<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration no. 333-53939
PROSPECTUS
4,200,000 Shares
[SOFTWORKS LOGO] SOFTWORKS
Common Stock
Of the 4,200,000 shares of Common Stock offered hereby, 1,700,000 are being
sold by SOFTWORKS, Inc. ("SOFTWORKS" or the "Company"), and 2,500,000 are being
sold by certain selling stockholders (the "Selling Stockholders"). The Company
will not receive any of the proceeds from the sale of the shares being sold by
the Selling Stockholders. Prior to this offering, there has been no public
market for the Common Stock. The Common Stock has been approved for quotation on
the Nasdaq National Market under the symbol "SWRX."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share........................... $7.00 $0.49 $6.51 $6.51
Total(3)............................ $29,400,000 $2,058,000 $11,067,000 $16,275,000
</TABLE>
- ---------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$750,000.
(3) One of the Selling Stockholders has granted the Underwriters a 30-day option
to purchase up to an additional 630,000 shares of Common Stock solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Selling Stockholders will be $33,810,000, $2,366,700 and $20,376,300,
respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered, subject to prior
sale, when, as and if accepted by the several Underwriters and subject to
approval of certain legal matters by Morrison & Foerster LLP, counsel for the
Underwriters. It is expected that certificates representing the shares of Common
Stock will be available for delivery in New York, New York, on or about August
7, 1998.
SoundView Financial Group, Inc. Raymond James & Associates, Inc.
August 4, 1998
<PAGE> 2
[ARTWORK]
SOFTWORKS and Catalog Solution are registered trademarks of the Company.
This Prospectus also includes other registered and unregistered trademarks and
service marks of the Company and other companies. All trademarks and service
marks appearing herein that do not relate to the Company's products and services
are the property of their respective holders.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE OR MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of the over-allotment
option described under "Underwriting" or the exercise of any other options or
warrants.
THE COMPANY
SOFTWORKS develops, markets, licenses and supports a family of enterprise
systems management software products for data and storage management and
performance management. The Company provides automated systems management
solutions designed to optimize system and application performance, reduce
hardware expenditures, and enhance the reliability and availability of the data
processing environment for enterprises that employ primarily mainframe computing
environments, and increasingly UNIX and Microsoft(R) Windows NT(R) ("NT"). The
Company believes that it has been a pioneer in the development of automated
systems management solutions and that it is currently a leading vendor in this
market. As of June 30, 1998, the Company's products were licensed for use by 81
of the Fortune 100 companies.
Gartner Group estimates that in 1997, the net new license revenue for the
storage management and network and systems management markets totaled
approximately $8.2 billion. The Company primarily operates in the storage
resource management market, a subset of the storage management market. The
storage resource management market is expected to grow at a 44% compounded
annual growth rate from $201 million in 1997 to $1.2 billion in 2002. Many
information technology ("IT") organizations are now demanding next generation
systems management tools that move beyond simply monitoring and reporting.
Solutions that incorporate platform-specific intelligence and allow automatic
management of storage and performance across heterogeneous environments address
a critical requirement of IT groups today. A comprehensive automation solution
should include proactive alerts, programmed responses and automated corrective
actions enabling effective management of the increasing volume and complexity of
the computing environments with fewer specialized technicians. These solutions
should also provide an efficient and effective vehicle for instituting "best
practices" across the enterprise.
The Company's offerings are grouped into four market segments ("Arenas"):
performance management; data and storage management; Year 2000; and professional
services. Historically, the Company's products addressed only the performance
and data storage requirements of mainframe operating systems. Recently, the
Company's products have been expanded to include UNIX-based storage management
products, and the Company expects to introduce NT-based storage management
products in the near future. In addition, the Company has extended its product
family by launching a suite of products in the Year 2000 Arena. The Company has
also created a professional services organization that provides systems
management services, including training, implementation of software and staff
augmentation.
The Company's products are developed using "SST," its proprietary
combination of a design strategy, a development methodology and a set of core
technologies, which is intended to enable the Company's software products to
provide immediate performance improvement and cost savings. The Company believes
that SST differentiates it from its competition by redefining and extending
traditional monitoring and reporting systems management through the use of
embedded intelligence which provides proactive alerts, programmed responses and
automated corrective actions.
The Company intends to leverage its market position in the mainframe
environment to become a leading provider of data and storage management and
performance management products for multi-platform environments. The Company
also plans to expand its offerings to include additional systems management
products and services for both the mainframe and multi-platform environments.
The Company's strategy is to: (i) enhance and extend product offerings in
current Arenas; (ii) expand domestic and international sales channels; (iii)
leverage its existing customer base; (iv) offer products in new systems
management Arenas; and (v) pursue strategic partnerships, alliances and
acquisitions.
3
<PAGE> 4
The Company has over 5,000 licenses of its products for use at over 1,900
installations. The Company's customers include ADP Financial Information
Services Inc., NationsBanc Services, Inc., Sherwin-Williams Co., Texas
Instruments Incorporated, The Vanguard Group and Wal-Mart Stores, Inc. The
Company sells its products through a global direct sales force and a network of
international distributors and resellers.
The Company was incorporated in Maryland in July 1977 and reincorporated in
Delaware in May 1998. It is a subsidiary of Computer Concepts Corp. ("Computer
Concepts"). The Company maintains its principal offices at 5845 Richmond
Highway, Alexandria, Virginia 22303 and its telephone number is (703) 317-2424.
THE OFFERING
Common Stock offered by the Company... 1,700,000 shares
Common Stock offered by the Selling
Stockholders.......................... 2,500,000 shares
Total Common Stock offered............ 4,200,000 shares
Common Stock to be outstanding after
the offering.......................... 15,973,000 shares
Use of proceeds....................... For working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol......... SWRX
SUMMARY FINANCIAL INFORMATION
The following summary financial information concerning the Company, other
than the as adjusted balance sheet data, has been derived from the financial
statements included elsewhere in this Prospectus and should be read in
conjunction with such financial statements and the notes thereto. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Preliminary Recent Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................... $ 11,626 $ 16,525 $ 26,770 $ 4,666 $ 6,596
Gross margin.................... 7,507 12,437 20,522 3,402 4,286
Net (loss) income............... (1,711) 792 786 (333) (767)
=========== =========== =========== =========== ===========
Basic and diluted net (loss)
income per share.............. $ (0.12) $ 0.06 $ 0.06 $ (0.02) $ (0.05)
=========== =========== =========== =========== ===========
Basic and diluted weighted
average shares outstanding.... 14,083,000 14,083,000 14,083,000 14,083,000 14,083,000
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
ACTUAL AS ADJUSTED (1)
---------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 909 $ 11,226
Working capital............................................. (1,544) 8,773
Total assets................................................ 35,362 45,679
Long term debt, net of current portion...................... 1,388 1,388
Total stockholder's equity.................................. 5,328 15,645
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 1,700,000 shares of Common Stock by the
Company at the initial public offering price of $7.00 per share and the
receipt by the Company of the net proceeds therefrom.
Except where otherwise indicated, this Prospectus gives effect to a
5,000-for-1 stock split of the Common Stock in May 1998 and a stock dividend in
June 1998.
4
<PAGE> 5
RISK FACTORS
Prospective investors, prior to making an investment decision, should
carefully read this Prospectus and consider, along with other matters referred
to herein, the risk factors below.
Fluctuations in Operating Results. The Company's operating results have
fluctuated in the past, and in the future, are expected to fluctuate
significantly from quarter to quarter and may fluctuate on an annual basis as a
result of a number of factors, including, but not limited to, the size and
timing of customer orders; the timing of renewals or the failure of existing
customers to renew their maintenance agreements with the Company when their
current agreements expire; changes in the Company's sales cycle; the timing of
new product announcements and introductions by the Company and its competitors;
the Company's ability to develop, introduce and market new products and product
enhancements; market acceptance of the Company's products; deferrals of customer
orders in anticipation of new products or product enhancements or service
offerings; changes in contract terms (including terms affecting the timing of
recognition of license and maintenance revenue) and the rate at which such
changes are made; the Company's ability to control costs, including the hiring
of new employees; political instability in, or trade embargoes with respect to,
foreign markets; changes in the Company's management team; and fluctuating
economic conditions. The Company's future operating results may fluctuate as a
result of these and other factors, which could have a material adverse effect on
the Company's business, operating results and financial condition. The Company's
operating results may be above or below the expectations of public market
analysts and investors. In the event that operating results are below
expectations, the price of the Company's Common Stock could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Management of Growth. In recent periods, the Company has experienced rapid
growth and an increase in responsibilities placed upon the Company's management
which has placed added pressures on the Company's operating and financial
systems. In 1997 and during the quarter ended March 31, 1998, the number of
persons employed by the Company increased by 82 and 20, respectively. In
addition, the Company recently hired a Chairman of the Board and a Chief
Financial Officer. The Company plans to expand the number of sales, marketing
and software development personnel in the United States and elsewhere. The
recent pace of growth, and anticipated expansion in the near future, has placed
and will continue to place a significant strain on the Company's management and
other resources. Failure to integrate new personnel on a timely basis could have
an adverse effect on the Company's operations. Furthermore, the expenses
associated with expanding the Company's management team and hiring new employees
may be incurred prior to the generation of any associated revenue. In addition,
the officers of the Company have had no prior experience managing a public
company. To manage future growth, the Company will be required to continue to
improve its operational, financial, accounting and management systems, and
motivate and effectively manage its employees. If the Company is unable to
manage growth effectively, the quality of the Company's products, its ability to
attract and retain key personnel and develop and market new products, and its
results of operations and financial condition could be materially adversely
affected. See "-- Dependence on Key Personnel" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Expansion of International Operations. In order to further increase sales
opportunities and profitability, the Company believes it will be necessary to
expand its marketing, direct and third-party sales and support channels outside
the United States, particularly in Europe. The Company may consider expanding
direct sales, marketing and support capabilities to countries in which the
Company currently maintains distributor relationships, as well as other
countries, as opportunities arise. The Company has limited experience in
marketing and selling its products outside the United States and there can be no
assurance that the Company will be able to increase sales of its products in
Europe or elsewhere. In addition, as the Company seeks to expand its
international operations, it must recruit, train and manage qualified personnel,
including agents. Failure of the Company to attract and retain qualified
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Sales, Distribution and Marketing."
Foreign Exchange. Since the Company intends to continue to pursue growth
opportunities in international markets, a significant change in the value of the
dollar against the currency of one or more countries
5
<PAGE> 6
where the Company recognizes substantial revenue or earnings may materially
adversely affect the Company's business, operating results and financial
condition. The Company has not sustained material foreign currency exchange
losses and presently does not attempt to hedge its exposure to fluctuations in
foreign currency exchange rates. International revenue generated by the Company
contributed approximately 23%, 30% and 18% of total revenue during 1995, 1996
and 1997, respectively. Should the Company's revenue from international sales
increase as intended, and should such sales be denominated in foreign
currencies, the Company may adopt a hedging strategy to guard against foreign
currency fluctuations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Relationship with Computer Concepts. After giving effect to the sale of
Common Stock offered hereby, Computer Concepts will beneficially own 68.7% of
the outstanding Common Stock of the Company and does not currently intend to
reduce its beneficial ownership of Common Stock to below 50%. Computer Concepts
determined to effect the offering at this time in order to maximize stockholder
value. As the controlling stockholder of the Company, Computer Concepts will
have the ability to control certain fundamental matters affecting the Company
and may be able to influence other decisions of the Company. The ongoing
relationship between Computer Concepts and the Company may result in conflicts
of interest between Computer Concepts and the Company even though they are not
engaged in competing businesses. Prior to the completion of the offering, the
Company, Computer Concepts, James Cannavino, Daniel DelGiorno, Jr. and Robert
Devine, each of whom are members of the Company's Board of Directors and will
serve as trustees (the "Trustees"), intend to enter into a voting trust
agreement (the "Voting Trust Agreement"). See "Certain Transactions -- Voting
Trust Agreement". Computer Concepts has received a going concern opinion with
respect to its audited financial statements for the year ended December 31,
1997. Computer Concepts expects that its financial condition will improve due to
increased revenue generated by sales and/or licensing of its technologies,
together with the proceeds of this offering. Under certain circumstances,
Computer Concepts' financial condition may influence its decisions as the
controlling stockholder of the Company. Computer Concepts has no present plans
to sell additional shares of Common Stock and does not expect to pledge any
Common Stock in order to secure any credit facility. In addition, without the
prior consent of SoundView Financial Group, Inc., Computer Concepts cannot sell
any Common Stock for 12 months from the date of this Prospectus. See "Certain
Transactions."
Benefits of the Offering to Existing Stockholders. After this offering, it
is expected that a public market will exist for the Common Stock. The Company
expects to use approximately $3.0 million of the net proceeds of this offering
to repay the balance advanced to it by its parent, Computer Concepts. Existing
stockholders are hereby offering an aggregate of 2,500,000 shares of Common
Stock having an aggregate original purchase price of approximately $939,000 and
a market value, based on an initial public offering price of $7.00, of
approximately $17.5 million (or an aggregate of 3,130,000 shares of Common Stock
with an original purchase price of $1.2 million and a market value of $21.9
million if the Underwriters' over-allotment option is exercised in full). After
this offering, existing stockholders are expected to retain an aggregate
11,773,000 shares of Common Stock having an aggregate original purchase price of
approximately $4.4 million, and a market value, based on an initial public
offering price of $7.00, of approximately $82.4 million (or an aggregate of
11,143,000 shares of Common Stock with an original purchase price of $4.2
million and a market value of $78.0 million if the Underwriters' over-allotment
option is exercised in full). Although Internet Tracking & Security Ventures
("Internet Tracking") is a Selling Stockholder, Computer Concepts is receiving
the benefit of the sale by Internet Tracking of those shares of Common Stock
since Computer Concepts used such shares to acquire certain assets of Internet
Tracking shortly prior to the consummation of this offering.
Ability to Recruit Personnel. The ability to achieve anticipated levels of
revenue is substantially dependent on the ability of the Company to attract and
retain skilled personnel on a timely basis, especially research and development
personnel. The Company believes that its future success will depend in large
part on its ability to attract and retain highly skilled technical, sales,
managerial and professional services personnel to ensure the quality of products
and services provided to its customers. Competition for such personnel, in
particular for product development personnel, is intense, and the Company
competes in the market for such personnel against numerous companies, including
larger, more established companies with significantly greater financial
resources than the Company. There can be no assurance that the Company will be
successful in
6
<PAGE> 7
attracting and retaining skilled personnel. The Company's inability to attract
and retain qualified employees could have a material adverse effect on the
Company's business, operating results and financial condition. See
"-- Dependence on Key Personnel" and "-- Rapid Technological Change; New
Versions and New Products."
Dependence on Key Personnel. The Company's business expansion plans are
dependent in substantial part upon the abilities of James A. Cannavino, its
Chairman of the Board, Judy G. Carter, its President and Chief Executive Officer
and Claude R. Kinsey, III, its Vice President and Chief Technology Officer.
Although each of Mr. Cannavino, Ms. Carter and Mr. Kinsey have entered into
employment agreements with the Company, there can be no assurance that they will
remain in the employ of or continue to provide services to the Company. The loss
of the services of any such persons could likely have a material adverse effect
on the Company. The Company has applied for $3 million life insurance policies
for both Mr. Cannavino and Ms. Carter, the proceeds of which will be payable to
the Company. See "Management."
Limited Sales Predictability. Revenue in any quarter is dependent to a
significant degree on orders booked and renewals of maintenance agreements in
that quarter and is not predictable with any degree of certainty. Since the
Company's expense levels are based in part on management's expectations
regarding future revenue, if revenue is below expectations in any quarter, the
adverse effect may be magnified by the Company's inability to adjust spending in
a timely manner to compensate for any revenue shortfall. In addition, because
customers are purchasing larger and more complex software products, as well as
suites of products, the average order value has been increasing and purchases of
the Company's products generally require approval of senior management. For
these and other reasons, sales cycles for the Company's products can be lengthy
and are subject to a number of significant risks over which the Company has
little or no control. As a result of the large dollar amounts which may be
represented by a single order, the timing of the receipt of an order can have a
significant impact on the Company's revenue and earnings for a particular
period. Any significant or ongoing failure to reach definitive agreements with
customers, including renewals of current maintenance agreements upon their
expiration, would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence on Proprietary Technology. The Company's success is dependent
upon its confidential and proprietary software technology and other proprietary
rights. The Company does not currently have any patents or pending patent
applications and relies principally on a combination of: (i) trade secret,
copyright and trademark laws; (ii) nondisclosure, use restriction and other
contractual restrictions and agreements; and (iii) certain technical measures to
protect its technology. Because patent applications in the U.S. are not publicly
disclosed until the relevant patent is issued, applications may have been filed
by third parties, which, if issued as patents, could relate to the Company's
services and products as currently designed or as the Company may modify them in
the future to meet the market's requirements.
The Company's policy is to enter into confidentiality, technology ownership
and/or license agreements, as applicable, with its technical software
programming employees as well as with distributors and customers, and to limit
access to and distribution of its software, documentation and other proprietary
information. In addition, the Company does not license or release its source
code, except in connection with source code escrow arrangements and applicable
source code use restrictions. Trade secret, copyright and trademark laws provide
limited protection. There can be no assurance that these laws, in combination
with the steps taken by the Company to protect its proprietary rights, will be
adequate to prevent misappropriation of its technology or other proprietary
rights. Also, such protections do not preclude competitors from independently
developing products with functionality or features similar, substantially
equivalent or superior to the Company's products and technologies. In addition,
effective protection of copyrights, trade secrets, trademarks, and other
proprietary rights may be unavailable or limited in certain foreign countries.
There can be no assurance that licenses for any intellectual property that might
be required in connection with the Company's development of its services or
products, either to avoid infringement of a third party's product, patent or
other rights or to enhance the Company's product offering, would be available on
commercially reasonable terms, if at all. Any failure by or inability of the
Company to protect its proprietary technology or to obtain appropriate licenses
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Licensing and Intellectual
Property."
7
<PAGE> 8
Proprietary Rights and Infringement. There has been substantial litigation
in the software industry involving intellectual property rights and the law is
not settled regarding the protectable aspects of software, its design, interface
and architecture. The Company does not believe its products infringe the
intellectual property or other proprietary rights of any third parties, and it
is not aware of any claims by any third party that the Company is infringing any
such right. Nevertheless, there can be no assurance that infringement claims
will not be asserted against the Company or its customers, or that such claims,
if asserted, would not have a material adverse effect on the Company's business,
operating results, and financial condition. In addition, as the Company acquires
or licenses a portion of the software included in its products from third
parties, the Company's exposure to infringement actions may increase because the
Company must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed software. Although the Company intends to
obtain representations as to the origins and ownership of such acquired or
licensed software, there can be no assurance that such representations are or
will be accurate or that such indemnifications will provide adequate
compensation for any breach of such representations. Furthermore, the Company
may initiate claims or litigation against third parties for infringement of or
otherwise to protect or establish the validity of the Company's proprietary
rights. The Company could incur substantial costs, product shipment delays or
restrictions, and diversion of management resources in defending, pursuing and
resolving any claims, with or without merit, relating to proprietary rights. The
Company might be subject to injunctive or other equitable relief, or might be
required to pay substantial damages awards or enter into licensing or royalty
arrangements to resolve any such claims, or might be prevented from selling or
delivering its products. Any of the foregoing could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Licensing and Intellectual Property."
