a decrease of $3.7 million or 27 percent from $13.7 million in the same period of the prior year. Consulting revenues were negatively impacted during the quarter as decreases in license revenues eroded the Company's consulting service revenue base. Further affecting consulting revenues was the completion of several large engagements during the quarter which were not replaced by engagements with similar revenue streams. For the nine months ended September 30, 1999, consulting revenues of $35.1million decreased $0.4 million or one percent from $35.5 million for the same period in 1998. COSTS OF LICENSES, MAINTENANCE AND CONSULTING. Although the cost of licenses, maintenance and consulting, in absolute dollars, decreased seven percent, the costs represented 48 percent and 43 percent of total revenues for the three months ended September 30, 1999 and 1998, respectively. The increase in the ratio of costs of licenses, maintenance and consulting over total revenues for the third quarter of 1999 is primarily attributable to lower revenues associated with the Company's consulting services. Consulting revenues for the third quarter decreased 27 percent from third quarter of 1998, while the related cost structure decreased slightly. For the nine months ended September 30, 1999, costs of licenses, maintenance and consulting represented 47 percent of total revenues compared to 42 percent for the same period in 1998. The decrease in total license revenues, which generally have a higher profit margin compared to consulting revenue, has negatively impacted cost of licenses, maintenance and consulting as a percent of total revenues. AMORTIZATION OF CAPITALIZED SOFTWARE. Amortization of capitalized software decreased $0.2 million or 12 percent in the third quarter of 1999 compared to the same period in 1998. The decrease is primarily attributable to a decrease in amortization associated with products that have been written off as part of the Company's restructuring actions in the second quarter of 1999. For the nine months ended September 30, 1999, amortization of capitalized software increased 11 percent to $3.9 million compared to $3.5 million for the same period in 1998. The increase is primarily due to the first half impact of additional amortization associated with the Company's ongoing practice of evaluating the lives of capitalized software products and additional amortization resulting from recent product releases. Offsetting the increase in amortization is the decrease in amortization associated with products which have been written off as part of the Company's restructuring actions in the second quarter of 1999. SALES AND MARKETING. Sales and marketing expenses decreased $0.6 million or 11 percent to $5.1 million for the three months ended September 30, 1999 compared to $5.8 million for the same period in 1998. For the first nine months of 1999, sales and marketing expenses decreased $0.3 million or two percent to $16.8 million compared to $17.1 million for the same prior year period. Cost savings associated with the reductions in North America headcount and marketing promotions in 1999 were partially offset by additional expenses associated with sales offices opened during the first quarter of 1999 and increased sales expenses in Europe and Asia Pacific over the prior year. 11 PRODUCT DEVELOPMENT. Product development-related expenses, excluding amortization of capitalized software, are detailed as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Product development costs, including additions to capitalized software (gross) $ 4,415 $ 4,984 $15,011 $15,095 Less: additions to capitalized software (1,005) (1,951) (4,139) (5,670) ------- ------- ------- ------- Product development expenses $ 3,410 $ 3,033 $10,872 $ 9,425 ======= ======= ======= =======
During the first quarter of 1999, the Company acquired $0.2 million in software technology which complemented internally developed products and related technology. Excluding the acquired software, gross product development expenses decreased due to headcount reductions resulting from the second quarter of 1999 realignment of strategic direction and restructuring. Additions to capitalized software, in absolute dollars, decreased as a result of lower gross product development expenses. Capitalized software additions in absolute dollars and as a percentage of gross product development costs decreased from the prior year as more product development resources were allocated to non-capitalizable projects. Historical additions to capitalized software, in absolute dollars and as a percentage of gross product development costs, are not a reliable indicator of additions to capitalized software that will be incurred in the future. GENERAL AND ADMINISTRATIVE. General and administrative expenses were flat at $3.5 million for the three months ended September 30, 1999 and 1998, respectively. For the first nine months of 1999, general and administrative expenses increased $1.4 million to $10.9 million compared to $9.4 million for the same period in 1998. The 15 percent increase for the first nine months of 1999 is attributable to increased usage of outside contractors and increased labor expenses during the first half of 1999. INCOME TAX EXPENSE. During the quarter ended September 30, 1999, the Company recorded an income tax expense of $0.2 million associated with foreign withholding taxes and foreign tax accruals. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's operating activities provided cash of $7.8 million in the first nine months of 1999 and $1.0 million during the comparable 1998 period. Increased collections of outstanding receivables and the change in deferred revenue were the primary factor contributing to cash provided from operations. These impacts were offset by the Company's net loss of $30.1 million for the nine months ended September 30, 1999. Financing activities used $0.7 million in cash during the first nine months of 1999 and $1.6 million during the same period in 1998. There were proceeds of $0.4 million from the employee stock purchase plan issuances during the first nine months of 1999 compared to $2.0 million from employee stock purchase plan issuances and stock option exercises in the comparable 1998 period. The Company used $1.0 million in cash in the first nine months of 1999 and $2.1 million in cash in the comparable 1998 period for the acquisition of common stock from the open market. All stock repurchases were made pursuant to resolutions of the Company's Board of Directors authorizing the repurchase of the Company's outstanding shares of common stock, which in aggregate is not to exceed a total cost of $17.5 million. As of September 30, 1999, the Company had acquired 1,049,500 shares of its common stock at a cost of $11.1 million. As of September 30, 1999, the Company had reissued 974,000 of the repurchased shares in connection with the Company's employee stock purchase plan, one of its employee stock option plans and the December 1997 acquisition of Revere, Inc. ("Revere"). In connection with the acquisition of Revere, the Company assumed a line of credit with an outstanding balance of $1.5 million. The outstanding balance on the assumed line of credit was subsequently paid in full in January 1998. The Company has a line of credit in the amount of $6.0 million, secured by marketable securities. The line of credit expires on December 31, 1999. The Company has never borrowed against this line of credit. 