Risk of Errors or Failures in Software Products. Products as complex as
those offered by the Company may contain errors, failures or bugs. In
particular, the computer environment is characterized by a wide variety of
standard and non-standard configurations and by errors, failures and bugs in
third party platforms and applications that make pre-release testing for
programming or compatibility errors very difficult, time-consuming and
expensive. Furthermore, there can be no assurance that, despite testing by the
Company and by others, errors, failures or bugs will not be found in new
products or releases after commencement of commercial shipments by the Company.
Errors, failures or bugs in the Company's products could result in adverse
publicity, product returns, loss of or delay in market acceptance of the
Company's products or claims by the customer or others against the Company.
Alleviating such problems could require significant expenditures of capital and
resources by the Company and could cause interruptions, delays or cessation of
service to the Company's customers. Errors, failures or bugs in the Company's
products could have a material adverse effect on the Company's business,
operating results and financial condition.
Rapid Technological Change; New Versions and New Products. The software
markets in which the Company competes are characterized by rapid technological
change, frequent introductions of new products and product enhancements, changes
in customer demands and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
and practices can render existing products obsolete and unmarketable. For
example, the Company's customers have adopted a wide variety of hardware,
software, database and networking platforms and applications. As a result, to
gain broad market acceptance, the Company must continue to support and maintain
its products on a variety of such platforms and applications, and extend its
product offerings to new platform, network and application environments. The
development of new versions of existing products that are compatible with
different operating systems and environments, the Internet, different database
systems, and other applications entails significant technical risk. The
Company's future success will depend on its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to its products and new products on a timely basis that keep pace with
technological developments, evolving industry standards and practices and
changing customer requirements. The success of the Company's products may also
depend, in part, on the Company's ability to introduce products which are
compatible with the Internet and World Wide Web. There can be no assurance that
the Company will be successful in developing, introducing and marketing the
enhancements to its products and new products, or versions of such products that
work with or on different operating environments, networks, platforms or
applications that respond to technological developments, evolving industry
standards and practices or changing customer requirements, or that the
8
<PAGE> 9
Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products or that such enhancements will adequately meet the requirements of the
marketplace and achieve any significant degree of market acceptance. If release
dates of future product enhancements or new products are delayed or if these
products or enhancements fail to achieve market acceptance when released, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the introduction or announcement
of new product offerings or enhancements by the Company or the Company's
competitors or major hardware, systems or software vendors may cause customers
to defer or forego purchases of the Company's products, which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Industry Background," "-- The SOFTWORKS
Solution," "-- Strategy," "-- Products and Services," and "-- Research and
Development."
Competition. The market in which the Company operates is competitive,
rapidly evolving and subject to continuous technological change. There can be no
assurance that the Company can maintain or enhance its competitive position
against current and future competitors. Significant factors, such as the
emergence of new products, fundamental changes in computing technology and data
storage and manipulation platforms and applications and aggressive pricing and
marketing strategies by the Company's competitors, may affect the Company's
competitive position. Many of the Company's current and potential competitors
have longer operating histories, greater name recognition, larger installed
customer bases and substantially greater financial, technical and marketing
resources than the Company. There can be no assurance that the Company's current
and potential competitors will not develop software products that may be or may
be perceived to be more effective or responsive to technological change than the
Company's current or future products or that the Company's technologies and
products will not be rendered obsolete by such developments. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition. See "Business -- Competition."
Dependence on Renewals of Maintenance Agreements. The Company derives a
significant portion of its total revenue from the renewal of maintenance
agreements with existing licensees. The Company's planned expense levels are
based in part on management's expectations regarding renewal rates and on future
renewal, license and other revenue. If such renewals and revenue are below
expectations in any quarter, the Company's inability to adjust spending in a
timely manner to compensate for the revenue shortfall could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's ability to secure renewals may be affected by, among
other factors, its ability to deliver consistent, high-quality and timely
product enhancements; ownership or management changes within customer
organizations, including acquisitions of customers by other companies; customer
capital budget constraints; the introduction or enhancement of competing
products and service offerings by third parties; political and economic
instability in customers' markets; and other factors, many of which may be
beyond the control of the Company. There can be no assurance that the Company
will be able to maintain its historical renewal rates, and any significant or
ongoing decline in renewal rates would have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with Possible Acquisitions. In the normal course of its
business, the Company evaluates potential acquisitions of businesses, products
and technologies that could complement or expand the Company's business. In the
event the Company identifies an appropriate acquisition candidate, there is no
assurance that the Company would be able to successfully negotiate the terms of
any such acquisition, finance such acquisition or integrate such acquired
business, products or technologies into the Company's existing business and
products. Furthermore, the negotiation of potential acquisitions as well as the
integration of an acquired business could cause diversion of management's time
and resources, and require the Company to use proceeds from the offering to
consummate a potential acquisition. There can be no assurance that a given
acquisition, whether or not consummated, would not have a material adverse
effect on the Company's business, operating results and financial condition. If
the Company consummates one or more significant
9
<PAGE> 10
acquisitions in which the consideration consists of Common Stock, stockholders
of the Company could suffer significant dilution of their interests in the
Company.
Discretion In Application of Proceeds. Management of the Company has
certain discretion over the use and expenditure of a significant portion of the
proceeds of this offering. The Company intends to use the funds raised in this
offering primarily for retention of product development personnel, promotion of
its products and for working capital and general corporate purposes. Although
the Company does not contemplate changes in the allocated use of proceeds, to
the extent the Company finds changes are necessary or appropriate in order to
address changed circumstances and/or opportunities, management may find it
necessary to adjust the use of the Company's capital, including the proceeds of
this offering. As a result of the foregoing, the success of the Company may be
substantially dependent upon the discretion and judgment of the management of
the Company with respect to the application and allocation of the net proceeds
hereof.
Year 2000 Risk. Year 2000 compliance is a measure of the ability of
computer hardware and software to differentiate between the years 1900-1999 and
the years 2000-2099. The underlying problem is caused by the fact that computer
programs traditionally have been written using two digits rather than four to
store year information. Failure to address this problem could result in system
failures and the generation of erroneous data. Moreover, there are a number of
software and product design approaches to achieving Year 2000 compliance, and
the Company may incur additional costs in maintaining its products'
compatibility with third-party products and platforms as a result of any Year
2000 compliance modifications that either the Company or a third party makes to
its relevant product offerings.
The Company is reviewing its internal computer programs and systems to
ensure that they will be Year 2000 compliant. The Company presently believes
that its computer systems will be Year 2000 compliant in a timely manner.
However, while the estimated cost of these efforts is not expected to be
material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect. In addition, the Company
cannot predict the effect of the Year 2000 problem on the vendors, customers and
other entities with which the Company transacts business, or with whose products
the Company's products interact and there can be no assurance that the effect of
the Year 2000 problem on such entities will not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Immediate and Substantial Dilution. The initial public offering price is
substantially higher than the net tangible book value per share of Common Stock.
Investors purchasing shares of Common Stock in this offering will incur
therefore immediate and substantial dilution in net tangible book value.
Notwithstanding the fact that all options presently outstanding are exercisable
at the offering price, to the extent that options (currently outstanding or
subsequently granted) to purchase the Company's Common Stock are exercised,
there may be further dilution. If the net proceeds of this offering, together
with available funds and cash generated by operations, are insufficient to
satisfy the Company's cash needs, the Company may be required to sell additional
equity or convertible debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. See "Dilution" and "Principal and Selling Stockholders."
No Cash Dividends on Common Stock. The Company has never declared or paid
any cash dividends on its shares of Common Stock. The Company intends to utilize
its earnings, if any, to facilitate the expansion of its business. Accordingly,
it has no intention of declaring or paying cash dividends on its Common Stock
for the foreseeable future. See "Dividend Policy."
Absence of Public Market; Negotiated Offering Price. Prior to the
offering, there has been no market for the Common Stock. Although the Common
Stock has been approved for quotation on the Nasdaq National Market, there can
be no assurance that an active market will develop for the Common Stock or, if
developed, that it can be maintained. The initial public offering price of the
Common Stock has been established by negotiations between the Company and the
Underwriters and does not necessarily bear any relationship to the Company's
book value, assets, past operating results, financial condition, or other
established criteria of value. See "Underwriting."
Shares Eligible for Future Sale. Sales of large amounts of the Company's
Common Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's future
10
<PAGE> 11
ability to raise capital through offerings of its equity securities. A
substantial number of outstanding shares of Common Stock and shares of Common
Stock issuable upon the exercise of outstanding stock options will become
available for resale in the public market at prescribed times. Upon completion
of this offering, there will be approximately 15,973,000 shares of Common Stock
of the Company outstanding. The 4,200,000 shares offered hereby will be eligible
for immediate sale in the public market without restriction, except for any
shares purchased by an affiliate of the Company (in general, a person who has a
control relationship with the Company), which will be subject to the limitations
of Rule 144 adopted under the Securities Act of 1933, as amended (the
"Securities Act"). No other shares will be immediately eligible for resale in
the public market without restriction under the Securities Act, but 11,483,000
shares will be eligible for resale in the public market pursuant to Rule 144 and
Rule 701 of the Securities Act beginning 90 days after the effective date of
this Prospectus. Computer Concepts, which owns all of these shares, has agreed
that it will not, without the prior written consent of SoundView Financial
Group, Inc., sell or otherwise dispose of any shares of Common Stock
beneficially owned by it for a period of one year after the effective date of
this Prospectus. Following expiration of the lock-up period (or earlier consent
of SoundView Financial Group, Inc.), these shares will be eligible for sale
subject to the restrictions of Rule 144. The Company intends to register
approximately 3,727,000 shares reserved for issuance under its stock option
plan. Options and stock issued under the stock option plan shall be subject to a
180 day lock-up period from the closing of this offering. Following this
offering, the holder of 190,000 shares of Common Stock will have certain rights
to register those shares under the Securities Act. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."
Potential Anti-Takeover Effects of Delaware Law and Certificate of
Incorporation; Possible Issuances of Preferred Stock. Certain provisions of
Delaware law and the Company's Certificate of Incorporation and By-laws could
make more difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be beneficial to the interests of the
stockholders. These provisions include Section 203 of the Delaware General
Corporation Law, the classification of the Company's Board of Directors into
three classes and the requirement that 66 2/3% of the stockholders of the
Company entitled to vote thereon approve certain transactions, including mergers
and sales or transfers of all or substantially all the assets of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock or preferred stock.
In addition, the Company's Certificate of Incorporation allows for the issuance
of up to two million shares of preferred stock by the Board of Directors without
stockholder approval on such terms as the Board may determine. The rights of the
holders of Common Stock and preferred stock will be subject to, and may be
adversely affected by, the rights of the holders of additional or other classes
of preferred stock that may be issued in the future. Moreover, although the
ability to issue preferred stock may provide flexibility in connection with
possible acquisitions and other corporate purposes, such issuance may make it
more difficult for a third party to acquire, or may discourage a third party
from acquiring, a majority of the voting stock of the Company. The Company has
not issued any shares of preferred stock and has no current plans to issue any
shares of any classes of capital stock other than as described herein. See
"Description of Capital Stock."
Limitations on Personal Liability of Directors. The Company's Certificate
of Incorporation and By-laws contain provisions which reduce the potential
personal liability of directors for certain monetary damages and provide for
indemnity of directors and other persons. The Company is unaware of any pending
or threatened litigation against the Company or its directors that would result
in any liability for which such director would seek indemnification or similar
protection. The Company has entered into indemnification agreements with certain
of its officers and directors. The indemnification agreements provide for
reimbursement for all direct and indirect costs of any type or nature whatsoever
(including attorneys' fees and related disbursements) actually and reasonably
incurred in connection with either the investigation, defense or appeal of
certain legal proceedings, (as defined) including amounts paid in settlement by
or on behalf of an indemnitee thereunder. See "Management -- Personal Liability
and Indemnification of Directors."
Forward-Looking Statements. All statements other than statements of
historical fact included in this Prospectus, including without limitation
statements under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," regarding the
Company's financial position, business strategy and the plans and objectives of
the Company's management for future operations, are forward-looking statements.
When used in this Prospectus, words such as "anticipate,"
11
<PAGE> 12
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or its management, identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors,
such as those disclosed under "Risk Factors," including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, the dependence on key personnel, control of
the Company by its present stockholder, absence of a public market and
management's discretion in the application of the offering proceeds. Such
statements reflect the current views of the Company with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, growth strategy and liquidity
of the Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this paragraph.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (after deducting underwriting discounts and estimated offering
expenses) is approximately $10.3 million. The Company will receive no benefit
from the sale of shares by the Selling Stockholders.
The Company intends to use the net proceeds of this offering primarily for
additional working capital, general corporate purposes, including hiring of
additional personnel and international expansion, and possible acquisitions. In
addition, the Company intends to repay the balance advanced to it by its parent,
Computer Concepts (approximately $3.0 million as of June 30, 1998). See "Certain
Transactions."
The amounts actually expended by the Company for working capital purposes
will vary significantly depending upon a number of factors, including any future
revenue growth and the amount of cash generated by the Company's operations.
Hence, the Company's management will retain broad discretion in the allocation
of the net proceeds from this offering. In addition, the Company may make one or
more acquisitions of complementary technologies, products or businesses which
broaden or enhance the Company's current product offerings. However, the Company
has no specific plans, agreements or commitments, oral or written, and is not
currently engaged in any negotiations for any such acquisition. Pending the uses
described above, the net proceeds will be invested in interest-bearing,
investment-grade securities, U.S. Government securities, money market
investments and short-term, interest-bearing deposits in major banks. See "Risk
Factors -- Discretion in Application of Proceeds" and "-- Risks Associated with
Possible Acquisitions." The net proceeds to the Company from this offering are
expected to be adequate to fund the Company's working capital needs for at least
the next twelve months. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has never declared or paid any cash dividends and
currently does not intend to pay cash dividends in the foreseeable future on the
shares of Common Stock. The Company intends to retain earnings, if any, to
finance the development and expansion of its business. In addition, the Company
is a party to the Voting Trust Agreement which limits the payment of dividends.
See "Certain Transactions -- Voting Trust Agreement." Payment of future
dividends on the Common Stock will be subject to the discretion of the Board of
Directors and will be contingent upon future earnings, if any, the Company's
financial condition, capital requirements, general business conditions and other
factors. Therefore, there can be no assurance that any dividends on the Common
Stock will ever be paid.
12
<PAGE> 13
DILUTION
The deficit in net tangible book value of the Company at March 31, 1998 was
($2,805,000), or ($0.20) per share of Common Stock. Net tangible book value per
share is equal to the Company's total tangible assets less total liabilities,
divided by the total number of shares of Common Stock outstanding, after giving
effect to a 5,000-for-1 stock split in May 1998, the issuance of a stock
dividend in June 1998 and the issuance of 190,000 shares of Common Stock to a
financial advisor to the Company simultaneously with the closing of this
offering and in connection therewith. After giving effect to the sale by the
Company of the 1,700,000 shares of Common Stock offered hereby at an initial
public offering price of $7.00 per share, and after deducting the underwriting
discount and estimated offering expenses, the net tangible book value of the
Company as of March 31, 1998 would have been $7.5 million or $0.47 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $0.67 per share to existing stockholders and an immediate dilution of $6.53
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 7.00
Net tangible book deficit per share before the offering..... $(0.20)
Increase per share attributable to new investors............ 0.67
------
Net tangible book value per share after the offering........ 0.47
-------
Dilution per share to new investors......................... $ 6.53
=======
</TABLE>
The following table summarizes, as of March 31, 1998, the difference
between existing stockholders and the new investors with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)........ 14,273,000 89.4% $ 5,289,000 30.8% $0.37
New investors(1)................... 1,700,000 10.6 11,900,000 69.2 $7.00
---------- ----- ----------- -----
Total.................... 15,973,000 100.0% $17,189,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 11,773,000 or 73.7% of the total
number of shares of Common Stock outstanding after this offering (11,143,000
or 69.8%, if the over-allotment option is exercised in full), and will
increase the number of shares held by new investors to 4,200,000 or 26.3%
(4,830,000 or 30.2%, if the over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after this offering.
(2) Includes 190,000 shares of Common Stock issued to a financial advisor to the
Company subsequent to March 31, 1998 and prior to the closing of this
offering.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998: (i) on an actual basis, giving effect to a 5,000-for-1 stock
split of the Common Stock in May 1998 and the issuance of a stock dividend in
June 1998; and (ii) as adjusted to give effect to the sale of 1,700,000 shares
of Common Stock offered by the Company hereby at an initial public offering
price of $7.00 per share and the issuance of 190,000 shares of Common Stock to a
financial advisor to the Company in connection with the initial public offering
and after deducting the underwriting discount and estimated offering expenses
payable by the Company. The information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion...................... $1,388 $ 1,388
Preferred stock, $0.001 par value, 2,000,000 shares
authorized; none issued or outstanding.................... -- --
Common stock, $0.001 par value, 150,000,000 shares
authorized; 14,083,000 shares issued and outstanding
(actual); 15,973,000 shares issued and outstanding (as
adjusted)................................................. 14 16
Additional paid-in capital.................................. 5,549 15,864
Retained (deficit) earnings................................. (189) (189)
Accumulated other comprehensive income...................... (46) (46)
------ -------
Total stockholders' equity............................. 5,328 15,645
------ -------
Total capitalization........................................ $6,716 $17,033
------ -------
</TABLE>
- ---------------
(1) As adjusted to reflect the sale by the Company of the 1,700,000 shares of
Common Stock offered hereby at the initial public offering price of $7.00
per share and the receipt of the estimated net proceeds therefrom. See "Use
of Proceeds."
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the three fiscal
years ended December 31, 1995, 1996 and 1997 are derived from the Company's
audited financial statements and for the two fiscal years ended December 31,
1994 and December 31, 1993 are derived from the Company's unaudited financial
statements. The financial information as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 has been derived from unaudited financial
information prepared by the Company, which in the opinion of management,
includes all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial information set forth therein. This
data should be read in conjunction with the consolidated financial statements of
the Company, related notes, and other financial information included elsewhere
in this Prospectus. See "Financial Statements." All numbers are in thousands,
except share and per share amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- -------------------------
1993(1) 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Software licenses............. $ 3,314 $ 4,438 $ 5,718 $ 8,611 $ 16,633 $ 2,295 $ 3,736
Maintenance................... 3,926 5,011 5,908 7,914 9,957 2,371 2,551
Professional services......... -- -- -- -- 180 -- 309
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue............... 7,240 9,449 11,626 16,525 26,770 4,666 6,596
Cost of revenue (exclusive of
amortization and depreciation
shown separately below):
Software licenses............. 740 223 432 424 580 101 439
Maintenance................... 1,370 1,905 3,687 3,664 5,513 1,163 1,646
Professional services......... -- -- -- -- 155 -- 225
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue....... 2,110 2,128 4,119 4,088 6,248 1,264 2,310
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin.................... 5,130 7,321 7,507 12,437 20,522 3,402 4,286
Operating expenses:
Sales and marketing........... 2,314 2,898 4,262 6,161 12,463 2,305 3,395
General and administrative.... 1,746 1,970 1,619 2,217 2,791 884 1,102
Amortization and
depreciation................ 268 861 2,088 1,596 1,972 436 490
Research and development...... 500 850 908 967 1,480 273 272
Impairment on goodwill........ -- -- 1,320 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.... 4,828 6,579 10,197 10,941 18,706 3,898 5,259
Income (loss) before provision
for (benefit from) income
taxes....................... 302 742 (2,690) 1,496 1,816 (496) (973)
Provision for (benefit from)
income taxes................ 128 260 (979) 704 1,030 (163) (206)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 174 $ 482 $ (1,711) $ 792 $ 786 $ (333) $ (767)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted net income
(loss) per share............ $ 0.01 $ 0.03 $ (0.12) $ 0.06 $ 0.06 $ (0.02) $ (0.05)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted weighted
average shares outstanding.... 14,083,000 14,083,000 14,083,000 14,083,000 14,083,000 14,083,000 14,083,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $1,210 $ 246 $ 167 $ 1,735 $ 360 $ 909
Working capital....................................... (810) (2,098) (3,516) (824) (775) (1,544)
Total assets.......................................... 9,827 12,633 12,766 22,543 35,683 35,362
Long term debt, net of current portion................ -- 135 465 351 1,294 1,388
Total stockholder's equity............................ 5,726 6,214 4,563 5,355 6,087 5,328
</TABLE>
- ---------------
(1) On September 1, 1993, the Company was acquired by Computer Concepts and
goodwill and software development costs were recorded on the books of the
Company as of the date of acquisition (see Note 8 to the Consolidated
Financial Statements). Amortization of the goodwill and software development
costs have been reflected in the selected consolidated financial data since
that time.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Financial Statements and Notes thereto included elsewhere
in this Prospectus. Quarterly financial data has been derived from information
prepared by the Company. Such data should be read in conjunction with the
consolidated financial statements of the Company, related notes and other
financial information included elsewhere in this prospectus. Certain statements
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" are forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."
OVERVIEW
The Company develops, markets, licenses and supports a family of enterprise
systems management software products for data and storage management and
performance management. The Company provides automated systems management
solutions designed to optimize system and application performance, reduce
hardware expenditures, and enhance the reliability and availability of the data
processing environment for enterprises that employ primarily mainframe computing
environments, and increasingly UNIX and Microsoft(R) Windows NT(R)("NT"). The
Company believes that it has been a pioneer in the development of automated
systems management solutions and that it is currently a leading vendor in this
market. As of June 30, 1998, the Company's products were licensed for use by 81
of the Fortune 100 companies.
The Company's offerings are grouped into four market segments ("Arenas"):
performance management; data and storage management ("DataStor"); Year 2000; and
professional services. Historically, the Company's products addressed only the
performance and data storage requirements of mainframe operating systems.
Recently, the Company's products have been expanded to include UNIX-based
storage management products, and the Company expects to introduce NT-based
storage management products in the near future. In addition, the Company has
extended its product family by launching a suite of products in the Year 2000
Arena. The Company has also created a professional services organization that
provides systems management services, including training, implementation of
software, and staff augmentation.
The Company's revenue consists of revenue from licensing its software
products, revenue from the maintenance and support of its software products and,
commencing in the third quarter of 1997, revenue from professional services
relating to information technology ("IT") consulting and staff augmentation.
Generally, the Company is required by its license agreement to provide
maintenance and enhancements during the maintenance period. "Maintenance"
includes diagnosis and correction of errors in the current version of the
product and telephone consultation to discuss general support questions.
"Enhancements" include upgrades to the products as they become available and new
releases of products, except for those which are sold as charged options to the
Company's general customer base. Substantially all of the Company's license
agreements are perpetual. Maintenance agreements are typically for a term of one
year and renew automatically upon the payment by the customer of an annual
maintenance fee.
Revenue from software licenses is recognized in accordance with the
Statement of Position 97-2 of the American Institute of Certified Public
Accountants, "Software Revenue Recognition." Revenue from the sale of perpetual
and term software licenses is recognized, net of provisions for returns, at the
time of delivery and acceptance of software products by the customer, when
collectibility is probable. The Company provides creditworthy customers with the
option to pay for license fees in one lump sum or generally in equal annual
installments over extended periods of time, generally three to five years. In
such instances, the Company does not consider sales contracts with amounts due
for periods greater than one year from delivery, fixed and determinable, and
accordingly recognizes such amounts as revenue when they become due. Maintenance
revenue that is bundled with an initial license fee is deferred and recognized
ratably over the maintenance period. Amounts deferred for maintenance are based
on the fair value of equivalent maintenance services sold separately. Revenue
from professional services, such as training and staff augmentation, is
recognized as the
16
<PAGE> 17
services are performed. Deferred license revenue resulting from extended payment
agreements is included in accounts receivable due after one year and deferred
revenue. Related sales commissions are also deferred and recognized over the
period of the installment payment plan.
Historically, the Company has not experienced any significant bad debts
associated with these long-term installment arrangements which were introduced
by the Company two years ago. The Company introduced extended payment terms to
all of its creditworthy customers in an effort to increase sales of its
products, achieve a stream of revenue and remain competitive. No single customer
accounted for greater than 3% of the Company's total revenue in 1997.
During 1997, approximately 59% of the Company's license revenue resulted
from products in the DataStor Arena which includes products such as Catalog
Solution and CenterStage. The Performance Arena, which includes products such as
Performance Essential and TeraSAM, accounted for approximately 32% of the
Company's license revenue in 1997. The Company's cost of license revenue
consists primarily of royalties paid to in-house and third-party software
developers and amortization of capitalized research and development costs.
Beginning in 1997 and continuing for four years, the Company is obligated to pay
a minimum annual royalty associated with certain Year 2000 products.
The Company's maintenance revenue has provided a stable and recurring
revenue stream due to relatively high maintenance renewal rates, which have
averaged approximately 95% over the past three years. Maintenance fee revenue
was $5.9 million, $7.9 million and $10.0 million, or 50.8%, 47.9% and 37.2% of
total revenue in 1995, 1996 and 1997, respectively. Revenue related to
professional services and staff augmentation is recognized as the services are
performed.
The Company markets and sells its products and services through a direct
sales force in the United States and directly and through distributors in South
America, Europe and Asia. International revenue transactions are denominated in
U.S. dollars and local currencies. Revenue generated by the Company's
international distributors is translated into U.S. dollars at the time the
transaction occurs. The Company has not sustained material foreign currency
exchange losses and presently does not attempt to hedge its exposure to
fluctuations in foreign currency exchange rates. International revenue generated
by the Company contributed approximately 23%, 30% and 18% of total revenue
during 1995, 1996 and 1997, respectively. Should the Company's revenue from
international sales increase as intended, and should such sales be denominated
in foreign currencies, the Company intends to adopt an adequate hedging strategy
to guard against foreign currency fluctuations.
Research and development costs consist principally of salaries and related
payroll for the employees engaged in the development and modification of
software products. For the two years ended December 31, 1996 and 1997, and the
three months ended March 31, 1998, research and development expenses were
$967,000, $1.5 million, and $272,000, respectively. The Company believes that
significant investments in research and development are required in order to
remain competitive.
The Company's operating results have fluctuated in the past and in the
future are expected to fluctuate significantly from quarter to quarter and may
fluctuate on an annual basis as a result of a number of factors. Revenue in any
quarter is dependent to a significant degree on orders booked and renewals of
agreements for maintenance in that quarter and is not predictable with any
degree of certainty. Since the Company's expense levels are based in part on
management's expectations regarding future revenue, if revenue is below
expectations in any quarter, the adverse effect may be magnified by the
Company's inability to adjust spending in a timely manner to compensate for any
revenue shortfall. In addition, because customers are purchasing larger and more
complex software products, as well as suites of products, the average order
value has been increasing and purchases of the Company's products require
approval of higher executive levels. See "Risk Factors -- Fluctuations in
Operating Results" and "Limited Sales Predictability."
SOFTWORKS was incorporated in Maryland in 1977 and was acquired by Computer
Concepts in 1993. It has operated as a wholly-owned subsidiary of Computer
Concepts since its acquisition. The Company was reincorporated in Delaware in
May 1998. Pursuant to the terms of the Voting Trust Agreement, as of the
17
<PAGE> 18
effective date of this offering, the payment of any management fee to Computer
Concepts will terminate and restrictions will be imposed on future intercompany
transactions. See "Certain Transactions."
PRELIMINARY RECENT OPERATING RESULTS
Preliminary unaudited operating results for the second quarter ended June
30, 1998 are estimated to be as follows: total revenue of approximately $9.0
million and income before provision for income taxes of approximately $150,000.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses................................ 49.2% 52.1% 62.1% 49.2% 56.6%
Maintenance...................................... 50.8 47.9 37.2 50.8 38.7
Professional services............................ -- -- 0.7 -- 4.7
----- ----- ----- ----- -----
Total revenue................................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue (exclusive of amortization and
depreciation shown separately below):
Software licenses................................ 3.7 2.5 2.1 2.2 6.6
Maintenance...................................... 31.7 22.2 20.6 24.9 25.0
Professional services............................ -- -- 0.6 -- 3.4
----- ----- ----- ----- -----
Total cost of revenue......................... 35.4 24.7 23.3 27.1 35.0
----- ----- ----- ----- -----
Gross margin....................................... 64.6 75.3 76.7 72.9 65.0
Operating expenses:
Sales and marketing.............................. 36.7 37.3 46.6 49.4 51.5
General and administrative....................... 13.9 13.4 10.4 18.9 16.7
Amortization and depreciation.................... 18.0 9.6 7.4 9.3 7.4
Research and development......................... 7.8 5.9 5.5 5.9 4.1
Impairment on goodwill........................... 11.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses...................... 87.7 66.2 69.9 83.5 79.7
----- ----- ----- ----- -----
(Loss) income before (benefit from) provision for
income taxes.................................. (23.1) 9.1 6.8 (10.6) (14.7)
(Benefit from) provision for income taxes........ (8.4) 4.3 3.9 (3.5) (3.1)
----- ----- ----- ----- -----
Net (loss) income.................................. (14.7)% 4.8% 2.9% (7.1)% (11.6)%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Total Revenue. Total revenue increased 41.4% to $6.6 million for the three
months ended March 31, 1998 from $4.7 million for the three months ended March
31, 1997. The increase was largely the result of sales of product licenses by
the Company's expanded direct sales force. In addition, revenue increased due to
sales of new products and product enhancements, including Year 2000 products.
License revenue increased 62.8% to $3.7 million for the three months ended March
31, 1998 from $2.3 million for the three months ended March 31, 1997.
Maintenance revenue increased 7.6% to $2.6 million for the three months ended
March 31, 1998 from $2.4 million for the three months ended March 31, 1997. This
increase is attributable to overall growth in license revenue and renewals of
maintenance contracts by the installed customer base. Professional services,
which commenced significant operations in the third quarter of 1997, contributed
$309,000 to total
18
<PAGE> 19
revenue for the period ended March 31, 1998. Foreign revenue decreased as a
percentage of total revenue to 19.8% for the period ending March 31, 1998 from
21.8% for the period ending March 31, 1997. In terms of absolute dollars,
foreign revenue increased to $1.3 million for the period ending March 31, 1998
from $1.0 million for the period ending March 31, 1997. The increase was
primarily the result of the expansion of the Company into Australia.
Cost of Revenue. Included in the cost of revenue are cost of software
license revenue, cost of maintenance revenue, and cost of professional service
revenue. Cost of software license revenue includes royalties paid to its
developers and to a third party under a licensing agreement for certain Year
2000 products. Cost of software license revenue increased 334.7% to $439,000, or
6.6% of total revenue, for the three months ended March 31, 1998 from $101,000,
or 2.2% of total revenue, for the three months ended March 31, 1997. This
increase was primarily attributable to the third party agreement that was not in
effect in during the three-month period ended March 31, 1997, as well as an
increase in software license revenue. Cost of maintenance revenue increased
41.5% to $1.6 million, or 25.0% of total revenue, for the three months ended
March 31, 1998 from $1.2 million, or 24.9% of total revenue, for the three
months ended March 31, 1997. This increase is attributable to the increase in
maintenance revenue over the same time period resulting from an increasing
customer base of maintenance contracts. As a percentage of maintenance revenue,
the cost of maintenance was 64.5% for the period ended March 31, 1998 and 49.1%
for the period ended March 31, 1997. This increase is primarily attributable to
staffing of maintenance personnel to support international sales in lieu of
reliance upon distributors, as well as to support the launch of new
multi-platform products. Cost of professional services revenue, which consists
primarily of salaries and expenses, commenced operations in the third quarter of
1997 and was $225,000 for the three months ended March 31, 1998.
Sales and Marketing Expense. Sales and marketing expense includes salaries
and related costs, commissions, travel, facilities and computers, communications
costs and promotional expenses for the Company's direct sales organization and
marketing staff. Sales and marketing expense increased 47.3% to $3.4 million for
the three months ended March 31, 1998 from $2.3 million for the three months
ended March 31, 1997. This increase was attributable to increased numbers of
sales people, as well as the establishment of new offices in Australia, Brazil,
France, Italy, Spain and additional offices in the United States. As a
percentage of revenue, sales and marketing expense increased to 51.5% for the
three months ended March 31, 1998 from 49.4% for the three months ended March
31, 1997. The Company expects to continue hiring additional sales and marketing
personnel.
General and Administrative Expense. General and administrative expense
includes administrative salaries and related benefits, management fees, as well
as legal, accounting and other professional fees. General and administrative
expense increased 24.7% to $1.1 million for the three months ended March 31,
1998 from $884,000 for the three months ended March 31, 1997. The increase in
general and administrative expenses was principally due to an increase in
finance and administrative personnel necessary to support the Company's growth.
As a percentage of revenue, this expense decreased to 16.7% for the three months
ended March 31, 1998 from 18.9% for the three months ended March 31, 1997.
Amortization and Depreciation Expense. Amortization and depreciation
expense increased 12.4% to $490,000 for the three months ended March 31, 1998
from $436,000 for the three months ended March 31, 1997.
Research and Development Expense. Research and development expense
includes salaries and related costs for the personnel involved in the Company's
research and development efforts. Research and development expense was $272,000
for the three months ended March 31, 1998 and $273,000 for the three months
ended March 31, 1997. As a percentage of revenue, this expense decreased to 4.1%
for the three months ended March 31, 1998 from 5.9% for the three months ended
March 31, 1997.
Provision for (Benefit from) Income Taxes. The benefit from income taxes
increased 26.4% to $206,000 for the three months ended March 31, 1998 from
$163,000 for the three months ended March 31, 1997. During these periods, the
Company reported its financial results on a consolidated basis with Computer
Concepts and did not file separate tax returns.
19
<PAGE> 20
Years Ended December 31, 1997 and 1996
Total Revenue. Total revenue increased 62.0% to $26.8 million in 1997 from
$16.5 million in 1996. License revenue increased 93.2% to $16.6 million in 1997
from $8.6 million in 1996. The increase was primarily due to an increase in the
number of licenses of the Company's products in the Performance Arena and
DataStor Arena, the conversion from central processing unit ("CPU")-based
pricing to millions of instructions processed per second ("MIPS")-based pricing,
the availability of extended payment terms to customers for a full fiscal year,
as well as the introduction of its Year 2000 products. New products in the Year
2000 Arena introduced during 1997 accounted for approximately 3.5% of software
license revenue. During 1997, the Company entered into approximately 107
MIPS-based licenses which accounted for $6.2 million in revenue. Sales in the
DataStor Arena accounted for approximately 59% of license revenue in 1997,
compared to approximately 60% of license revenue in 1996. Sales in the
Performance Arena accounted for approximately 32% of license revenue in 1997,
compared to approximately 36% of license revenue in 1996. Maintenance revenue
increased 25.8% to $10.0 million in 1997 from $7.9 million in 1996. This
increase is attributable to overall growth in license revenue and renewals of
maintenance contracts by the installed customer base. Professional services
commenced significant operations in the third quarter of 1997 and contributed
$180,000 to total revenue in 1997. Foreign revenue decreased as a percentage of
total revenue to 17.7% for the period ending December 31, 1997 from 29.5% for
the period ending December 31, 1996. In terms of absolute dollars, foreign
revenue decreased slightly to $4.7 million for the period ending December 31,
1997 from $4.9 million for the period ending December 31, 1996.
Cost of Revenue. Cost of software license revenue, including royalties
paid to its developers and the amortization of capitalized software development
costs increased 36.8% to $580,000, or 2.1% of total revenue, in 1997, from
$424,000, or 2.5% of total revenue, in 1996. Cost of maintenance increased 50.5%
to $5.5 million in 1997 from $3.7 million in 1996. As a percentage of
maintenance revenue, cost of maintenance increased to 55.4% in 1997 from 46.3%
in 1996. This increase is primarily attributable to staffing of maintenance
personnel to support international sales in lieu of reliance upon distributors.
Sales and Marketing Expense. Sales and Marketing expense increased 102.3%
to $12.5 million in 1997 from $6.2 million in 1996. Sales and marketing expense
was 46.6% of total revenue in 1997 and 37.3% of total revenue in 1996. The
increase was primarily attributable to the expansion of the direct sales force
both domestically and internationally.
General and Administrative Expense. General and administrative expense
increased 25.9% to $2.8 million in 1997 from $2.2 million in 1996. As a
percentage of total revenue, general and administrative expense declined to
10.4% in 1997 from 13.4% in 1996. General and administrative expenses grew in
absolute dollars as the Company added personnel to all administrative areas, but
declined as a percentage of total revenue principally due to economies of scale
associated with increased revenue.
Amortization and Depreciation Expense. Amortization and depreciation
expense increased 23.6% to $2.0 million in 1997 from $1.6 million in 1996. This
increase was primarily due to the depreciation of additional computer equipment
and software purchased during 1997.