12 Investing activities used cash of $11.7 million in the first nine months of 1999 compared to providing cash of $4.3 million for the same period in 1998. The increase in cash used is primarily attributable to an increase of investment purchases in 1999. As of September 30, 1999, the Company's principal sources of liquidity included cash, cash equivalents and short- and long-term investments aggregating $24.0 million. The following sentence is a forward looking statement. The Company believes that its principal sources of liquidity, together with funds expected to be generated from operations, will satisfy the Company's currently anticipated working capital and capital expenditure requirements for at least the next twelve months. YEAR 2000 READINESS - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and devices with imbedded technology that are time- sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. The Company has completed an assessment to determine the effect that the Year 2000 issue will have on it. The Company believes that its current commercial application software products generally offered for license by the Company to end-user customers are Year 2000 ready. However, certain versions of these products currently installed at customers' sites will require upgrading or other modifications to become Year 2000 ready. The Company has identified those affected customers who are on the Company's warranty maintenance program, has contacted those customers and is assisting those customers to assess their readiness. The Company is making available to those customers a Year 2000 ready release of its software and will assist such customers to become Year 2000 ready. The following sentence is a forward-looking statement. The Company believes that the costs associated with making certain versions of the Company's products Year 2000 ready will not be material to the Company's business, results of operations or financial condition. The Company has completed an assessment of its computer equipment and software, including information technology systems, such as accounting, data processing and telephone/PBX systems, and non-information technology systems, such as fax machines and alarm systems, to determine if they are Year 2000 ready. The following three sentences are forward-looking statements. The Company believes that certain of its non-critical computer equipment and software will require replacement or modification, at a total cost which is not material to the Company's results of operations or financial condition. The Company believes that even if such replacements or modifications were not completed, the Year 2000 issue would not have a material adverse effect on the Company's business, results of operations or financial condition. In addition, even if the Company's vendors or suppliers fail to become Year 2000 ready in a timely manner, the Company believes that such failure would not have a material adverse effect on the Company's business, results of operations or financial condition. The costs and impact of the Year 2000 issue are based upon management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, the functioning of its products in accordance with specifications and other factors. There can be no assurance that these estimates will prove to be accurate and actual results could differ from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues and the functioning of the Company's products in accordance with specifications. In addition, variability of definitions of "Year 2000 ready" and the number of products that the Company has sold, may lead to claims for which the impact on the Company is not currently estimable. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, would not materially adversely affect the Company's business, results of operations or financial condition. OTHER MATTERS - ------------- 13 On September 30, 1999, the Company announced the appointment of Frank M. Richardson as its Chief Executive Officer ("CEO"). Leonard Y. Liu, the former CEO, will continue as Chairman of the Board. ADDITIONAL RISK FACTORS - ----------------------- The Company operates in a rapidly changing environment that involves numerous risks and uncertainties which could have a material adverse effect on the Company. The following discussion details some, but not all, of these risks and uncertainties. LIQUIDITY AND CAPITAL RESOURCES. There can be no assurance that the Company will not need to raise substantial additional capital to fund its operations in the future. There can be no assurance that additional financing will be available on acceptable terms or will be available at all. FLUCTUATION IN OPERATING RESULTS. The Company's operating results fluctuate as a result of a variety of factors including: (i) the execution of new license agreements; (ii) the shipment of software products; (iii) customer acceptance criteria for services performed; (iv) completion of milestone or other significant development requirements pursuant to the Company's license agreements; (v) the financial terms of consulting agreements and the inclusion of fixed as opposed to variable pricing; (vi) third-party royalty payments for licensed software; (vii) the demand for the Company's products and services; (viii) changes in the Company's product mix; (ix) the development and launch of new products, and the life cycles of the Company's existing products; (x) research and development expenditures required to update and expand the Company's product portfolio and related third-party consulting costs; (xi) sales and marketing expenses generally related to the entry into new markets with new or existing products and maintenance of market share in existing markets; (xii) acquisitions and the integration and development of acquired entities or products; (xiii) competitive conditions in the industry; and (xiv) general economic conditions. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. The Company's quarterly operating results are particularly dependent on the number of license agreement bookings executed in each quarter. The amount of quarterly bookings has varied substantially from quarter to quarter due to a variety of reasons including: (i) a high proportion of license agreements are negotiated during the latter part of each quarter and may not be completed before the quarter end; (ii) the sales cycles for some of the Company's products are relatively long due to the Company's focus on "enterprise solutions" as opposed to individual products, which adds complexity to the customer's selection, negotiation and approval process; (iii) the amount related to each booking may vary significantly due to the need for different solutions for different customers; (iv) procurement procedures may vary from customer to customer, which may affect the timing of the bookings; (v) customers may continue to forego or delay software purchases due to increased attention and spending on Year 2000 related projects; 14 (vi) the period for a customer to complete product evaluations and to complete any subsequent purchase approval may be delayed due to resource limitations; and (vii) economic, political and industrial conditions can adversely affect business opportunities without notice. In addition, bookings that are executed during a particular quarter may not be recognized as revenue during such quarter because such bookings may not have met the Company's revenue recognition criteria. No assurance can be given that the Company will be able to effect new bookings in accordance with historical results or management's expectations, and the inability of the Company to do so could have a material adverse effect on the Company's operating results. The Company believes that Year 2000 pressures have caused customers to forego or delay the licensing of new software as they utilize resources to ensure that their existing software products are Year 2000 ready. Continuation of this trend will have an adverse impact on Company revenues and results of operations. There can be no assurance that revenues will return to historical levels or obtain historical growth rates in the Year 2000 or beyond. While the Company typically sells its software under a standard license agreement, license agreements associated with large enterprise solutions often require the negotiation of terms and conditions that differ substantially from the Company's standard license agreement terms. The negotiation of these agreements may extend the sales cycle. The Company may not always obtain terms and conditions that permit the recognition of revenue upon shipment of the licensed product or under the percentage of completion method of contract accounting rules. Accordingly, revenue may not be recognized after shipment of a product because specified milestones have not been met or because applicable services have not been completed or cash is secured. The Company has entered and expects to enter into fixed-price consulting agreements, particularly in response to increased competition in the industry. The Company has recognized lower profit margins on certain fixed-price service agreements when compared to variable agreements. No assurance can be given that the Company will be able to negotiate fixed-price agreements on terms that will allow the Company to retain its historical operating margins. The Company has historically generated a majority of its consulting revenue from pre- and post-implementation services. Recently, the Company has provided services that include, but are not limited to, Year 2000 readiness engagements, best practice solution engagements and other hardware and software solutions. The Company intends to continue its pursuit of consulting engagements for which the Company believes it is qualified. There can be no assurance that these engagements will result in profit margins equal to or greater than those engagements that are specific to a customer's product implementation. Also, there can be no assurance that consulting revenue generated from non- implementation-related projects will continue in the future. Employee- and facility-related expenditures comprise a significant portion of the Company's operating costs and expenses, and are therefore relatively fixed over the short term. In addition, the Company's expense levels are based, in significant part, on the Company's forecasted revenue. If revenue levels fall below expectations, net income is likely to be adversely affected. There can be no assurance that the Company will be profitable on a quarterly or annual basis in the future. Any of the foregoing factors could cause the Company's future operating results to fall below the expectations of public securities market analysts, which could have an adverse effect on the trading price of the Company's common stock. See "Volatility of Stock Price." RELIANCE ON THIRD PARTY TECHNOLOGY. The Company generates revenue from internally developed software products, some of which utilize technology licensed from third parties. The Company expects to continue utilizing third party technology and may enter into agreements with additional business partners. If sales of software utilizing third party technology increase disproportionately, gross margins may be below historical levels due to third party royalty obligations. There can be no assurance that the third parties will renew existing agreements with the Company or will not require financial conditions which are unfavorable to the Company. In addition, there can be no assurance that existing third party agreements will not be terminated. INDUSTRY. 15 Certain software companies, including the Company, have experienced significant economic downturns as a result of technological shifts, competitive pressures and uncertainties caused by the Year 2000 transition. These downturns are characterized by decreased product demand, price erosion, work slowdowns and layoffs. The Company's operations may, in the future, experience substantial fluctuations from period to period because of such industry patterns and general economic and political conditions which could affect the timing of orders from customers. There can be no assurance that such factors will not have a materially adverse effect on the Company's business, operating results or financial condition. INTERNATIONAL. The Company plans to increase its presence in international markets by marketing its Tamaris, Horizon and consulting and services products. The Aptos and IMMPOWER product lines will be focused in the geographic areas that have traditionally proven successful. Risks associated with such pursuits include, but are not limited to, the following: (i) changing market demands, (ii) economic and political conditions in foreign markets, (iii) foreign exchange fluctuations, (iv) longer collections cycles, (v) difficulty in managing a geographically dispersed organization and (vi) changes in international tax laws. The downturn in the Asia Pacific business climate had and continues to have an adverse effect on some market opportunities. Operating results are likely to be adversely affected if the Company's expansion into international markets is not successful. COMPETITION. The business and financial applications software market for complex organizations is intensely competitive. The Company's principal competitors with Tamaris solutions are SAP AG, Oracle Corporation and PeopleSoft, Inc. With the Horizon suite of products, the Company principally competes with Hyperion Solutions Corporation, and Comshare, Inc. With Aptos solutions, the Company principally competes with Oracle Corporation, Lawson Software, Inc., Platinum Software, Inc., and Systems Union Group Ltd. With the IMMPOWER suite of products, the Company