Research and Development Expense. Research and development expense
increased 53.1% to $1.5 million in 1997 from $967,000 in 1996. The increase was
primarily attributable to the Company's accelerated development of
multi-platform and Year 2000 products.
Provision for (Benefit from) Income Taxes. The provision for income taxes
increased 46.3% to $1.0 million in 1997 from $704,000 in 1996. During these
years, the Company was reported on a consolidated basis for Federal income tax
purposes with its parent corporation and did not file a separate Federal tax
return. On a stand-alone basis, if the Company had filed a separate Federal tax
return, its effective rates for 1997 and 1996 would have been 56.7% and 47.1%,
respectively. These rates differ from the Federal statutory income tax rate
primarily because of the non-deductibility of operating losses incurred by the
recently established foreign subsidiary corporations. A valuation reserve has
been established for the deferred tax asset generated from foreign net operating
losses as it is uncertain how, and if, these losses will be utilized against
future foreign
20
<PAGE> 21
income. During these periods, the Company reported its financial results on a
consolidated basis with Computer Concepts and did not file separate tax returns.
Years Ended December 31, 1996 and 1995
Total Revenue. Total revenue increased 42.1% to $16.5 million in 1996 from
$11.6 million in 1995. License revenue increased 50.6% to $8.6 million in 1996
from $5.7 million in 1995. The increase was primarily due to an increase in the
number of licenses of the Company's Catalog Solution and Performance Solution
products and to the introduction during 1996 of extended payment terms. Sales in
the DataStor Arena accounted for approximately 60% of license revenue in 1996
and 1995. Sales in the Performance Arena accounted for approximately 36% of
license revenue in 1996, compared to approximately 35% of license revenue in
1995. The Company did not introduce any new products during 1996. Maintenance
revenue increased 34.0% to $7.9 million in 1996 from $5.9 million in 1995. This
increase is attributable to overall growth in license revenue and renewals of
maintenance contracts by the installed customer base. Foreign revenue increased
to 29.5% ($4.9 million) for the period ending December 31, 1996 from 23.5% ($2.7
million) for the period ending December 31, 1995.
Cost of Revenue. Cost of software license revenue was relatively constant
at $424,000, or 2.5% of total revenue, in 1996 as compared to $432,000, or 3.7%
of total revenue, in 1995. Cost of maintenance revenue was $3.7 million in 1996
and 1995.
Sales and Marketing Expense. Sales and marketing expense increased 44.6%
to $6.2 million in 1996 from $4.3 million in 1995. Sales and marketing expense
was 37.3% of total revenue in 1996 and 36.7% of total revenue in 1995. The
increase was primarily attributable to the expansion of the direct sales force
both domestically and internationally.
General and Administrative Expense. General and administrative expense
increased 36.9% to $2.2 million in 1996 from $1.6 million in 1995. As a
percentage of total revenue, general and administrative expense decreased to
13.4% in 1996 from 13.9% in 1995.
Amortization and Depreciation Expense. Amortization and depreciation
expense decreased 23.6% to $1.6 million in 1996 from $2.1 million in 1995.
During 1995, the Company recorded amortization expense related to goodwill
resulting from the acquisition of DBopen, Inc. (see Note 3 to the Consolidated
Financial Statements). The remaining asset was written off during the fourth
quarter of 1995, and as a result, no such amortization was recorded in 1996.
Research and Development Expense. Research and development expense
increased 6.5% to $967,000 in 1996 from $908,000 in 1995. As a percentage of
total revenue, research and development expense decreased to 5.9% in 1996 from
7.8% in 1995.
Provision for (Benefit from) Income Taxes. The provision for income taxes
in 1996 was $704,000 as compared to an income tax benefit of $979,000 in 1995.
During these years, the Company was reported on a consolidated basis for Federal
income tax purposes with its parent corporation and did not file a separate
Federal tax return. On a standalone basis, if the Company had filed a separate
Federal tax return, its effective rates for 1996 and 1995 would have been 47.1%
and (36.4)%, respectively. These rates differ from the Federal statutory income
tax rate primarily because of the non-deductibility of operating losses incurred
by the recently established foreign subsidiary corporations. During these
periods, the Company reported its financial results on a consolidated basis with
Computer Concepts and did not file separate tax returns.
21
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited quarterly statements of
operations data for each of the Company's last nine quarters, including the
period ended March 31, 1998, as well as the percentage of the Company's total
revenue represented by each item. The information has been derived from the
Company's audited Financial Statements. The unaudited quarterly Financial
Statements have been prepared on substantially the same basis as the audited
Financial Statements contained herein. In the opinion of management, the
unaudited quarterly Financial Statements include all adjustments, consisting
only of normal recurring adjustments that the Company considers to be necessary
to present fairly this information when read in conjunction with the Company's
Financial Statements and notes thereto appearing elsewhere herein. The results
of the operations for any quarter are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses.......... $1,406 $1,528 $2,049 $3,628 $2,295 $3,809 $4,281 $6,248 $3,736
Maintenance................ 1,786 1,886 2,039 2,203 2,371 2,458 2,578 2,550 2,551
Professional services...... -- -- -- -- -- -- 45 135 309
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue............ 3,192 3,414 4,088 5,831 4,666 6,267 6,904 8,933 6,596
Cost of revenue (exclusive of
amortization and
depreciation shown
separately below):
Software licenses.......... 140 98 124 62 101 114 161 204 439
Maintenance................ 868 829 829 1,138 1,163 1,337 1,355 1,658 1,646
Professional services...... -- -- -- -- -- -- 38 117 225
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue.... 1,008 927 953 1,200 1,264 1,451 1,554 1,979 2,310
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin................. 2,184 2,487 3,135 4,631 3,402 4,816 5,350 6,954 4,286
Operating expenses:
Sales and marketing........ 1,220 1,225 1,455 2,261 2,305 3,300 3,247 3,611 3,395
General and
administrative........... 503 479 512 723 884 594 586 727 1,102
Amortization and
depreciation............. 371 389 399 437 436 445 500 591 490
Research and development... 247 212 248 260 273 413 683 111 272
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............... 2,341 2,305 2,614 3,681 3,898 4,752 5,016 5,040 5,259
------ ------ ------ ------ ------ ------ ------ ------ ------
(Loss) income before (benefit
from) provision for income
taxes...................... (157) 182 521 950 (496) 64 334 1,914 (973)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Benefit from) provision for
income taxes................ (31) 127 224 384 (163) 84 207 902 (206)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net (loss) income............. $ (126) $ 55 $ 297 $ 566 $ (333) $ (20) $ 127 $1,012 $ (767)
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses.......... 44.0% 44.8% 50.1% 62.2% 49.2% 60.8% 62.0% 70.0% 56.6%
Maintenance................ 56.0 55.2 49.9 37.8 50.8 39.2 37.3 28.5 38.7
Professional services...... -- -- -- -- -- -- 0.7 1.5 4.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue (exclusive of
amortization and
depreciation shown
separately below):
Software licenses.......... 4.4 2.9 3.0 1.1 2.2 1.8 2.3 2.3 6.6
Maintenance................ 27.2 24.3 20.3 19.5 24.9 21.3 19.6 18.6 25.0
Professional services...... -- -- -- -- -- -- 0.6 1.3 3.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue.... 31.6 27.2 23.3 20.6 27.1 23.1 22.5 22.2 35.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin................. 68.4 72.8 76.7 79.4 72.9 76.9 77.5 77.8 65.0
Operating expenses:
Sales and marketing........ 38.2 35.9 35.6 38.8 49.4 52.7 47.0 40.4 51.5
General and
administrative........... 15.8 14.0 12.5 12.4 18.9 9.5 8.5 8.1 16.7
Amortization and
depreciation............. 11.6 11.4 9.8 7.5 9.3 7.1 7.3 6.6 7.4
Research and development... 7.7 6.2 6.1 4.4 5.9 6.6 9.9 1.3 4.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............... 73.3 67.5 64.0 63.1 83.5 75.9 72.7 56.4 79.7
------ ------ ------ ------ ------ ------ ------ ------ ------
(Loss) income before (benefit
from) provision for income
taxes...................... (4.9) 5.3 12.7 16.3 (10.6) 1.0 4.8 21.4 (14.7)
(Benefit from) provision for
income taxes............... (1.0) 3.7 5.4 6.6 (3.5) 1.3 3.0 10.1 (3.1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net (loss) income............ (3.9)% 1.6% 7.3% 9.7% (7.1)% (0.3)% 1.8% 11.3% (11.6)%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Demand for the Company's products is generally higher during the fourth
quarter, primarily due to the capital spending trends of its customers, which
has resulted in higher license revenue in that period and lower license revenue
in the first quarter. The Company anticipates that its business will continue to
be subject to such seasonal variations.
The operating results for any quarter are not necessarily indicative of
results that will be obtained for any future period. Due to the relatively fixed
nature of certain of the Company's costs, including personnel and facilities
costs, a decline in revenue, failure to achieve expected revenue in any fiscal
quarter or unanticipated variations in billing and utilization rates of service
personnel would result in lower profitability in that quarter. The Company's
quarterly results may fluctuate as a result of a variety of factors, many of
which are not within the Company's control, including timing and levels of
software purchases by customers, the timing, size and state of new product
development projects, new product introductions by the Company or its
competitors, levels of market acceptance for the Company's products, or the
hiring of additional personnel. In addition, the Company historically has
recognized a large portion of its revenue from sales in the last month of a
quarter such that the magnitude of quarterly fluctuations may not become evident
until late in, or at the end of, a particular quarter. The Company believes,
therefore, that past operating results and period-on-period comparisons should
not be relied upon as an indication of future performance.
23
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through cash generated from
operations and advances from Computer Concepts. At March 31, 1998, the balance
owing to Computer Concepts was $2.6 million. The Company anticipates repaying
the balance with the proceeds of this offering. The Voting Trust Agreement
prohibits advances from Computer Concepts to the Company without the prior
approval of the Trustees. See "CERTAIN TRANSACTIONS -- Voting Trust Agreement."
At March 31, 1998 the Company had $909,000 in cash and cash equivalents.
The Company's operating activities provided cash of $1.7 million and used cash
of $162,000 in the three months ended March 31, 1998 and March 31, 1997,
respectively, and provided $213,000, $2.7 million and $564,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Cash used in investing activities during the three months ended March 31,
1998 was $795,000, and was $2.6 million, $1.3 million and $1.4 million for the
years ended December 31, 1997, 1996, and 1995, respectively. The Company's use
of cash was principally for the purchase of property and equipment, software
development and technologies, and additional contingent consideration to two of
the Company's former stockholders in conjunction with the acquisition of the
Company by Computer Concepts. Through March 31, 1998, the Company paid
approximately $1.6 million of a maximum amount payable to such former
stockholders of $2.0 million. (See Note 8 to the Consolidated Financial
Statements).
The Company's principal commitments as of March 31, 1998 consisted
primarily of (i) leases on its corporate headquarters facilities, various sales
offices and operating equipment, (ii) employment agreements and (iii) a software
distribution agreement. (See Note 7 to the Consolidated Financial Statements)
There were no material commitments for capital expenditures. The Company intends
to enter into a credit agreement in August 1998 with a commercial bank to obtain
a $3.0 million line of credit secured by all of the Company's real and personal
property, consisting primarily of the Company's domestic accounts receivable.
Amounts outstanding under the line of credit will bear interest at the bank's
prime rate or LIBOR plus 1.7%, at the Company's option. Amounts available under
this facility, together with the Company's current cash balances and cash flow
from its operations and the proceeds of this offering, are expected to be
sufficient to meet its working capital and capital expenditure needs for at
least the next 12 months. However, there can be no assurance that the Company
will have sufficient capital to finance potential acquisitions or other growth
oriented activities, which could require the Company to incur additional debt or
obtain other financing.
YEAR 2000
The Company is reviewing its internal computer programs and system to
ensure that the programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000 compliant in a
timely manner. However, while the estimated cost of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect. In addition,
the Company cannot predict the effect of the Year 2000 problem on the vendors,
customers and other entities with which the Company transacts business, or with
whose products the Company's products interact and there can be no assurance
that the effect of the Year 2000 problem on such entities will not have a
material adverse effect on the Company's business, operating results and
financial condition.
24
<PAGE> 25
BUSINESS
OVERVIEW
SOFTWORKS develops, markets, licenses and supports a family of enterprise
systems management software products for data and storage management and
performance management. The Company provides automated systems management
solutions designed to optimize system and application performance, reduce
hardware expenditures, and enhance the reliability and availability of the data
processing environment for enterprises that employ primarily mainframe computing
environments, and increasingly UNIX and Microsoft(R) Windows NT(R) ("NT"). The
Company believes that it has been a pioneer in the development of automated
systems management solutions and that it is currently a leading vendor in this
market. As of June 30, 1998, the Company's products were licensed for use by 81
of the Fortune 100 companies.
The Company's products are developed using "SST," its proprietary
combination of a design strategy, a development methodology and a set of core
technologies, which is intended to enable the Company's software products to
provide immediate performance improvement and cost savings. The Company believes
that SST differentiates it from its competition by redefining and extending
traditional monitoring and reporting systems management through the use of
embedded intelligence which provides proactive alerts, programmed responses and
automated corrective actions.
The Company's offerings are grouped into four market segments ("Arenas"):
performance management; data and storage management; Year 2000; and professional
services. Historically, the Company's products addressed only the performance
and data storage requirements of mainframe operating systems. Recently, the
Company's products have been expanded to include UNIX-based storage management
products, and the Company expects to introduce NT-based storage management
products in the near future. In addition, the Company has extended its product
family by launching a suite of products in the Year 2000 Arena. The Company has
also created a professional services organization that provides systems
management services, including training, implementation of software, and staff
augmentation.
The Company has over 5,000 licenses of its products for use at over 1,900
installations. The Company's customers include ADP Financial Information
Services Inc., NationsBanc Services, Inc., Sherwin-Williams Co., Texas
Instruments Incorporated, The Vanguard Group and Wal-Mart. The Company sells its
products through a global direct sales force and a network of international
distributors and resellers.
INDUSTRY BACKGROUND
The information technology ("IT") infrastructure worldwide is growing
rapidly and becoming increasingly complex. Despite the widespread adoption of
distributed platforms, such as UNIX and NT, mainframes continue to serve as the
basis for a majority of corporate applications, especially those that are
mission critical. In particular, mainframe environments remain the preferred
platform for high-volume, transaction-oriented applications as well as
applications that require the storage and rapid retrieval of large amounts of
data. Contrary to earlier predictions, the growing volume of data and increasing
number of functions residing on non-mainframe platforms has not reduced reliance
upon mainframes. While the number of mainframe sites and central processing
units ("CPUs") has increased only slightly, the amount of mainframe processing
power, as measured by the aggregate number of millions of instructions processed
per second ("MIPS") installed globally, has increased substantially in recent
years and is anticipated to continue to grow approximately 25% per year through
2002, according to Gartner Group. The overall complexity of the IT
infrastructure has increased because mainframes, UNIX and NT platforms must
co-exist to satisfy an array of business application requirements across the
enterprise.
In addition to the increasing complexity of the multi-platform IT
environment, there are other trends that are driving the need for software
solutions that address enterprise-wide systems management requirements. The
proliferation of NT and UNIX application servers complicates the task of
effectively managing the IT assets of major corporations, in part because of the
decentralized systems management practices adopted to deal with heterogeneous
systems. In addition to the duplication of effort associated with decentralized
systems management, corporations can no longer guarantee compliance with their
"best practices." "Best practices"
25
<PAGE> 26
are a set of standard practices and policies which evolved in mainframe
environments and are designed to ensure the data integrity and availability
required by mission-critical computing systems. Corporate IT organizations need
solutions that enable them to extend these "best practices" across their
multi-platform computing environments to deliver the data integrity required for
mission-critical applications.
Software vendors have responded to the need for UNIX and NT systems
management by developing distinct tools tailored to address the unique data
administration, performance and security functions required for each specific
platform. These platform-specific tools are designed to monitor systems and
provide reports that require systems management personnel with platform-specific
expertise to interpret the reports and identify and correct problems. The result
has been a significant increase in the number of technical personnel required to
effectively manage enterprise systems, and such personnel are in increasingly
short supply. Further, the systems storage and technical personnel demands
created by the Year 2000 compliance requirement has exacerbated the resulting
personnel shortage.
As a result of these industry-wide developments, many IT organizations now
demand next generation tools that move beyond simply monitoring and reporting.
Solutions that incorporate platform-specific intelligence and allow automatic
management of storage and performance across heterogeneous environments address
a critical requirement of IT groups today. A comprehensive automation solution
should include proactive alerts, programmed responses and automated corrective
actions enabling effective management of the increasing volume and complexity of
the computing environments with fewer specialized technicians. These solutions
should also provide an efficient and effective vehicle for instituting "best
practices" across the enterprise.
According to Gartner Group, the net new license revenue for the network and
systems management and storage management markets in 1997 totaled approximately
$8.2 billion. Gartner Group also estimates that the storage management market is
expected to grow at a compound annual rate of approximately 20% through the year
2002. The Company primarily operates in the storage resource management market,
a subset of the storage management market. The storage resource management
market is expected to grow at a 44% compound annual growth rate from $201
million in 1997 to $1.2 billion in 2002.
THE SOFTWORKS SOLUTION
The Company provides automated systems management solutions to help
organizations more efficiently and effectively manage their IT infrastructure.
The Company's software incorporates intelligent agent technology to perform
system and data management and analysis tasks across multi-platform
environments. By using the Company's products, customers are able to maintain
high standards of service delivery and respond more easily to the rapid
introduction of new technologies. The Company's products are designed to enable
its customers to exploit the most application-appropriate processor without
incurring the expense of maintaining multiple teams of technology specialists
for each operating system platform. The Company's products possess the following
key features:
- Integrated Storage and Performance Management Solution. The Company
provides integrated Arenas for both storage and performance management.
The Company believes that many organizations want an integrated suite of
products to address their storage and performance needs, and the
Company's solutions provide the functionality and scalability that is
typically required. The Company's solutions are designed to optimize
system and application performance, and enhance the reliability and
availability of the data processing environment for enterprises that
employ mainframe, UNIX and/or NT computing environments.
- Automated Responses to Systems Management Requirements. In contrast to
conventional systems management solutions which merely provide reporting
and monitoring capabilities, the Company's new generation of products
provide proactive alerts, programmed responses and automated corrective
actions. This use of automation enables organizations to employ fewer
specialized technicians to manage the increasing volume and complexity
within the enterprise computing environment, thereby enabling IT
personnel to focus more of their time on other mission-critical systems
management tasks. "Proactive alerts" detect system events and
abnormalities and alert the user to potential system,
26
<PAGE> 27
application or data availability issues. SOFTWORKS products probe system
resources to determine if key storage and performance indicators are
within acceptable ranges. If an "out of reasonable range" condition is
detected, the products offer three alternative, but not mutually
exclusive, responses. The products can (i) notify the management console
or appropriate network or system monitoring software; (ii) automatically
correct the issue using "pre-programmed responses" which enable the user
to programmatically tell the product what to do in the event that a
particular condition is detected; or (iii) guide the user through
"automated corrective actions" which present the user with one or more
alternative responses to the condition and guide the user through the
corrective action.