principally competes with Datastream/SQL, Indus International, Marcam, Mincom, PSDI and SAP AG. The Company also competes to a lesser extent with other independent software application vendors. Some of the Company's current and potential competitors have substantially greater financial, technical, marketing and sales resources than the Company. Some of these competitors also offer business application products not offered by the Company, primarily in the areas of human resources and manufacturing. However, Walker remains one of the few companies committed to providing and enhancing applications for the mainframe environment. Most of the competitors listed above compete with Walker by offering UNIX-based applications. The Company encounters competition from a broader range of firms in the market for professional services. Principal competitors include Andersen Consulting, IBM Global Services and the consulting divisions of the major accounting firms. These competitors possess greater resources than the Company. Niche consulting firms that specialize in the Company's products also compete with the Company primarily on the basis of price. The principal competitive factors in the market for business and financial applications software and services include: (i) product functionality, (ii) flexibility, (iii) portability, (iv) integration, (v) reliability, (vi) performance, (vii) product availability, 16 (viii) speed of implementation, (ix) quality of customer support and user documentation, (x) vendor reputation, (xi) experience, (xii) financial stability, (xiii) cost effectiveness, and (xiv) price. The Company believes that it competes favorably with respect to these factors. There can be no assurance, however, that the Company will be able to compete successfully in the future. RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid technological change. The pace of change has accelerated due to advances in mainframe and client/server technology and the growth in Internet, Intranet and extranet utilization. The Company expects to evaluate potential opportunities and may invest in those which are compatible with the Company's strategic direction. However, there can be no assurance that any such investments will be profitable. The Company's products are also designed primarily for use with certain mainframe and client/server systems. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete. Accordingly, the Company's future success depends in part upon its ability to continue to enhance its current products and to develop and introduce new products that respond to evolving customer requirements and keep pace with technological development and emerging industry standards, such as new operating systems, hardware platforms, interfaces and third party applications software. There can be no assurance that: (i) the Company will be successful in developing and marketing product enhancements or new products that respond to technological change, changes in customer requirements or emerging industry standards; (ii) the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of such products and enhancements; or (iii) any new products or enhancements that it may introduce will achieve market acceptance. PRODUCT DEVELOPMENT. The Company's continued success is dependent on its continued ability to introduce, develop and market new and enhanced versions of its software products, although there can be no assurance that such ability can be maintained. The Company plans to continue its investment in product development in future periods. However, there can be no assurance that revenues will be sufficient to support the future product development that is required for the Company to be competitive. Although the Company may be able to release new products in addition to enhancements to existing products, there can be no assurance that the Company's new or upgraded products will be accepted, will not be delayed or canceled, or will not contain errors or "bugs" that could affect the performance of the product or cause damage to users' data. PROPRIETARY RIGHTS. The Company regards its products as proprietary. Through its license agreements with customers and its internal security systems, confidentiality procedures and employee agreements, the Company has taken steps to maintain the trade secrecy of its products. However, there can be no assurances that misappropriation will not occur. In addition, the laws of some countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the confidentiality of any proprietary information will provide any meaningful competitive advantage. The Company has no patents relating to its products. The Company believes that, because of the rapid pace of technological change in the computer software industry, patents and copyrights are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent product enhancements and the timeliness and quality of support services. There can be no assurance that the Company's current efforts to retain its products as proprietary will be adequate. Although the Company believes that its products do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against thex Company in the future with respect 17 to current or future products or that any such assertions will not require the Company to enter into royalty arrangements or result in costly litigation. PRODUCT LIABILITY. The Company's license agreements with its customers contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be enforced as a result of international, federal, state and local laws or ordinances or unfavorable judicial decisions. The license and support of the Company's software for use in mission critical applications creates the risk of product liability claims against the Company. Damage liability or injunctive relief resulting from such a claim could cause a materially adverse impact on the Company's business, operating results and financial condition. EMPLOYEES. The Company believes that its continued success will depend in large part upon its ability to attract, train and retain highly-skilled technical, sales, marketing and managerial personnel. Because of a high level of demand, competition for such personnel is intense and the Company sometimes experiences difficulty in locating candidates with appropriate qualifications or within desired geographic locations. Revenue growth is dependent on the Company's ability to attract, train, retain and productively manage such personnel. ACQUISITION-RELATED RISKS. The Company has acquired and may continue to acquire complimentary businesses, products or technology. The process of integrating an acquired company's business into the Company's operations may result in unforeseen operating difficulties and expenditures and may require significant management attention that would otherwise be available for the ongoing development of the Company's business. There can be no assurance that any anticipated benefits of an acquisition will be realized. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization related to goodwill and other intangible assets, which could materially affect the Company's operating results and financial condition. Acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies and products of the acquired company, risks associated with entering markets in which the Company has no or limited direct prior experience and the potential loss of key employees of the acquired company. VOLATILITY OF STOCK PRICE. High technology companies, including the Company, frequently experience volatility in their common stock prices. Factors such as quarterly fluctuations in results of operations, announcements of technological innovations by the Company or its competitors or the introduction of new products by the Company or its competitors and macroeconomic conditions in the computer hardware and software industries generally may have a significant adverse impact on the market price of the Company's stock. If revenues or earnings in any quarter fail to meet the expectations of the investment community, there could be an immediate impact on the Company's stock price. In addition, the Company has issued shares and stock options which if sold directly or exercised and sold on the open market in large concentrations, could cause the Company's stock price to decline in the short term. Furthermore, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for many high technology companies, in some cases unrelated to the operating performance of those companies. These broad market fluctuations may materially adversely affect the market price of the stock of the Company. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has U.S. dollar interest-bearing investments that are subject to interest rate risk. The Company analyzed its investments at year-end to determine the sensitivity to interest rate changes. The fair values of these instruments were determined by net present values. The Company's sensitivity analysis used the same change in interest rates for all maturities. All other factors were held constant. If interest rates increased by 10 percent the expected effect on net income related to the Company's investments would be immaterial. The majority of the Company's revenues are denominated in the U.S. dollar. The Company does not engage in interest rate swaps or enter into foreign currency forward contracts. 18 No material changes have occurred since December 31, 1998. 19 PART II. OTHER INFORMATION - --------------------------- Item 1. LEGAL PROCEEDINGS In September 1999, Commercial Data Servers, Inc., a California corporation, dba Xbridge systems, inc. ("CDS"), filed a civil action against the Company and International Business Machines Corp., a New York corporation ("IBM"), in the Superior Court of the State of California, County of San Francisco. The action alleges that the Company and IBM acted to injure competition in alleged violation of California's antitrust statute, prohibiting group boycotts, exclusive dealing arrangements and attempts to monopolize, and California's unfair competition statute, prohibiting unfair, unlawful and/or fraudulent business practices. CDS requested that the court grant CDS declaratory relief and monetary relief in an unspecified amount, including restitution and disgorgement of certain amounts, treble damages, attorneys' fees and costs and interest. The Company filed its answer to CDS' complaint in October 1999. IBM removed the action to the United States District Court, San Jose Division, for the Northern District of California in October 1999, and subsequently filed a motion to dismiss. The following sentence contains forward- looking statements. Although no assurance can be given, the Company believes that CDS' claims against the Company are without merit and that the final resolution of this matter will not have a material adverse effect on the Company's business, financial condition or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.20 Form of Executive Severance Benefits Agreement entered into between the registrant and certain of its employees. 27.1 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended September 30, 1999. 20 WALKER INTERACTIVE SYSTEMS, INC. FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WALKER INTERACTIVE SYSTEMS, INC. -------------------------------- (Registrant) Date: November 12, 1999 By: /s/ Michael B. Shahbazian ----------------- ------------------------- Michael B. Shahbazian Senior Vice President and Chief Financial Officer (Principal Financial Officer) 21 WALKER INTERACTIVE SYSTEMS, INC. FORM 10-Q INDEX TO EXHIBITS 10.20 Form of Executive Severance Benefits Agreement entered into between the registrant and certain of its employees. 27.1 Financial Data Schedule (electronic filing only) 22 EX-10.20 2 FORM OF EXECUTIVE SEVERANCE BENEFITS AGREEMENT Exhibit 10.20 EXECUTIVE SEVERANCE BENEFITS AGREEMENT This Executive Severance Benefits Agreement (this "Agreement") is entered into by and between Walker Interactive Systems, Inc., a Delaware corporation (the "Company") and ____________ ("Executive"), effective July __, 1999. This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article 6. The Company and Executive hereby agree as follows: ARTICLE 1 EMPLOYMENT BY THE COMPANY 1.1 The Company currently employs Executive. 1.2 The Company and Executive wish to set forth the compensation and benefits which Executive shall be entitled to receive in the event Executive's employment with the Company is terminated under the circumstances described herein. 1.3 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company and Executive's execution of the general waiver and release described in Section 3.2. 1.4 This Agreement shall supersede any other agreement relating to Executive's severance from employment with the Company. ARTICLE 2 SEVERANCE BENEFITS 2.1 Covered Termination Severance Benefits. If within twenty-four (24) months following a Change of Control, Executive's employment terminates due to an Involuntary Termination Without Cause or a Constructive Termination, such termination of employment will be deemed a "Covered Termination". A Covered Termination entitles Executive to receive the following benefits set forth in Sections 2.2 through 2.4 and Sections 2.9 and 2.10. 2.2 Severance Payment. Executive shall receive a severance payment equal to twelve (12) months of Base Pay plus Bonus, subject to applicable tax withholding, payable at such time or times as the Company may elect; provided that Executive shall not receive such 1 severance payments at a rate slower than the Company's regularly scheduled payment dates for payroll and bonus. If Executive is indebted to the Company at his or her date of termination, the Company reserves the right to offset any severance payment under this Agreement by the amount of such indebtedness. In no event shall payment of any severance payment be made prior to Executive's date of termination or in the absence of an effective release pursuant to Section 3.2 2.3 Acceleration Of Stock Option Vesting. The portion of Executive's stock options that would have vested on or before the date twelve (12) months from the occurrence of the Covered Termination shall accelerate and immediately become vested and exercisable. Notwithstanding the foregoing, if the Change of Control was a transaction that was accounted for as a pooling of interests for financial reporting purposes, then the unvested portion of such stock options shall not accelerate unless the Company receives reasonable assurances from the Company's independent public accountants (and from the acquiring party's independent public accountants) that in their good faith judgement such acceleration will not adversely affect the pooling of interests accounting treatment of such Change of Control transaction. 