- Application of "Best Practices" to a Multi-Platform Environment. The
Company's solutions are designed to enable the centralized control of
disparate applications and platforms, thereby facilitating the
implementation of an organization's "best practices" across
multi-platform environments. The Company's solutions operate efficiently
in multi-platform environments by using embedded intelligent agents which
recognize and respond to the particular requirements of each specific
operating system.
- Reduced Cost of Systems Management. The Company's solutions are designed
to reduce the overall cost of managing an organization's IT
infrastructure through a combination of advanced products and technology
with comprehensive service and support. The Company's SST technology is
specifically designed to enable customers (i) to minimize the amount of
intervention by IT personnel, thereby enabling them to focus on other
mission-critical systems management tasks, and (ii) to facilitate system
availability 24 hours per day, seven days per week. Furthermore, the
Company's solution often reduces hardware expenditures by permitting
organizations to defer purchases of CPU and storage upgrades.
STRATEGY
The Company's objective is to become a leading provider of data and storage
management products, performance management products, and related systems
management software products and services on both mainframe and multi-platform
environments. The primary elements of the Company's strategy to achieve this
objective include the following:
Enhance and Extend Product Offerings in Current Arenas. The Company
intends to use its technical expertise to enhance its core product
functionality, as well as add products to existing Arenas. These products
will enhance customers' ability to derive superior performance in
mission-critical systems and applications, facilitate the management of
enterprise storage devices and data and help ensure system and data
availability. In addition, the Company intends to integrate and extend its
Year 2000 offerings.
Expand Domestic and International Sales Channels. The Company intends
to continue to focus on expanding its sales efforts. SOFTWORKS has
increased its direct sales force from 11 in January 1996 to 88 as of March
31, 1998, and the Company has added 27 sales engineers to support its
direct sales force. In addition to its 10 sales offices in the United
States, the Company maintains direct sales offices in Australia, Brazil,
Canada, France, Spain and the United Kingdom. The Company is also
continuing to expand its international distribution channels by adding
sales agents and opening additional direct sales offices.
Leverage Existing Customer Base. The Company has an extensive
customer base in excess of 1,900 installations. It intends to generate
additional revenue from these customers by cross-selling products in the
same and other product Arenas, as well as providing incentives to upgrade
to multi-year maintenance agreements.
Offer Products in New Systems Management Arenas. Although the Company
currently provides products that address performance, data and storage
management processes across the enterprise, there is significant growth
potential in extending the Company's SST technology and product offerings
to additional systems management market segments. The Company intends to
respond to anticipated demand for additional multi-platform systems
management solutions, such as application systems management, performance
management, change management or security management. To facilitate this
27
<PAGE> 28
expansion, the Company is currently developing the next generation of SST
to permit further integration and web-enablement of the Company's products,
as well as to allow integration and deployment of third party systems
management tools.
Pursue Strategic Partnerships, Alliances and Acquisitions. In
addition to its internal development efforts, the Company intends to
acquire new products, technologies or the distribution rights to third-
party products that address complementary systems management market
segments. The Company also intends to pursue relationships whereby third
parties could distribute some of the Company's products.
28
<PAGE> 29
PRODUCTS AND SERVICES
Using the Company's proprietary SST development methodologies and core
technologies, the Company has developed offerings grouped into four Arenas --
data and storage management products, performance management products, Year 2000
products and professional services.
Products
The following table describes the functionality of the Company's products:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
INITIAL
RELEASE
PRODUCT DATE DESCRIPTION
<S> <C> <C> <C>
DATASTOR ARENA ENTERPRISE-WIDE TOOLS DESIGNED TO FACILITATE STORAGE
MANAGEMENT AND SYSTEM AND DATA AVAILABILITY
Catalog Solution 1986 - Provides comprehensive OS/390 catalog maintenance,
diagnostics, reporting, backup, repair and recovery
- Reduces disaster recovery time
- Improves the integrity and availability of the catalog
environment and mission-critical data resources distributed
across multiple operating system platforms
- -----------------------------------------------------------------------------------------------------------
CenterStage 1995 - Provides centralized control and monitoring of storage
A suite of independent and and data resources distributed across multiple operating
integratable products for system platforms
OS/390-MVS, AIX, HP-UX, - Reduces the cost, complexity and skill requirements for
Solaris, DB2 and capacity planning, disaster recovery, and storage resource
OpenEdition management
- Reports storage subsystem information and provides an
assessment of data and storage problems
- Provides customer-controlled automation to correct
designated storage problems and minimize the need for
storage administrators to develop platform-specific
solutions
PERFORMANCE ARENA DERIVES SUPERIOR PERFORMANCE FROM MISSION-CRITICAL SYSTEMS
AND APPLICATIONS
Performance Essential - Designed to optimize and improve system and
I/O Plus for VSAM 1984 processing performance
I/O Plus for xSAM 1993 - Reduces the requirement for manual tuning efforts
HiperLoad for VSAM 1992 - May defer or eliminate costly processor upgrades while
helping to ensure that service level requirements are met
- -----------------------------------------------------------------------------------------------------------
TeraSAM 1995 - Provides transparent file segmentation to overcome VSAM's
4GB file size restriction
- Splits large VSAM files into separate physical data sets
that can be managed and processed more efficiently
- Enables parallel backup, restore and reorganization of
segments to reduce batch processing time
- -----------------------------------------------------------------------------------------------------------
VSAM Assist 1978 - Provides VSAM backup, recovery, and migration
capabilities to simplify and improve VSAM file and data
maintenance
- Reduces batch processing time while safeguarding data
- -----------------------------------------------------------------------------------------------------------
VSAM Quick Index 1981 - Reduces batch processing time and processor utilization
by building alternate indices quickly
- Improves data availability by providing faster access to
data
YEAR 2000 ARENA ENTERPRISE-WIDE TOOLS DESIGNED TO IDENTIFY, ASSESS,
DIAGNOSE, SIMULATE, TEST, AGE AND BRIDGE PROGRAMS AND DATA
TO SOLVE MILLENNIUM ISSUES
HotDate 2000 1997- - Independent and integratable products which facilitate
1998 Year 2000 assessment, remediation and testing on OS/390 and
MVS
- -----------------------------------------------------------------------------------------------------------
HotDate 2000/MP 1998 - Products that perform Year 2000 assessment and
remediation for C and COBOL on UNIX (HP-UX, Solaris, AIX)
and assessment for Powerbuilder on NT
- -----------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
The Company provides its customers both product maintenance and enhancement
releases under their existing maintenance agreements. Enhancement releases
typically occur once a year and are developed primarily to respond to market
demand and to ensure that the product is competitive in the market. Maintenance
releases occur at a minimum of one maintenance release per product per year. The
Company typically introduces upgrades to its existing products on an annual
basis.
Professional Services
The Company's Professional Services organization provides implementation,
training and consulting services for its own software (Product SKILLPACKS) and
the software of third-party vendors (Extended SKILLPACKS). The Company's
Professional Services organization also provides staff augmentation services to
enable each customer to augment its technical staff with the personnel required
to meet specific short-term or long-term project goals.
The Company's SKILLPACKS are strategic IT services offerings that provide
customers with expertise and assistance in installing and implementing certain
software products. Product SKILLPACKS are intended to expedite the effectiveness
of the Company's products, accelerate the customer's staff productivity and
expose the customer to the full capabilities of the Company's products. Extended
SKILLPACKS provide implementation of third-party products, assistance with
product conversions, training in specific areas related to systems management
and address short-term, critical project requirements. SKILLPACKS prices are
dependant upon the complexity of each customer's environment, the expertise
level of each customer's staff, and each customer's goal and time frame.
Customer Service and Technical Support
The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.
CUSTOMERS
As of June 30, 1998, the Company's products were licensed for use by
approximately 1,800 customers at over 1,900 installations, including 81 of the
Fortune 100 companies. The Company's target customers are large organizations
with complex information systems. In the past, the Company targeted
multi-platform enterprises that relied on mainframe systems. In the future, the
Company intends also to target organizations that rely on UNIX or NT-based
systems.
The following is a representative list of organizations, each of which
accounted for in excess of $50,000 in revenue to the Company for the fiscal year
ended December 31, 1997:
Acxiom Corporation
ADP Financial Information Services Inc.
American International Group Data
Center, Inc.
Gallileo International, LLC
NationsBanc Services, Inc.
Nielsen Media Research
Norfolk Southern Corporation
Sherwin-Williams Co.
State of Tennessee
Texas Instruments Incorporated
The Vanguard Group
Unum Life Insurance Company
Wachovia Operational Services
Corporation
Wal-Mart Stores, Inc.
SALES, DISTRIBUTION AND MARKETING
As of June 30, 1998, SOFTWORKS has over 5,000 licenses of its products for
use by approximately 1,800 customers at over 1,900 installations, including 81
of the Fortune 100 companies. The Company markets its products and services
through its worldwide distribution channels which include direct sales
personnel, agents, and distributors. The Company has approximately 115 sales and
sales support employees engaged in
30
<PAGE> 31
promoting the licensing of the Company's products and services. In the United
States the Company operates 10 sales offices. Internationally, the Company has
sales offices in Australia, Brazil, Canada, France, Spain and the United
Kingdom. The U.K. office also covers the Scandinavian and Benelux countries. The
Company's international distributors currently are located in Argentina, Chile,
Germany, Hong Kong, Indonesia, Israel, Japan, Korea, Malaysia, Mexico, Peru,
Philippines, Singapore, South Africa, Thailand, Turkey, Uruguay and Venezuela.
All offices are responsible for specific geographic territories that may extend
beyond the state, province, or country in which the office is located.
The Company's direct sales force is comprised of account managers and sales
engineers who, in addition to the sale of the Company's products, are
responsible for technical demonstrations, product installation and product
implementation. A separate Federal Accounts group specifically targets United
States government clients, including end-users and system integrators. In
addition to the traditional distribution channels, the Company has established a
web-based interface to allow the purchase and download of the Company's
UNIX-based products.
Since 1996, the Company actively has encouraged customers who have licensed
only one or two products to license multiple products and to enter into
multi-year maintenance agreements to generate additional revenue and a
significant deferred revenue stream.
The Company maintains vendor relationships with leading organizations such
as IBM, EMC, Hewlett-Packard, Sun and Oracle. These relationships provide the
Company access to pre-release versions of software to help ensure that the
Company's products utilize the latest technology and continue to be competitive
with new operating systems and database releases. These relationships also
provide the Company with insight for strategic planning and product direction.
The Company has implemented marketing initiatives to support the sales and
distribution of its products and services, and communicate corporate direction.
The Company's marketing department is responsible for collateral development,
lead generation and brand awareness of the Company and its products. Marketing
programs include public relations, seminars, industry conferences and trade
shows, advertising and direct mail. The Company's marketing organization also
contributes to both the product direction and strategic planning processes by
providing market research and conducting surveys and focus groups.
LICENSING AND INTELLECTUAL PROPERTY
The Company considers certain features of its software, its internal
operations and development process, and its SST methodology and technology to be
proprietary. The Company relies on a combination of trade secret, copyright and
trademark laws, contractual provisions and certain technology and security
measures to protect its proprietary intellectual property. The Company does not
currently have any patents or pending patent applications. Notwithstanding the
efforts the Company takes to protect its proprietary rights, existing trade
secret, copyright, and trademark laws afford only limited protection. In
addition, effective protection of copyrights, trade secrets, trademarks and
other proprietary rights may be unavailable or limited in certain foreign
countries. The Company believes that, because of the rapid rate of technological
change in the computer software industry, factors such as the knowledge, ability
and experience of the Company's employees, product and service offering
development, and quality of customer support services are more important than
any available trade secret or copyright protection.
The Company does not sell or transfer title of its products to its clients.
The products are licensed generally pursuant to non-exclusive and perpetual
licensing agreements for which extended payment terms of three to five years may
be offered. In the case of extended payment term agreements, the customer is
contractually bound to equal annual fixed payments. The first year of
maintenance is bundled with standard licensing agreements. In the case of
extended payment term agreements, maintenance is bundled for the length of the
payment term. Thereafter, in both instances, the customer may purchase
maintenance annually. Revenue with respect to such extended payment terms is
deferred and recognized over the period of the installment payment plan.
31
<PAGE> 32
The Company's mainframe products are licensed to end users either on a CPU
basis or a MIPS basis. Under the CPU option, the license fee is based
principally upon the number and size of the central processing units. Under the
MIPS option, which the Company is now emphasizing, the license fee is based upon
the amount of the customer's computing power as measured in MIPS. In the last
two fiscal quarters, 50% of the Company's new licenses were priced on a MIPS
basis. The Company's client-server products are licensed to end users on a
per-server or length of service basis.
The Company generates revenue through perpetual product licenses and
maintenance agreements that are renewed annually on the anniversary of the
original purchase date. In 1997, approximately 37% of the Company's revenue was
generated from maintenance agreements. The renewal rate for maintenance
agreements averages approximately 95%. Other revenue is generated when product
licenses are transferred to different or larger CPUs. No single customer
accounted for greater than 3% of the Company's total revenue in 1997.
Currently, the Company licenses certain technology on a perpetual basis
from third parties which is incorporated in some of the Company's products. In
the future, the Company may license additional technology from third parties for
incorporation in some of the Company's products on a perpetual or term basis.
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change, which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
The Company uses a design strategy and development methodology, SST, that
facilitates product development, adherence to market requirements, quality
testing practices, product consistency and ease of integration, and long-term
supportability and maintainability. This methodology has evolved over the life
of the Company to address the changing requirements of product-for-market
development that have come about as a result of client-server technology
advances. The Company is currently expanding the scope of its CenterStage suite
of products to address Oracle and NT, and to enhance and extend the SST
knowledge base. The Company is also finalizing the development of additional
products for its Year 2000 Arena.
The Company believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of March 31, 1998, the Company's research and development group
consisted of 31 employees. The Company seeks to recruit highly qualified
employees, and its ability to attract and retain such employees will be a
principal factor in its success in maintaining a leading technological position.
For the two years ended December 31, 1996 and 1997, and the three months ended
March 31, 1998, research and development expenses were $967,000, $1.5 million
and $272,000, respectively. The Company believes that significant investments in
research and development are required in order to remain competitive.
COMPETITION
The market in which the Company operates is highly competitive, rapidly
evolving and subject to continuous technological change. The Company's products
have traditionally addressed niches within the performance and storage
management segments. In conjunction with the Company's SST strategy, the Company
groups its existing products into bundles to compete more effectively and better
address customers' strategic issues. This approach enables the Company to expand
its audience to include systems and applications personnel, as well as a higher
level of management within the customer and prospect base.
Although the Company believes that it maintains a competitive advantage by
bundling its software products to minimize point product competition and by
offering products which the Company believes are unavailable from its
competitors, there are no assurances that the Company can maintain or enhance
its competitive position against current and future competitors. Significant
factors such as the emergence of new products, fundamental changes in computing
technology and data storage and manipulation platforms and
32
<PAGE> 33
applications and aggressive pricing and marketing strategies by the Company's
competitors may affect the Company's competitive position. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition, larger installed customer bases and substantially greater
financial, technical and marketing resources than the Company. There can be no
assurance that the Company's current and potential competitors will not develop
software products that may be or may be perceived to be more effective or
responsive to technological change than are the Company's current or future
products or that the Company's technologies and products will not be rendered
obsolete by such developments. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's primary competitors are Sterling Software,
Inc. and Boole & Babbage, Inc. in the data and storage management market; Boole
& Babbage, Inc. and Computer Associates International, Inc. in the performance
management market; and Compuware, Inc. and Viasoft Inc. in the Year 2000 market.
The Company believes that its products compete effectively on the basis of
quality, functionality, technical support and service, and embedded intelligence
and proactive automation.
EMPLOYEES
As of March 31, 1998, the Company employed 218 full-time employees,
including 118 in marketing, sales and support services, 82 in research and
development, customer support and maintenance, and 18 in finance and
administration. The Company employs 192 people in the United States and 26 in
foreign countries. The future success of the Company will depend in large part
upon its continued ability to attract and retain highly skilled and qualified
personnel in a highly competitive environment. The Company believes that its
employee relations are good.
PROPERTIES
The Company's executive offices, customer support and marketing operations
are currently located in facilities occupying approximately 26,000 sq. ft. in
Alexandria, Virginia pursuant to a lease expiring in September 2001. The annual
rent and maintenance for the facility is approximately $324,000. The lease
provides for a renewal option for five years at an annual rent increase of three
percent during the option period. The Company also leases an aggregate of 10,000
sq. ft. at an aggregate annual rental of $329,550 in 9 locations throughout the
United States which are used for sales activities. The Company maintains foreign
sales offices in Australia, Brazil, Canada, France, Spain and the United
Kingdom.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on its business, financial condition and results of
operations.
33
<PAGE> 34
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The directors, executive officers and other key personnel of the Company
and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
James A. Cannavino(1)........................ 54 Chairman of the Board of Directors
Judy G. Carter............................... 46 President, Chief Executive Officer and Director
C.R. Kinsey, III............................. 53 Vice President and Chief Technology Officer
Robert C. McLaughlin......................... 52 Treasurer and Chief Financial Officer
Daniel DelGiorno, Jr. ....................... 43 Director
Robert Devine(1)............................. 59 Director
Charles Feld(1).............................. 55 Director
OTHER KEY PERSONNEL
Joseph Miksch................................ 50 Vice President, Global Sales
Lisa Welch................................... 33 Vice President, Technology
</TABLE>
- ---------------
(1) Member, audit committee.
DIRECTORS AND EXECUTIVE OFFICERS
James A. Cannavino has been Chairman of the Board of the Company since
April 1998. Mr. Cannavino is President and Chief Executive Officer of CyberSafe,
Inc., a corporation specializing in network security. He was the President and
Chief Executive Officer of Perot Systems Corporation through July 1997, and
prior to that was a Senior Vice President at IBM, responsible for strategy and
development. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino currently is a consultant to Computer Concepts
and serves on the boards of the National Center for Missing and Exploited
Children, 7th Level and Marist College.
Judy G. Carter has been President and Chief Executive Officer and a
Director of the Company since October 1993. Prior thereto, Ms. Carter was the
Chief Operating Officer for the Company from 1991. Ms. Carter started at the
Company as a system software developer and progressed into a number of
supervisory and managerial roles, culminating in her appointment as vice
president of technical services in 1990. Ms. Carter is a director of Fairfax
Opportunities Unlimited, a non-profit organization.