2.4 COBRA Continuation. Executive and Executive's covered dependents who are enrolled in a health or dental plan sponsored by the Company may be eligible to continue coverage under such health or dental plan (or to convert to an individual policy), at the time of the Executive's termination of employment under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The Company will notify the individual of any such right to continue health coverage at the time of termination. The Company will continue to pay its share of Executive's health insurance premiums until the earlier of: (i) twelve (12) months after the date of termination, or (ii) such time as the Executive becomes eligible to participate in another employer's health insurance plan (the "COBRA Period"); provided that Executive elects to continue coverage under COBRA and timely pays Executive's portion of the premiums. No provision of this Agreement will affect the continuation coverage rules under COBRA, except that the Company's payment of any applicable insurance premiums during the COBRA Period will be credited as payment by Executive for purposes of Executive's payment required under COBRA. Therefore, the period during which Executive must elect to continue the Company's group medical or dental coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Executive, and all other rights and obligations of Executive under COBRA (except the obligation to pay insurance premiums that the Company pays during the COBRA Period) will be applied in the same manner that such rules would apply in the absence of this Agreement. 2.5 Company Termination Severance Benefits. In the event Executive's employment terminates due to an Involuntary Termination Without Cause other than within twenty-four (24) months following a Change of Control (a "Company Termination"), Executive shall be entitled to receive the following benefits set forth in Sections 2.6 through 2.10. 2.6 Severance Payment. Executive shall receive a severance payment equal to twelve (12) months of Base Pay, subject to applicable tax withholding, payable at such time or times as the Company may elect; provided that Executive shall not receive such severance payments at a rate slower than the Company's regularly scheduled payment dates for payroll and 2 bonus. If Executive is indebted to the Company at his or her date of termination, the Company reserves the right to offset any severance payment under this Agreement by the amount of such indebtedness. In no event shall payment of any severance payment be made prior to Executive's date of termination or in the absence of an effective release pursuant to Section 3.2 2.7 Stock Option Vesting and Exercise Period. Except for the options listed on Exhibit A hereto, the portion of Executive's stock options that would have vested on or before the date twelve (12) months from the occurrence of the Company Termination shall accelerate and immediately become vested and exercisable and the period during which Executive may exercise any and all stock options deemed vested as of the date of Executive's termination shall be extended such that Executive will have twelve (12) months after the date of such termination to exercise such options. 2.8 COBRA Continuation. Executive and Executive's covered dependents who are enrolled in a health or dental plan sponsored by the Company may be eligible to continue coverage under such health or dental plan (or to convert to an individual policy), at the time of the Executive's termination of employment under COBRA. The Company will notify the individual of any such right to continue health coverage at the time of termination. The Company will continue to pay its share of Executive's health insurance premiums for three (3) months after the date of termination; provided that Executive elects to continue coverage under COBRA and timely pays Executive's portion of the premiums. No provision of this Agreement will affect the continuation coverage rules under COBRA, except that the Company's payment of any applicable insurance premiums during such three month period will be credited as payment by Executive for purposes of Executive's payment required under COBRA. Therefore, the period during which Executive must elect to continue the Company's group medical or dental coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Executive, and all other rights and obligations of Executive under COBRA (except the obligation to pay insurance premiums that the Company pays during such three month period) will be applied in the same manner that such rules would apply in the absence of this Agreement. 2.9 Accrued Vacation Pay. In addition to any other amount payable under this Article 2, Executive will be entitled to receive any accrued vacation pay in accordance with the Company's vacation pay policy then in effect for employees generally. 2.10 Mitigation. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by any retirement benefits received by Executive after the date of the Covered Termination, Company Termination or otherwise. 3 ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 Tax Consequences. The Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from any payments hereunder. Executive acknowledges that he or she has been advised by the Company to consult with a tax advisor or attorney with respect to the tax consequences, if any, of these amendments to his or her stock option grants. 