C.R. Kinsey, III, a co-founder of the Company, has been Vice President of
the Company since May 1998 and has been Chief Technology Officer since 1977.
From 1977 until May 1998, Mr. Kinsey was also Secretary and Treasurer of the
Company. In addition, Mr. Kinsey is a primary technical advisor to the Company's
technology division for new product research and development, product
enhancements and service and support.
Robert C. McLaughlin has been Treasurer and Chief Financial Officer since
March 1998. Prior thereto, Mr. McLaughlin was a Department Director with global
responsibilities at Perot Systems Corporation in Dallas, Texas from November
1996 through December 1997. Mr. McLaughlin also served as Senior Vice President
for a real estate investment venture in West Palm Beach, Florida from 1993 to
1996, as a Vice President of First Union National Bank of Florida, N.A. in Fort
Lauderdale from 1991 to 1993 and a Vice President of Southeast Bank, N.A. in
Miami from 1987 to 1991.
Daniel DelGiorno, Jr. has been a Director of the Company since May 1998.
Mr. DelGiorno is the President and Chief Executive Officer, Treasurer and a
director of Computer Concepts for more than the past five years. He is also the
President and principal stockholder of Tech Marketing Group Corp., a privately
held corporation which is a stockholder of Computer Concepts.
34
<PAGE> 35
Robert Devine has been a Director of the Company since May 1998. Mr. Devine
is a director and the Chief Executive Officer of Chemtainer Industries, Inc. for
more than twenty years. Chemtainer Industries manufactures and distributes a
diverse array of commercial and consumer products nationally and internationally
with eleven plants located in nine states from coast to coast. Mr. Devine is
also a director of Rototron Corp. and Tracey International, and has been a
director and vice-president of the non-profit New York City Mental Health
Association for more than ten years.
Charles Feld has been a Director of the Company since July 1998. Mr. Feld
is President of the Feld Group, Inc., a provider of temporary chief information
officer consulting services, for more than the past five years. Since December
1997, Mr. Feld has also served as operating Chief Information Officer of Delta
Air Lines. Prior thereto, from June 1992 until August 1997, Mr. Feld served as
operating Chief Information Officer for Burlington Northern Santa Fe Corp.
OTHER KEY PERSONNEL
Joseph Miksch has been Vice President, Global Sales since 1996. Mr. Miksch
is responsible for all of the Company's global direct and indirect sales efforts
in Europe, the Middle East, Africa, Asia-Pacific and North and South America.
Prior to joining the Company, Mr. Miksch was Chief Operating Officer at DBE,
Inc. for two years, where he was responsible for launching new products into the
Oracle and DB2 markets. Prior thereto, for 10 years, Mr. Miksch served in
several senior vice president positions at Computer Associates, Inc. in its
system, graphics application and database divisions.
Lisa Welch has been Vice President, Technology since 1988. Ms. Welch is
responsible for strategic planning and business development, and direct research
and product development. She is also responsible for customer service and
information delivery activities. Prior to joining the Company, Ms. Welch was
employed with NCR as a systems engineer.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to the Company's Chief Executive Officer and its other most highly
compensated executive officer other than the Chief Executive Officer ("named
executive officers") whose total annual salary and bonus equaled or exceeded
$100,000 for services rendered for the fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) COMPENSATION($)(2)
- --------------------------- ---- --------- -------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Judy G. Carter............ 1997 $155,000(3) $165,000(4) -- $ 1,000
President and Chief
Executive Officer
C.R. Kinsey, III.......... 1997 $155,000(3) $165,000(4) -- $189,000
Vice-President and Chief
Technology Officer
</TABLE>
- ---------------
(1) No Other Annual Compensation is shown because the amounts of perquisites and
other non-cash benefits provided by the Company do not exceed the lesser of
$50,000 or 10% of the total annual base salary and bonus disclosed in this
table for the respective officer.
(2) All Other Compensation includes royalties paid in respect of software
products developed by such officers.
(3) Includes $5,000 deferred from 1996.
(4) Includes $77,500 deferred from 1996.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted by the Company to the named executive
officers during the fiscal year ended December 31, 1997.
35
<PAGE> 36
EMPLOYMENT AGREEMENTS
Mr. James A. Cannavino has entered into an agreement with the Company
wherein he has agreed to serve as Chairman of the Board of Directors. As
compensation for his services, Mr. Cannavino has been granted options to
purchase 1,200,000 shares of Common Stock, 600,000 of which are Type I options
and 600,000 of which are Type II options. "Type I" options vest one-half on the
earlier of (i) the closing date of this offering, or (ii) December 31, 1998 and
one-half on December 31, 1998. "Type II" options vest on December 31, 2002,
subject to earlier vesting based upon the Company reaching certain defined
levels of net income. The agreement with Mr. Cannavino further provides for the
issuance of a $500,000 full recourse loan to him for relocation or other
purposes upon the effective date of this offering. The loan shall be interest
bearing, is unsecured, and shall be payable on December 1, 2000, provided that
certain accelerated payments are required in the event Mr. Cannavino sells
shares of Common Stock. Mr. Cannavino will also receive a monthly salary of
$2,000 and be reimbursed for certain expenses.
Judy G. Carter, C.R. Kinsey, III, Robert C. McLaughlin, Joseph Miksch and
Lisa Welch have entered into employment agreements with the Company commencing
on the effective date of this offering. The employment agreements with Ms.
Carter and Mr. Kinsey terminate December 31, 2002 and the employment agreements
for Mr. McLaughlin, Mr. Miksch and Ms. Welch are each for a three year term. The
term of the agreements automatically renew for additional one year periods
unless the Company or the employee notifies the other party at least ninety days
prior to the end of any renewal term of its desire to terminate such agreement.
Pursuant to the agreements, Ms. Carter, Mr. Kinsey, Mr. McLaughlin, Mr. Miksch
and Ms. Welch receive annual compensation of $200,000, $200,000, $120,000,
$135,000 and $130,000, respectively and an incentive bonus based on the Company
meeting or exceeding annual or quarterly net income targets to be established by
the Board of Directors. The incentive payments to Ms. Carter and Mr. Kinsey are
up to $150,000 for 1998 and up to $200,000 for each of the years 1999 through
2002. Each employment agreement also provides for certain payments following
death or disability and further provides, in the event of a change in control of
the Company, as defined therein, the right, at the election of the employee, to
terminate the agreement and receive a lump sum payment of approximately three
times the employee's annual salary.
401(k) SAVINGS PLAN
The Company sponsors a retirement plan (the "401(k) Savings Plan") intended
to be qualified under section 401(k) of the Internal Revenue Code of 1986, as
amended. All employees over age 21 who have completed at least 1,000 hours in
their first year of employment by the Company are eligible to participate in the
401(k) Savings Plan. Employees may contribute to the 401(k) Savings Plan on a
tax deferred basis up to 20% of their total annual salary, but in no event more
than the maximum permitted by the Code ($10,000 in calendar 1998). The Company
matches all employee contributions up to $2,375 per year per employee, and all
Company contributions are fully vested. As of December 31, 1997, 115 employees
had elected to participate in the 401(k) Savings Plan. For the fiscal year ended
December 31, 1997, the Company contribution is an aggregate approximately
$52,000 to the 401(k) Savings Plan, of which an aggregate $4,700 was a
contribution for Judy G. Carter and C.R. Kinsey, III.
1998 LONG TERM INCENTIVE PLAN
In May 1998, the Company adopted the SOFTWORKS, Inc. 1998 Long Term
Incentive Plan (the "1998 Incentive Plan") in order to motivate qualified
employees of the Company, to assist the Company in attracting employees and to
align the interests of such persons with those of the Company's stockholders.
The 1998 Incentive Plan provides for the grant of "incentive stock options"
within the meaning of the Section 422 of the Internal Revenue Code of 1986, as
amended, "non-qualified stock options," restricted stock, performance grants and
other types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 1998 Incentive Plan, which will be administered by the Long Term
Incentive Plan Administrative Committee of the Board of Directors, authorizes
the issuance of a maximum of 3,727,000 shares of Common Stock, which may be
either newly issued shares, treasury shares, reacquired shares, shares purchased
in the
36
<PAGE> 37
open market or any combination thereof. If any award under the 1998 Incentive
Plan terminates, expires unexercised, or is cancelled, the shares of Common
Stock that would otherwise have been issuable pursuant thereto will be available
for issuance pursuant to the grant of new awards. To date, the Company has
granted options to purchase 2,668,000 shares of Common Stock under the 1998
Incentive Plan to its officers, directors and key employees. The Company has
also issued options to purchase an aggregate 969,500 shares of Common Stock to a
consultant and various other employees. Of the 2,668,000 options granted to
date, James A. Cannavino has been granted 600,000 Type I options and 600,000
Type II options, Judy Carter has been granted 150,000 Type I options and 200,000
Type II options, Claude Kinsey has been granted 200,000 Type I options and
250,000 Type II options and each of Joseph Miksch, Lisa Welch and Robert
McLaughlin has been granted 20,000 Type I options and 80,000 Type II options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no Compensation Committee for its fiscal year ended
December 31, 1997.
PERSONAL LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Company's Certificate of Incorporation and By-laws contain provisions
which reduce the potential personal liability of Directors for certain monetary
damages and provide for indemnity of Directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
Directors that would result in any liability for which such Director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as Directors. The Company believes that the
substantial increase in the number of lawsuits being threatened or filed against
corporations and their directors has resulted in a growing reluctance on the
part of capable persons to serve as members of boards of directors of companies,
particularly of companies which intend to become public companies. The Company
also believes that the increased risk of personal liability without adequate
insurance or other indemnity protection for its directors could result in
overcautious and less effective direction and management of the Company.
Consequently, the Company has agreed to indemnify its Directors and officers and
has applied for directors and officers liability insurance. However, there can
be no assurance that the Company will be able to obtain such insurance.
The provisions affecting personal liability do not abrogate a Director's
fiduciary duty to the Company and its stockholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a Director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a Director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its Directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
Director's status as a Director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance.
These provisions diminish the potential rights of action which might
otherwise be available to stockholders by limiting the liability of officers and
Directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a
37
<PAGE> 38
director of the Company in connection with any stockholders derivative action.
However, the provisions do not have the effect of limiting the right of a
stockholder to enjoin a Director from taking actions in breach of his fiduciary
duty, or to cause the Company to rescind actions already taken, although as a
practical matter courts may be unwilling to grant such equitable remedies in
circumstances in which such actions have already been taken.
The Company has entered into Indemnification Agreements with certain of its
officers and Directors. The Indemnification Agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of certain legal
proceedings, including amounts paid in settlement by or on behalf of an
indemnitee thereunder.
38
<PAGE> 39
CERTAIN TRANSACTIONS
In prior fiscal years, Computer Concepts provided certain corporate and
administrative services to the Company including executive management and
professional services (accounting, auditing and legal). These services were
performed for $500,000 in each of 1997 and 1996. Prior to 1996, the Company
effectively operated independently of Computer Concepts and was responsible for
its own expenses. As a result, prior to 1996, Computer Concepts performed no
material services nor incurred any material expenses on behalf of the Company.
The Company and Computer Concepts also jointly participated in certain employee
benefit plans (defined contribution and employee health) and the Company was
allocated its applicable share of these costs. Additionally, in prior fiscal
years, certain of the Company's employees received part of their compensation in
the form of Computer Concepts common stock or options. Upon consummation of this
offering, the Company will no longer pay any administrative fees to Computer
Concepts.
Mr. Cannavino, Chairman of the Board of the Company, remains a consultant
to Computer Concepts and will receive from Computer Concepts prior to the
effective date of the Registration Statement of which this Prospectus is a part
100,000 shares of the Common Stock. The 100,000 shares of Common Stock are to be
transferred in consideration for services rendered to Computer Concepts. It is
not anticipated that Mr. Cannavino will receive significant additional
compensation from Computer Concepts for future consulting services.
The employment agreement between the Company and Mr. Cannavino provides for
the issuance of a $500,000 full recourse loan to him for relocation or other
purposes upon the effective date of this offering. The loan shall be interest
bearing at the rate of approximately six percent per annum, unsecured, and
payable on December 1, 2000, provided that certain accelerated payments are
required in the event Mr. Cannavino sells shares of Common Stock.
VOTING TRUST AGREEMENT
Prior to the completion of the offering, the Company, Computer Concepts,
James Cannavino, Daniel DelGiorno, Jr. and Robert Devine, each of whom are
members of the Company's Board of Directors and will serve as Trustees, intend
to enter into a Voting Trust Agreement. Pursuant to the Voting Trust Agreement,
Computer Concepts will deposit its shares of Common Stock in a voting trust,
together with certain shares of Common Stock that may be acquired by its
affiliates. The Voting Trust Agreement provides, among other things, that the
Trustees will have the right to vote the deposited shares in connection with
certain specified major transactions (the "Approval Actions") and that Computer
Concepts and its affiliates will have the right to vote for the election of
Directors and on other actions other than Approval Actions, except that if an
"independent" Trustee (as defined below) ceases to be a Director for any reason
or is required to resign as a Director of the Company for failure to remain
independent, the remaining independent Trustee(s) will have the right to vote
for a successor independent Director, which Trustee(s) will take direction from
the holders of a majority of the shares of Common Stock not held by Computer
Concepts and its affiliates. The Voting Trust Agreement requires that each
Trustee must be a Director of the Company, that two of the three Trustees must
be "independent" and that a Trustee required to be independent who ceases to be
so will resign as Trustee and as a Director of the Company. The Voting Trust
Agreement does not prevent the pledge of any of the deposited shares. As used in
the Voting Trust Agreement, the term "independent" means any Director of the
Company who does not derive in excess of $60,000 of compensation from Computer
Concepts or its affiliates (other than the Company) in any fiscal year (other
than Mr. Cannavino's receipt of 100,000 shares of the Common Stock referred to
above).
Pursuant to the Agreement, the Company agrees that the following Approval
Actions will not be taken without the approval of the Trustees: (i) the sale,
lease, encumbrance, assignment, transfer or conveyance of all or substantially
all (i.e., 51% or more) of the assets or capital stock of the Company to an
acquiring party, or the merger or consolidation of the Company into or with
another corporation, if Computer Concepts or one of its affiliates is a party to
such transaction; (ii) any filing by the Company or a subsidiary for relief as a
debtor under any bankruptcy or similar law, any application by the Company or a
subsidiary for the appointment of a receiver, trustee, custodian or similar
fiduciary for a substantial portion of the consolidated
39
<PAGE> 40
assets of the Company and its subsidiaries, or the consent by the Company or a
subsidiary to any petition or application seeking similar relief which is filed
against the Company or the subsidiary, or the voluntary liquidation, dissolution
or winding up of the Company; (iii) the declaration or payment of any dividends
on any capital stock of the Company; (iv) the incurrence of any liens upon any
property or properties of the Company which, individually or in the aggregate,
are material to the operations of the Company; (v) the acquisition of any equity
security, or any right to acquire any equity security, of any other corporation,
other than the Company's formation of one or more wholly-owned subsidiaries (or
subsidiaries in which a de minimis number of shares are held by a third party in
order to comply with local law), if such other corporation is Computer Concepts
or one of its affiliates; (vi) the acquisition of assets outside the ordinary
course of business from Computer Concepts or one of its affiliates; (vii) any
transaction or proposed transaction between the Company and any "person," as
such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (other than a Trustee, the Company, any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, or any corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportion as their ownership of stock
of the Company), pursuant to which such person becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; (viii) any transaction or proposed
transaction between the Company and an affiliate or any transaction or proposed
transaction between the Company and Computer Concepts for an aggregate
consideration in excess of $1 million unless a fairness opinion is obtained from
SoundView Financial Group, Inc. or any other independent investment banking
institution of national standing appointed by the Company; or (ix) any other
transaction which requires stockholder approval under Delaware law to the extent
that any of the parties to the Voting Trust Agreement have been advised in
writing by counsel that the transaction presents an actual conflict of interest
between Computer Concepts and its affiliates and the other holders of Common
Stock.
The Voting Trust Agreement will remain in effect until the earliest of: (i)
Computer Concepts and its affiliates collectively ceasing to own 25% or more of
the Common Stock, (ii) the acquisition by a person other than Computer Concepts
and its affiliates of a greater percentage of the Common Stock than that then
owned by Computer Concepts and its affiliates or (iii) 10 years from the date of
the Voting Trust Agreement.
40
<PAGE> 41
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of July 9, 1998 of (i) each person known by the Company to beneficially own
5% or more of the Company's outstanding Common Stock, (ii) each of the Company's
executive officers, directors and director nominees, and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares of Common Stock are beneficially owned, and investment and
voting power is held, by the persons named as owners. Percentage ownership
includes options currently exercisable or exercisable within 60 days to purchase
741,500 shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENTAGE OWNERSHIP
-------------------------- --------------------------
BEFORE AFTER BEFORE AFTER
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING OFFERING(1)(2)
------------------------ ----------- ----------- -------- --------------
<S> <C> <C> <C> <C>
Computer Concepts Corp.(3).................. 12,983,000 11,483,000 87.6% 68.7%
Internet Tracking & Security Ventures,
LLC(4).................................... 1,000,000 0 6.7 *
James A. Cannavino(5)....................... 400,000 400,000 2.7 2.4
Judy G. Carter(6)........................... 75,000 75,000 * *
Claude R. Kinsey III(7)..................... 100,000 100,000 * *
Robert C. McLaughlin(8)..................... 10,000 10,000 * *
Daniel DelGiorno, Jr.(9).................... 13,049,500 11,549,500 88.0 69.1
Robert Devine(10)........................... 21,000 21,000 * *
Charles Feld(10)............................ 21,000 21,000 * *
All officers and directors as a group (7
persons) (5)(6)(7)(8)(9)(10)(11).......... 13,676,500 12,176,500 92.3 72.8
</TABLE>
- ---------------
* Less than one percent (1%) unless otherwise indicated.
(1) Includes the issuance of 190,000 shares of Common Stock to a financial
advisor.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The address is 80 Orville Drive, Bohemia, New York 11716.
(4) The address is 50 Charles Lindbergh Boulevard, Uniondale, New York 11553.
(5) Includes options currently exercisable or exercisable within 60 days to
purchase 300,000 shares of Common Stock.
(6) Includes options currently exercisable or exercisable within 60 days to
purchase 75,000 shares of Common Stock.
(7) Includes options currently exercisable or exercisable within 60 days to
purchase 100,000 shares of Common Stock.
(8) Includes options currently exercisable or exercisable within 60 days to
purchase 10,000 shares of Common Stock.
(9) Includes shares of Common Stock owned by Computer Concepts, as to which Mr.
DelGiorno disclaims beneficial ownership. Includes options currently
exercisable or exercisable within 60 days to purchase 66,500 shares of
Common Stock.