3.2 Employee Agreement And Release Prior To Receipt Of Benefits. Upon the occurrence of a Covered Termination or Company Termination, and prior to the receipt of any benefits under this Agreement on account of such Covered Termination or Company Termination, Executive shall execute the Employee Agreement and Release (the "Release") in the form attached hereto as Exhibit B. Such Release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution and shall confirm Executive's obligations under the Company's standard form of proprietary information and inventions agreement. It is understood that Executive has twenty-one (21) calendar days to consider whether to execute such Release, and Executive may revoke such Release within seven (7) calendar days after execution. In the event Executive does not execute such Release within the twenty-one (21)-day period, or if Executive revokes such Release within the subsequent seven (7)-day period, no benefits shall be payable under this Agreement, and this Agreement shall be null and void. 3.3 Limitation on Competitive Activities. During the twelve (12) month period after the occurrence of a Covered Termination or Company Termination, Executive will not directly or indirectly (whether for compensation or without compensation), as an individual proprietor, partner, stockholder, officer, employee, consultant, director, joint venturer, investor, lender, or in any other capacity whatsoever (other than as the holder of not more than one percent (1%) of the total outstanding stock of a publicly held company), engage in any business activity that is competitive with the business of the Company ("Competitive Activity"). For purposes of this Agreement, "Competitive Activity" shall be deemed to include, without limitation, obtaining employment, performing work or providing services to SAP, PeopleSoft, Oracle, Hyperion or QSP (or any related corporation, partnership or other related entity). These Competitive Activities are prohibited in addition to any limitations on Executive's activities set forth in his Proprietary Information Agreement with the Company, and they are considered by the parties hereto to constitute a reasonable restriction for the purpose of protecting the business of the Company. However, if any such limitation is found by a court of competent jurisdiction to be unenforceable because it extends for too long a period or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If Executive does not comply with any of the foregoing, no benefits shall be payable under this Agreement, any benefits previously paid to Executive pursuant to this Agreement shall be repaid or surrendered to the Company, and this Agreement shall be null and void. 4 ARTICLE 4 OTHER RIGHTS AND BENEFITS 4.1 Nonexclusivity. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Covered Termination or Company Termination shall be payable in accordance with such plan, policy, practice or program. 4.2 Certain Reductions in Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any payment, distribution or other benefit provided by the Company to or for the benefit of Executive (whether paid or payable or provided or to be provided pursuant to the terms of this Agreement or otherwise) (a "Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986 ("the Code") and (ii) but for this Section 4.2, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, in accordance with this Section 4.2, such Payments shall be reduced to the maximum amount that would result in no portion of the Payments being subject to the Excise Tax, but only if and to the extent that such a reduction would result in Executive's receipt of Payments that are greater than the net amount Executive would receive (after application of the Excise Tax) if no reduction is made. The amount of required reduction, if any, shall be the smallest amount so that the Executive's net proceeds with respect to the Payments (after taking into account payment of any Excise Tax and all federal, state and local income, employment or other taxes) shall be maximized. If, notwithstanding any reduction described in this Section 4.2 (or in the absence of any such reduction), the Internal Revenue Service (the "IRS") determines that a Payment is subject to the Excise Tax (or subject to a different amount of the Excise Tax than determined by the Company or the Executive), then Section 4.2(c) shall apply. If the Excise Tax is not eliminated pursuant to this Section 4.2, Executive shall pay the Excise Tax. (b) All determinations required to be made under this Section 4.2 shall be made by the Company's independent auditors. Such auditors shall provide detailed supporting calculations both to the Company and Executive. Any such reasonable determination by the Company's independent auditors shall be binding upon the Company and Executive. The Executive shall determine which and how much of the Payments, including without limitation any option acceleration benefits provide under this Agreement or any option ("Option Benefits"), as the case may be, shall be eliminated or reduced consistent with the requirements of this Section 4.2, provided that, if Executive does not make such determination within ten (10) business days of the receipt of the calculations made by the Company's independent auditors, the Company shall elect which and how much of the Option Benefits or other Payments, as the case may be, shall be eliminated or reduced consistent with the requirements of this Section 4.2, and 5 then the Company shall notify Executive promptly of such election. Within five (5) business days thereafter, the Company shall pay to or distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Company's independent auditors hereunder, it is possible that Option Benefits or other Payments, as the case may be, will have been made by the Company which should not have been made ("Overpayment") or that additional Option Benefits or other Payments, as the case may be, which will not have been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Company's independent auditors, based upon the assertion of a deficiency by the IRS against Executive or the Company which the Company's independent auditors believe has a high probability of success, determine that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of Executive shall be treated for all purposes as a loan ab initio to Executive which Executive shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by Executive to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which Executive is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Company's independent auditors, based upon controlling precedent or other substantial authority, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. ARTICLE 5 TRANSFERABILITY OF BENEFITS 5.1 No benefit hereunder shall be subject to sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. ARTICLE 6 DEFINITIONS For purposes of this Agreement, the following terms are defined as follows: 6.1 "Base Pay" means Executive's base pay (excluding overtime, bonuses, draws, commission, and other forms of additional compensation and benefits), at the rate in effect during the last regularly scheduled payroll period immediately preceding any termination of Executive's employment. 6.2 "Board" means the Board of Directors of the Company. 6.3 "Bonus" means the average of the amount of Executive's bonus for the previous two (2) fiscal years of the Company. 6 6.4 "Cause" means termination of Executive's employment with the Company for any of the following reasons as determined in good faith by the Board: (a) an intentional act which materially injures the Company; (b) an intentional refusal or failure to follow lawful and reasonable directions of the Board or an individual to whom Executive reports (as appropriate); (c) a willful and habitual neglect of duties; or (d) a conviction of a felony involving moral turpitude which is reasonably likely to inflict or has inflicted material injury on the Company. 