(10) Includes options currently exercisable or exercisable within 60 days to
purchase 21,000 shares of Common Stock.
(11) The address of each officer and director listed above is c/o Softworks,
Inc., 5845 Richmond Highway, Suite 400, Alexandria, Virginia 22303.
41
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 150,000,000 shares of
Common Stock, $.001 par value per share and 2,000,000 shares of preferred stock,
$.001 par value per share ("Preferred Stock").
COMMON STOCK
General. The Company has 150,000,000 authorized shares of Common Stock,
14,273,000 of which were issued and outstanding prior to the closing of this
offering. All shares of Common Stock currently outstanding are validly issued,
fully paid and non-assessable, and all shares which are the subject of this
Prospectus, when issued and paid for pursuant to this offering, will be validly
issued, fully paid and non-assessable.
Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of stockholders. The
Company's Board of Directors consists of three classes each of which serves for
a term of three years. At each annual meeting of the stockholders the Directors
in only one class will be elected. The holders are not permitted to vote their
shares cumulatively. Accordingly, the holders of more than fifty percent (50%)
of the issued and outstanding shares of Common Stock can elect all of the
Directors of the Company. See "Principal and Selling Stockholders."
Dividend Policy. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of the funds legally available therefor. Any such dividends may be paid in
cash, property or additional shares of Common Stock. The Company has not paid
any cash dividends since its inception and presently anticipates that all
earnings, if any, will be retained for development of the Company's business and
that no dividends on the shares of Common Stock will be declared in the
foreseeable future. Payment of future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, general business conditions and other pertinent facts.
Therefore there can be no assurance that any dividends on the Common Stock will
be paid in the future. In addition, pursuant to the Voting Trust Agreement, the
Company may not declare or pay dividends on the Common Stock without the prior
approval of the Trustees. See "Certain Transactions -- Voting Trust Agreement"
and "Dividend Policy."
Miscellaneous Rights and Provisions. Holders of Common Stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of the Company, each share of Common Stock is entitled
to share ratably in any assets available for distribution to holders of the
equity of the Company after satisfaction of all liabilities, subject to the
rights of holders of Preferred Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of Preferred Stock. Currently there are no shares of Preferred
Stock issued or outstanding.
The issuance of Preferred Stock by the Company's Board of Directors could
adversely affect the rights of holders of shares of Common Stock by, among other
things, establishing preferential dividends, liquidation rights or voting power.
The issuance of Preferred Stock could be used to discourage or prevent efforts
to acquire control of the Company through the acquisition of shares of Common
Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Certificate of Incorporation contains certain provisions
which may be deemed to be "anti-takeover" in nature in that such provisions may
deter, discourage or make more difficult the assumption
42
<PAGE> 43
of control of the Company by another entity or person. In addition to the
ability to issue Preferred Stock, these provisions are as follows:
A vote of 66 2/3% of the stockholders is required by the Company's
Certificate of Incorporation in order to approve certain transactions
including mergers and sales or transfers of all or substantially all of the
assets of the Company.
The Company's By-laws provide that the members of the Company's Board
of Directors be classified into three classes: Class I (which consists of
Robert Devine) will serve until the Company's 1999 Annual Meeting of
Stockholders. Class II (which consists of James A. Cannavino and Judy G.
Carter) will serve until the Company's 2000 Annual Meeting of Stockholders.
Class III (which consists of Daniel DelGiorno, Jr.) will serve until the
Company's 2001 Annual Meeting of Stockholders. After their initial
staggered terms, the term of each class will run for three years and expire
at successive annual meetings of stockholders. Accordingly, it is expected
that it would take a minimum of two annual meetings of stockholders to
change a majority of the Board of Directors. Further, Directors may only be
removed for cause prior to the expiration of their term of office.
DELAWARE GENERAL CORPORATION LAW
The Delaware General Corporation Law further contains certain anti-takeover
provisions. Section 203 of the Delaware General Corporation Law provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person who owns 15% or more of the
corporation's outstanding voting stock (an "interested stockholder") for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation (excluding shares owned by persons
who are both officers and directors of the corporation and shares held by
certain employee stock ownership plans), or (iii) the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The transfer agent and registrar for the Common Stock is Manhattan Transfer
Registrar Co., Lake Ronkonkoma, New York.
43
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 15,973,000 shares
of Common Stock outstanding. Of these shares, the 4,200,000 shares of Common
Stock sold in this offering (4,830,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (in general, a person who has
a control relationship with the Company), which will be subject to the
limitations of Rule 144 adopted under the Securities Act. All of the remaining
shares are deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, commencing ninety (90) days after the
effective date of the Registration Statement of which this Prospectus is a part,
a person, including an affiliate of the Company (or persons whose shares are
aggregated), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or the average weekly trading volume of the Common
Stock on all exchanges and/or reported through the automated quotation system of
a registered securities association during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. A person who has not been an affiliate of
the Company for at least the three months immediately preceding the sale and who
has beneficially owned shares of Common Stock for at least two years is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
11,483,000 of the shares of restricted stock outstanding upon completion of
this offering (10,853,000 shares if the Underwriters' over-allotment option is
exercised in full) have been held for more than one year. Computer Concepts,
which owns all of these shares, has agreed that it will not, without the prior
written consent of SoundView Financial Group, Inc., sell or otherwise dispose of
any shares of Common Stock beneficially owned by it for a period of one year
after the effective date of this Prospectus. Following expiration of the lock-up
period (or earlier consent of SoundView Financial Group, Inc.), these shares
will be eligible for sale subject to the restrictions of Rule 144. The Company
intends to register approximately 3,727,000 shares reserved for issuance under
its stock option plan. Options and stock issued under the stock option plan
shall be subject to a 180 day lock-up period from the closing of this offering.
Following this offering, the holder of 190,000 shares of the Common Stock will
have certain rights to register those shares under the Securities Act. The sale
of a substantial number of these shares in the public market could adversely
affect prevailing market prices following the offering.
44
<PAGE> 45
UNDERWRITING
Upon the terms and subject to the conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below, for whom
SoundView Financial Group, Inc. and Raymond James & Associates, Inc. are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Stockholders an aggregate of 4,200,000 shares
of Common Stock. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
SoundView Financial Group, Inc. ............................ 1,440,000
Raymond James & Associates, Inc. ........................... 960,000
BancAmerica Robertson Stephens.............................. 90,000
Bear, Stearns & Co. Inc. ................................... 90,000
BT Alex. Brown Incorporated................................. 90,000
CIBC Oppenheimer Corp. ..................................... 90,000
Credit Suisse First Boston Corporation ..................... 90,000
Deutsche Bank Securities Inc. .............................. 90,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 90,000
Hambrecht & Quist LLC....................................... 90,000
ING Baring Furman Selz LLC.................................. 90,000
Lehman Brothers Inc. ....................................... 90,000
Morgan Stanley & Co. Incorporated .......................... 90,000
NationsBanc Montgomery Securities LLC....................... 90,000
PaineWebber Incorporated.................................... 90,000
Prudential Securities Incorporated.......................... 90,000
SG Cowen Securities Corporation............................. 90,000
Smith Barney Inc............................................ 90,000
Dain Rauscher Wessels....................................... 45,000
First Albany Corporation.................................... 45,000
Friedman, Billings, Ramsey & Co., Inc. ..................... 45,000
Hanifen, Imhoff Inc. ....................................... 45,000
Needham & Company, Inc. .................................... 45,000
Preferred Capital Markets, Inc. ............................ 45,000
C.E. Unterberg, Towbin...................................... 45,000
Wheat First Securities, Inc................................. 45,000
---------
Total............................................. 4,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers (who may include the Underwriters) at
such price less a concession not to exceed $0.29 per share. The Underwriters may
allow, and
45
<PAGE> 46
such dealers may reallow, a concession not to exceed $0.10 per share to any
other Underwriter and certain other dealers. After the initial public offering
of the shares offered hereby, the offering price and other selling terms may be
changed by the Representatives. The Representatives have advised the Company
that the Underwriters do not intend to confirm any shares to any accounts over
which they exercise discretionary control.
Computer Concepts has granted to the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to an aggregate of
630,000 additional shares of Common Stock at the initial public offering price
less underwriting discounts and commissions. Such option may be exercised solely
for the purpose of covering over-allotments, if any, in connection with the
offering of the shares offered hereby. To the extent that the Underwriters
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
The offering of the shares offered hereby is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
The Company, all directors and executive officers of the Company and
certain other persons have agreed that, for a period of 180 days, and Computer
Concepts has agreed that, for a period of 12 months after the date of this
Prospectus, without the prior written consent of SoundView Financial Group,
Inc., they will not, with certain limited exceptions, directly or indirectly,
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or, in any manner, transfer all or a portion of
the economic consequences associated with the ownership of the Common Stock,
other than the shares of Common Stock offered hereby.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Exchange Act, pursuant to which such
persons may bid for or purchase shares of Common Stock for the purpose of
stabilizing the market price for shares of Common Stock. The Underwriters also
may create a short position for the account of the Underwriters by selling more
shares of Common Stock in connection with this offering than they are committed
to purchase from the Company and the Selling Stockholders, and in such case may
purchase shares of Common Stock in the open market following the completion of
this offering to cover all or a portion of the shares of Common Stock or by
exercising the Underwriters' over-allotment option referred to above. In
addition, SoundView Financial Group, Inc., on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the other Underwriters
whereby it may reclaim from an Underwriter (or a dealer participating in this
offering) for the account of the other Underwriters, the selling concession with
respect to shares of Common Stock that are distributed in this offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph are required, and, if they are undertaken, may be discontinued at any
time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock offered hereby was
determined by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors that were considered in determining the
initial public offering price were prevailing market conditions, revenue and
earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the history of and prospects for the Company's business and the
industry in which it competes, the Company's management and other factors deemed
relevant.
46
<PAGE> 47
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by the law firm of Blau, Kramer, Wactlar &
Lieberman, P.C., Jericho, New York. Members of Blau, Kramer, Wactlar &
Lieberman, P.C. own options to purchase an aggregate 25,000 shares of Common
Stock of the Company. Certain matters will be passed upon for the Underwriters
by Morrison & Foerster LLP, New York, New York.
EXPERTS
The audited financial statements of the Company as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997,
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1, pursuant to the Securities Act, with respect to the Common Stock. This
Prospectus does not contain all of the information set forth in the Registration
Statement, and the exhibits thereto. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and its exhibits. As of the date of this Prospectus, the Company will be subject
to the informational requirements of the Exchange Act, and in accordance
therewith shall file reports, proxy and information statements, and other
information with the Commission. The Registration Statement and such reports,
proxy and information statements, and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices at Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the Commission's web site located at
http://www.sec.gov. The Common Stock is listed on the Nasdaq National Market,
and the Company's reports and other information may be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
47
<PAGE> 48
SOFTWORKS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets As of December 31, 1996 and 1997
and As of March 31, 1998 (unaudited) (in thousands, except
share and per share data)................................. F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1995, 1996 and 1997 and For the Three Months
Ended March 31, 1997 (unaudited) and March 31, 1998
(unaudited) (in thousands, except share and per share
data)..................................................... F-4
Consolidated Statements of Stockholder's Equity For the
Years Ended December 31, 1995, 1996 and 1997 and For the
Three Months Ended March 31, 1998 (unaudited) (in
thousands, except share data)............................. F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1995, 1996 and 1997 and For the Three Months
Ended March 31, 1997 (unaudited) and March 31, 1998
(unaudited) (in thousands)................................ F-6
Notes to Consolidated Financial Statements As of December
31, 1996 and 1997 and As of March 31, 1998 (unaudited).... F-7
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SOFTWORKS, Inc.:
We have audited the accompanying consolidated balance sheets of SOFTWORKS,
Inc., a Delaware corporation, and subsidiaries (the "Company") as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SOFTWORKS, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 29, 1998
F-2
<PAGE> 50
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,735 $ 360 $ 909
Accounts receivable, net of allowance for doubtful
accounts of $249, $206, and $185 in 1996, 1997, and
1998, respectively..................................... 5,962 10,652 6,885
Installment receivables................................... 2,697 6,148 7,686
Prepaid expenses and other current assets................. 423 984 1,344
Deferred tax assets....................................... 472 138 240
------- ------- -------
Total current assets................................... 11,289 18,282 17,064
------- ------- -------
Installment receivables, noncurrent....................... 3,714 6,480 7,173
Property and equipment, net............................... 1,223 1,523 1,481
Software development costs, net........................... 948 3,357 3,467
Goodwill, net of accumulated amortization of $1,728,
$2,477, and $2,684 in 1996, 1997, and 1998,
respectively........................................... 4,683 4,611 4,666
Other assets.............................................. 357 734 686
Deferred tax assets, noncurrent........................... 329 696 825
------- ------- -------
Total assets...................................... $22,543 $35,683 $35,362
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 2,022 $ 4,689 $ 3,520
Current portion of long-term debt......................... 225 1,083 1,037
Deferred maintenance revenue.............................. 6,258 6,225 5,848
Deferred installment revenue.............................. 2,461 5,506 6,985
Due to Parent............................................. 1,147 1,554 1,218
------- ------- -------
Total current liabilities.............................. 12,113 19,057 18,608
------- ------- -------
Deferred maintenance revenue, noncurrent.................. 249 740 783
Deferred installment revenue, noncurrent.................. 3,950 7,122 7,872
Long-term debt............................................ 351 1,294 1,388
Payable to Parent for federal income taxes................ 525 1,383 1,383
------- ------- -------
Total liabilities...................................... 17,188 29,596 30,034
------- ------- -------
Commitments and Contingencies
Stockholder's Equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; none issued or outstanding................. -- -- --
Common stock, $.001 par value; 150,000,000 shares
authorized; 14,083,000 shares issued and outstanding... 14 14 14
Additional paid-in capital................................ 5,549 5,549 5,549
Retained (deficit) earnings............................... (208) 578 (189)
Accumulated other comprehensive loss...................... -- (54) (46)
------- ------- -------
Total stockholder's equity............................. 5,355 6,087 5,328
------- ------- -------
Total liabilities and stockholder's equity........ $22,543 $35,683 $35,362
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 51
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses............. $ 5,718 $ 8,611 $ 16,633 $ 2,295 $ 3,736
Maintenance................... 5,908 7,914 9,957 2,371 2,551
Professional services......... -- -- 180 -- 309
----------- ----------- ----------- ----------- -----------
Total revenue.............. 11,626 16,525 26,770 4,666 6,596
----------- ----------- ----------- ----------- -----------
Cost of revenue (exclusive of
amortization and depreciation
shown separately below):
Software licenses............. 432 424 580 101 439
Maintenance................... 3,687 3,664 5,513 1,163 1,646
Professional services......... -- -- 155 -- 225
----------- ----------- ----------- ----------- -----------
Total cost of revenue...... 4,119 4,088 6,248 1,264 2,310
----------- ----------- ----------- ----------- -----------
Gross margin.................... 7,507 12,437 20,522 3,402 4,286
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing........... 4,262 6,161 12,463 2,305 3,395
General and administrative.... 1,619 2,217 2,791 884 1,102
Amortization and
depreciation............... 2,088 1,596 1,972 436 490
Research and development...... 908 967 1,480 273 272
Impairment on goodwill........ 1,320 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses... 10,197 10,941 18,706 3,898 5,259
----------- ----------- ----------- ----------- -----------
(Loss) income before (benefit)
provision for income taxes.... (2,690) 1,496 1,816 (496) (973)
(Benefit) provision for income
taxes......................... (979) 704 1,030 (163) (206)
----------- ----------- ----------- ----------- -----------
Net (loss) income............... $ (1,711) $ 792 $ 786 $ (333) $ (767)
=========== =========== =========== =========== ===========
Basic and diluted net (loss)
income per share.............. $ (0.12) $ 0.06 $ 0.06 $ (0.02) $ (0.05)
=========== =========== =========== =========== ===========
Basic and diluted weighted
average shares outstanding.... 14,083,000 14,083,000 14,083,000 14,083,000 14,083,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 52
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER TOTAL
------------------- PAID-IN (DEFICIT) COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY (LOSS) INCOME
---------- ------ ---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995.......... 14,083,000 $14 $5,489 $ 711 $ -- $ 6,214
Contribution to capital......... -- -- 60 -- -- 60
Net loss and comprehensive
loss.......................... -- -- -- (1,711) -- (1,711) $(1,711)
---------- --- ------ ------- ---- ------- =======
BALANCE, December 31, 1995........ 14,083,000 14 5,549 (1,000) -- 4,563
Net income and comprehensive
income........................ -- -- -- 792 -- 792 $ 792
---------- --- ------ ------- ---- ------- =======
BALANCE, December 31, 1996........ 14,083,000 14 5,549 (208) -- 5,355
Foreign currency translation
adjustment.................... -- -- -- -- (54) (54) $ (54)
Net income...................... -- -- -- 786 -- 786 786
---------- --- ------ ------- ---- ------- -------
Total comprehensive income.... $ 732
=======
BALANCE, December 31, 1997........ 14,083,000 14 5,549 578 (54) 6,087
Foreign currency translation
adjustment (unaudited)........ -- -- -- -- 8 8 $ 8
Net loss (unaudited)............ -- -- -- (767) -- (767) (767)
---------- --- ------ ------- ---- ------- -------
Total comprehensive (loss)
(unaudited)................. $ (759)
=======
BALANCE, March 31, 1998
(unaudited)..................... 14,083,000 $14 $5,549 $ (189) $(46) $ 5,328
========== === ====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 53
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(1,711) $ 792 $ 786 $ (333) $ (767)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating
activities --
Amortization and depreciation:
Property and equipment........................ 432 505 697 147 180
Software development costs.................... 509 543 689 149 170
Goodwill...................................... 1,238 659 749 177 207
Provision for doubtful accounts................. 5 50 75 75 55
Loss on disposal of property and equipment...... 22 2 -- -- --
Impairment on goodwill.......................... 1,320 -- -- -- --
Deferred tax (benefit) provision................ (1,070) 569 (33) (184) (231)
Changes in operating assets and liabilities --
Accounts receivable and installment
receivables..................................... (1,260) (8,598) (11,002) (343) 1,480
Inventories..................................... 2 -- -- -- --
Prepaid expenses and other current assets....... 63 (314) (561) (151) (360)
Other assets.................................... 39 (306) (377) 10 48
Accounts payable and accrued expenses........... (42) 761 2,515 (195) (936)
Deferred revenue................................ 1,017 8,071 6,675 486 1,895
------- ------- -------- ------ ------
Net cash provided by (used in) operating
activities................................. 564 2,734 213 (162) 1,741
------- ------- -------- ------ ------
Cash flows from investing activities:
Purchases of property and equipment............... (515) (445) (990) (258) (138)
Software development and technology purchases..... (546) (359) (1,044) (96) (388)
Additional consideration for SOFTWORKS, Inc.
acquisition..................................... (327) (478) (522) (224) (269)
------- ------- -------- ------ ------
Net cash used in investing activities......... (1,388) (1,282) (2,556) (578) (795)
------- ------- -------- ------ ------
Cash flows from financing activities:
Net borrowings from (advances to) Parent.......... 728 145 407 15 (336)
Change in amount payable to Parent for federal
income taxes.................................... -- -- 858 -- --
Repayments of long-term debt...................... (94) (190) (253) (61) (69)
Proceeds from long-term debt...................... 111 161 -- -- --
------- ------- -------- ------ ------
Net cash provided by (used in) financing
activities................................. 745 116 1,012 (46) (405)
------- ------- -------- ------ ------
Effect of exchange rate changes on cash and cash
equivalents....................................... -- -- (44) -- 8
------- ------- -------- ------ ------
Net (decrease) increase in cash and cash
equivalents....................................... (79) 1,568 (1,375) (786) 549
Cash and cash equivalents, beginning of period...... 246 167 1,735 1,735 360
------- ------- -------- ------ ------
Cash and cash equivalents, end of period............ $ 167 $ 1,735 $ 360 $ 949 $ 909
======= ======= ======== ====== ======
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 45 $ 46 $ 44 $ 13 $ 10
------- ------- -------- ------ ------
Income tax paid (refunded)........................ $ 91 $ 40 $ (96) $ -- $ 14
======= ======= ======== ====== ======
Supplemental schedule of noncash investing and
financing activities:
Assumption of long term debt from capitalized
software technology (Note 7).................... $ -- $ -- $ 2,160 $ -- $ --
======= ======= ======== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 54
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996, AND 1997 AND AS OF MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
The Company
SOFTWORKS, Inc. ("SOFTWORKS" or the "Company") designs, develops, markets,
and supports systems management software products for enterprise computing
environments primarily in the United States. SOFTWORKS wholly-owns subsidiaries
in the United Kingdom, France, Brazil, Australia, Italy, and Spain which operate
primarily as sales offices. SOFTWORKS was incorporated in 1977 under the state
laws of Maryland and reincorporated in 1998 under the state laws of Delaware. In
1993, SOFTWORKS was acquired by Computer Concepts Corp. (the "Parent" or the
"Stockholder"), which is a publicly traded company listed on the Nasdaq SmallCap
Exchange under the symbol "CCEE."