6.5 "Change of Control" means that the Company (a) merges or combines with any other company or entity and the Company is not the surviving corporation, or the stockholders of the Company immediately prior to the merger or consolidation do not hold a majority of the shares of the resulting corporation; (b) sells all or substantially all its assets to any other company or entity; or (c) has forty percent (40%) or more of its stock acquired by a person and/or affiliates of such person. 6.6 "Constructive Termination" means that Executive voluntarily terminates employment after any of the following are undertaken without Executive's express written consent: (a) the assignment to Executive of any duties or responsibilities which result in a diminution or adverse change of Executive's position, status or circumstances of employment; provided, however, that a mere change in Executive's title or reporting relationship shall not constitute a Constructive Termination; (b) a reduction by the Company in Executive's Base Pay; (c) a relocation of Executive's business office to a location more than thirty (30) miles from the location at which Executive performs duties as of the date of this Agreement, except for required travel by Executive on the Company's business to an extent substantially consistent with Executive's business travel obligations; (d) any breach by the Company of any provision of this Agreement or any other material agreement between Executive and the Company concerning Executive's employment; or (e) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. 6.7 "Covered Termination" means an Involuntary Termination Without Cause or a Constructive Termination. 6.8 "Involuntary Termination Without Cause" means Executive's dismissal or discharge other than for Cause. The termination of Executive's employment as a result of 7 Executive's death or disability will not be deemed to be an Involuntary Termination Without Cause. ARTICLE 7 GENERAL PROVISIONS 7.1 Employment Status. This Agreement does not constitute a contract of employment or impose upon Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, (ii) to change the status of Executive as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. 7.2 Notices. Any notices provided hereunder must be in writing, and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at Executive's address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at the address as listed in the Company's payroll records. 7.3 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 7.4 Waiver. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 7.5 Complete Agreement. This Agreement, including Exhibits, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter, wholly superseding all written and oral agreements with respect to payments and benefits to Executive in the event of employment termination. It is entered into without reliance on any promise or representation other than those expressly contained herein. 7.6 Duration of Agreement. This Agreement shall terminate upon the date of Executive's termination of employment with the Company. If not sooner terminated, this Agreement shall terminate on July 30, 2000 and beginning on July 31, 2000 and on each subsequent anniversary of such date, one (1) year shall be added to the term of this Agreement, unless at least twelve (12) months prior to such date or anniversary, the Company shall have notified Executive in writing that such extension will not become effective. Notwithstanding the 8 foregoing, this Agreement shall not terminate or expire with respect to Executive if Executive becomes entitled to receive payments and benefits set forth in Section 2 until Executive shall have received such payments and benefits in full. 7.7 Amendment or Termination of Agreement. Notwithstanding anything in Section 7.6 to the contrary, this Agreement may be changed or terminated upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by an executive officer of the Company after such change or the Board has approved termination. 7.8 Counterparts. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 7.9 Headings. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof or to affect the meaning thereof. 7.10 Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 7.11 Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California, without regard to such state's conflict of laws rules. 7.12 Non-Publication. The parties mutually agree not to disclose publicly the terms of this Agreement except to the extent that disclosure is mandated by applicable law or to respective advisors (e.g., attorneys, accountants). 7.13 Construction of Agreement. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. In Witness Whereof, the parties have executed this Agreement on the day and year written above. Walker Interactive Systems, Inc. [Executive] By:________________________________ ___________________________________ Name:______________________________ 9 Title:_____________________________ Exhibit A: Excluded Options Exhibit B: Employee Agreement and Release 10 Exhibit A EXCLUDED OPTIONS 2 Exhibit B EMPLOYEE AGREEMENT AND RELEASE I understand and agree completely to the terms set forth in the foregoing agreement. I hereby confirm my obligations under the Walker Interactive Systems, Inc.'s (the "Company") proprietary information and inventions agreement. In granting the release herein, I acknowledge that I understand that I am waiving the benefit of any provision of law in any jurisdiction to the following effect: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected her settlement with the debtor." (California Civil Code section 1542). I hereby expressly waive and relinquish all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to the release of unknown and unsuspected claims granted in this Agreement. Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and its and their respective officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to the date I execute this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; harassment; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to the Company's indemnification agreement. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Agreement; (B) I have the right to consult with an attorney prior to executing this Agreement; (C) I have twenty-one (21) days to consider this Agreement (although I may choose to voluntarily execute this Agreement earlier); (D) I have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (E) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by me, provided that the Company has also executed this Agreement by that date (the "Effective Date"). Walker Interactive Systems, Inc. [Executive] By:_______________________________ ___________________________________ Title:____________________________ Date:______________________________ EX-27.1 3 FINANCIAL DATA SCHEDULE
5 WALKER INTERACTIVE SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 10,880 13,133 25,448 2,037 0 46,628 29,478 25,170 69,773 36,568 0 0 0 14 26,156 69,773 69,939 69,939 36,887 88,025 0 0 0 (17,340) 12,701 0 0 0 0 (30,041) (2.14) (2.14)
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