Public Offering
On May 28, 1998, the Board of Directors of SOFTWORKS, in conjunction with
the Parent, authorized management of SOFTWORKS to file a registration statement
with the Securities and Exchange Commission permitting SOFTWORKS to sell
1,700,000 shares of common stock to the public as well as 2,500,000 shares of
SOFTWORKS' common stock owned by the existing Stockholder (the "Offering").
Increase in Authorized Shares and Stock Split
SOFTWORKS has restated its articles of incorporation to increase the number
of authorized shares to 2,000,000 of preferred shares and 150,000,000 of common
shares. Additionally, on May 28, 1998, the Board of Directors of SOFTWORKS
effected a 5,000-for-1 stock split. Further, on June 29, 1998, the Board of
Directors of SOFTWORKS declared and issued a stock dividend of 583,000 shares of
Common Stock to its Stockholder. The effects of the stock split, and stock
dividend have been given retroactive application in the consolidated financial
statements for all periods presented.
Voting Trust Agreement
In conjunction with the Offering, shares owned by the Parent will be placed
in a voting trust. The voting power of the trust will be held by three trustees
who will be members of the Board of Directors of SOFTWORKS. One trustee will be
the Chairman of the Parent and the remaining two trustees will be directors who
do not have a significant financial interest in the Parent, of which one is the
Chairman of SOFTWORKS. The agreement provides that upon a change in either of
the remaining two trustees, the non-Parent stockholders have control of the
selection of the successor director/trustee. This agreement remains in effect
until the Parent reduces its ownership to 25% of SOFTWORKS.
Principles of Consolidation
The consolidated financial statements include the accounts of SOFTWORKS and
its wholly-owned subsidiaries (the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
Risks and Other Factors
As a company that develops, markets, licenses and supports a family of
enterprise systems management software products for data and storage management
and performance management, SOFTWORKS faces certain risks. These include
dependence on proprietary technology, rapid technological change, errors or
failures in its products, dependence on key personnel, challenges in recruiting
personnel and a highly competitive marketplace.
F-7
<PAGE> 55
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
After the Offering, the Parent will continue to own more than 50% of the
outstanding shares of the Company. The Parent received a going concern opinion
with respect to its audited financial statements for the year ended December 31,
1997. Under certain circumstances, the Parent's financial condition may
influence its decisions as the controlling stockholder of the Company. The
voting trust agreement noted above gives the majority of trustees control over
significant corporate actions, including certain disposition or encumbrance of
assets and the payment of dividends.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The unaudited consolidated balance sheet as of March 31, 1998, and the
unaudited consolidated statements of operations and cash flows for the three
months ended March 31, 1997 and 1998, have been prepared by the Company and in
the opinion of management include all adjustments, consisting only of normal
recurring accruals, which management considers necessary for fair presentation
of the financial statements for such periods. The Company's results of
operations for the three months ended March 31, 1998, are not necessarily
indicative of results that may be expected for any other future interim periods
or for the year ending December 31, 1998. Demand for the Company's products has
historically been higher during the fourth quarter, primarily due to the capital
spending trends of its customers, which has resulted in higher software license
revenue in that period and lower software license revenue in the first quarter.
Revenue Recognition
Revenue from the sale of perpetual and term software licenses are
recognized, net of provisions for returns, at the time of delivery and
acceptance of software products by the customer, when collectibility is
probable. The Company provides customers with the option to pay for license fees
in one lump sum or generally in equal annual installments over extended periods
of time, generally three to five years. In such instances, the Company does not
consider sales contracts with amounts due for periods greater than one year from
delivery, fixed and determinable, and accordingly recognizes such amounts as
revenue when they become due. Maintenance revenue that is bundled with an
initial license fee is deferred and recognized ratably over the maintenance
period. Amounts deferred for maintenance are based on the fair value of
equivalent maintenance services sold separately. Revenue from professional
services, such as training and staff augmentation, is recognized as the services
are performed.
The American Institute of Certified Public Accountants issued Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), which superceded
Statement of Position 91-1 "Software Revenue Recognition." SOP 97-2 provides
additional guidance with respect to multiple element arrangements; returns,
exchanges, and platform transfer rights; resellers; services; funded software
development arrangements; and contract accounting. The Company implemented SOP
97-2 for the year ended December 31, 1997. The adoption of SOP 97-2 was not
material to the Company's revenue recognition policy for software transactions.
Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
Installment Receivables
Perpetual license agreements may be executed under installment payment
plans generally with annual payment terms for three to five years. Revenue and
related sales commissions are deferred and recognized as payments become due.
F-8
<PAGE> 56
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the useful life of the
asset or the lease term. Capitalized lease assets are amortized over the shorter
of the lease term or the service life of the related assets.
Software Development Costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased software
technologies are recorded at cost and software technologies acquired in purchase
business transactions are recorded at their estimated fair value. Software costs
associated with technology development and purchased software technologies are
amortized using the greater of the ratio of current revenue to total projected
revenue for a product or the straight line method. Amortization of software
costs begins when products become available for general customer release. Costs
incurred prior to establishment of technological feasibility are expensed as
incurred and reflected as research and development costs in the accompanying
consolidated statements of operations.
Goodwill
In connection with its acquisition by the Parent in 1993 under which there
was a change in 100 percent of the Company's equity interests, the excess of the
acquisition cost of the Company over the then fair value of its tangible and
intangible net assets (or goodwill) has been recorded on the books of the
Company, using "push-down" accounting. The goodwill is being amortized over a
ten year period.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software development costs, and property
and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. The Company has determined
that as of December 31, 1997, there has been no impairment in the carrying value
of long-lived assets.
Income Taxes
The Company's results are included in the consolidated Federal income tax
returns of the Parent. Income taxes are calculated as if the Company filed on a
separate return basis and the amount of current income tax expense or benefit is
either owed to or due from the Parent. Separate provisions for income taxes have
been determined for wholly-owned foreign subsidiaries which are consolidated for
SOFTWORKS' financial reporting, but not eligible to be included in the Parent's
consolidated U.S. Federal income tax return. Withholding taxes payable to
various other foreign countries are also included in the current foreign tax
provision.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." ("SFAS No. 109").
SFAS No. 109 requires the determination of deferred tax assets and liabilities
based on the differences between the financial statement and income tax bases of
assets and liabilities, using enacted tax rates. SFAS No. 109 requires that the
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax asset will not be realized.
F-9
<PAGE> 57
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and Diluted Net (Loss) Income Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and has been implemented for all periods presented. SFAS No. 128 requires
dual presentation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share includes the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. For all periods presented the
Company had no potentially dilutive securities, as a result the basic and
diluted earnings per share amounts are identical.
Basic and diluted net earnings per share is also computed pursuant to SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an initial
public offering, be included in the calculation of basic and diluted net income
(loss) per share as if they were outstanding for all periods presented. To date
the Company has not had any nominal issuances or grants at nominal prices.
Foreign Currency
The functional currency for all of the Company's foreign operations is the
subsidiary's local currency. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates and revenue and expense
accounts and cash flows are translated at average exchange rates during the
period. Gains and losses resulting from translation are recorded as accumulated
other comprehensive income in stockholder's equity. Transaction gains and losses
are recognized in the consolidated statements of operations as incurred.
Included in cash and cash equivalents at December 31, 1996, December 31,
1997 and March 31, 1998 (unaudited) is approximately $619,000, $278,000 and
$337,000, respectively, of cash denominated in various foreign currencies.
Concentrations and Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivables. At December 31, 1997, the Company's cash investments are
held at various financial institutions, which limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade accounts receivables are limited due to the large number of
customers comprising the Company's revenue base and their dispersion across
different industries and geographic areas. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. Unless otherwise disclosed, the fair value of
financial instruments approximates their recorded values.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses, during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE> 58
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION OF DBOPEN, INC.:
In October 1994, the Company entered into an agreement to acquire DBopen,
Inc. ("DBopen"), a provider of personal computer database administration tools
employing client/server technology. In connection with the acquisition, the
Parent issued $939,000 of restricted common stock and assumed long-term debt of
approximately $423,000. The acquisition was accounted for as a purchase and,
accordingly, DBopen's assets and liabilities were recorded at their fair values
as of December 31, 1994 and the operations of DBopen were included in the
Company's operations as of that date. The cost of the acquisition exceeded the
fair value of net assets acquired by $1,916,000 and was recorded as goodwill.
As a result of limited sales and changing market conditions during late
1995, it became apparent that significant additional expenditures would have to
be incurred in order to modify the DBopen products to meet such changing market
conditions. In the opinion of management, such additional costs would exceed the
projected benefits and the decision was made to discontinue the products.
Consistent with this business decision, the Company wrote-off the remaining
carrying value of its investment in DBopen of $1,320,000 in the fourth quarter
of 1995.
4. INSTALLMENT RECEIVABLES AND DEFERRED INSTALLMENT REVENUE:
During 1996, the Company began offering customers extended payment terms to
purchase software. The payment schedule for installment receivables, noncurrent,
at December 31, 1997, is as follows (in thousands):
<TABLE>
<S> <C>
Due in 1999......................................... $4,161
Due in 2000......................................... 1,422
Due in 2001......................................... 897
------
$6,480
======
</TABLE>
Deferred installment revenue which relates to the installment receivables
is scheduled to be earned as follows (in thousands):
<TABLE>
<CAPTION>
SOFTWARE
LICENSES MAINTENANCE TOTAL
-------- ----------- -------
<S> <C> <C> <C>
Earned in 1998....................................... $5,059 $ 447 $5,506
====== ====== ======
Earned in 1999....................................... $3,506 $1,043 $4,549
Earned in 2000....................................... 1,181 428 1,609
Earned in 2001....................................... 745 171 916
Earned in 2002....................................... -- 48 48
------ ------ ------
$5,432 $1,690 $7,122
====== ====== ======
</TABLE>
5. PREPAID EXPENSES AND OTHER ASSETS:
Included in prepaid expenses and other current assets are prepaid
commissions of $211,000, $511,000 and $1,006,000 at December 31, 1996, December
31, 1997 and March 31, 1998 (unaudited), respectively. Also included in other
assets are noncurrent prepaid commissions of $289,000, $538,000 and $585,000 at
December 31, 1996, December 31, 1997 and March 31, 1998 (unaudited),
respectively.
F-11
<PAGE> 59
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ------------------ MARCH 31,
IN YEARS 1996 1997 1998
----------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment and software......... 3 to 7 $ 1,636 $ 2,565 $ 2,698
Furniture and fixtures.................. 5 to 7 163 204 209
Leasehold improvements.................. 7 473 500 500
------- ------- -------
2,272 3,269 3,407
Less accumulated depreciation and
amortization.......................... (1,049) (1,746) (1,926)
------- ------- -------
Property and equipment, net............. $ 1,223 $ 1,523 $ 1,481
======= ======= =======
</TABLE>
7. SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized software development costs.............. $ 478 $ 1,242 $ 1,617
Purchased and acquired software technologies for
resale............................................ 1,894 4,228 4,133
------- ------- -------
2,372 5,470 5,750
Less accumulated depreciation....................... (1,424) (2,113) (2,283)
------- ------- -------
Software development costs, net..................... $ 948 $ 3,357 $ 3,467
======= ======= =======
</TABLE>
In July 1997, the Company acquired from Cognizant Technology Solutions
Corporation ("CTS") the rights to technology (the "Technology") that complement
the Company's existing Year 2000 product solutions. Pursuant to the software
distribution agreement, in exchange for the Technology rights, the Company is
required to pay CTS a royalty on sales of the Technology at defined rates
subject to minimum annual royalties as follows: $100,000 in 1997, $900,000 in
1998, $1,400,000 in 1999 and $400,000 in 2000. An asset equal to the present
value of the minimum annual royalties of $2,160,000 has been recorded as
purchased and acquired software technologies for resale and is being amortized
over the five year term of the agreement. The payment obligation is recorded as
long-term debt.
8. ACQUISITION BY THE PARENT:
In September 1993, the Company was acquired by the Parent and the
acquisition was accounted for using the purchase method of accounting.
Accordingly, assets and liabilities were recorded at their fair values as of the
effective date of the acquisition, and the operations of the Company have been
included in the Parent's consolidated statements of operations since that date.
The purchase price approximated $5,700,000 (payable in cash and restricted
common stock of the Parent) and originally resulted in $5,484,000 of goodwill
related to the excess of cost over the fair value of net assets acquired. The
acquisition agreement also requires the Company to make additional contingent
purchase consideration payments to two of the Company's former stockholders
based upon certain product revenue for the three-year period ending September
1998, up to a maximum of $1,000,000 each, for an aggregate maximum of
$2,000,000. Through March 31, 1998 (unaudited), the Company has incurred a
liability of $1,864,000 ($1,596,000 of which has been paid) to the
F-12
<PAGE> 60
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonemployee former stockholders, which has been treated as additional
consideration in connection with the acquisition and, accordingly, added to the
goodwill related to the acquisition.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts payable.............................. $ 515 $ 1,834 $1,613
Accrued payroll and benefits........................ 643 579 528
Commissions payable................................. 556 1,368 669
Other accrued expenses.............................. 308 908 710
------- ------- ------
$ 2,022 $ 4,689 $3,520
======= ======= ======
</TABLE>
10. TRANSACTIONS WITH THE PARENT:
The Parent provides certain corporate and administrative services to the
Company, including executive management and professional services (accounting,
auditing, and legal). These services were performed for $500,000 in the years
ended December 31, 1996 and 1997, and $125,000 for the three months ended March
31, 1997 (unaudited) and 1998 (unaudited). These costs were allocated to the
Company based on a proportional cost allocation method. Prior to 1996, the
Company effectively operated independently of its Parent and was responsible for
its own expenses. As a result, prior to 1996 the Parent performed no material
services nor incurred any material expenses on behalf of the Company. The
Company and its Parent also jointly participate in certain employee benefit
plans (defined contribution and employee health), and the Company is allocated a
portion of these costs on an incremental basis.
Management believes that the intercompany charges and cost allocations are
reasonable and approximate the expenses that the Company would have incurred had
it been operating as a stand-alone entity. Subsequent to the Offering
contemplated by this prospectus, the Company will perform the corporate and
administrative functions directly, using its own resources or purchased
services, and will be responsible for the costs and expenses associated with the
management of a public corporation. At March 31, 1998, the Company owed the
Parent $2,601,000, which will be repaid with proceeds from the Offering.
Additionally, certain Company employees receive part of their compensation
in the form of the Parent's common stock or options. Included in the Company's
consolidated statements of operations are noncash compensation charges related
to the fair value of the Parent's common stock issued and noncash compensation
charges related to the intrinsic value of stock options granted pursuant to APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Charges for both
stock and options totaled $0, $187,000, and $18,000 for the years ended December
31, 1995, 1996, and 1997, respectively.
F-13
<PAGE> 61
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had elected to recognize compensation expense based upon the
fair value of the options at the date of the grant consistent with the
methodology prescribed by SFAS Statement No. 123, "Accounting For Stock-Based
Compensation," the effect on the Company's net (loss) income would be as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ----- -----
<S> <C> <C> <C>
Net (loss) income:
As reported............................................. $(1,711) $ 792 $ 786
Pro forma............................................... (1,752) 672 598
Basic and diluted (loss) income per share:
As reported............................................. $ (0.12) $0.06 $0.06
Pro forma............................................... (0.12) 0.05 0.04
</TABLE>
The fair value of options granted during 1995, 1996, and 1997,
respectively, is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility
ranging from 79% to 130%, (2) risk-free interest rates ranging from 5.4% to
6.25% and (3) expected lives ranging from 1.1 to 3.9 years.
11. INCOME TAXES:
The following table summarizes components of income (loss) before income
taxes and the (benefit from) provision for both current and deferred income
taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
(Loss) income before (benefit from) provision for income
taxes:
United States......................................... $(2,602) $1,471 $2,579
Foreign............................................... (88) 25 (763)
------- ------ ------
Total......................................... $(2,690) $1,496 $1,816
======= ====== ======
(Benefit from) provision for income taxes:
Current --
United States...................................... $ -- $ -- $ 858
Foreign............................................ 91 135 55
State and other.................................... -- -- 150
------- ------ ------
91 135 1,063
------- ------ ------
Deferred --
United States...................................... (926) 505 (27)
Foreign............................................ 16 (16) --
State and other.................................... (160) 80 (6)
------- ------ ------
(1,070) 569 (33)
------- ------ ------
Total......................................... $ (979) $ 704 $1,030
======= ====== ======
</TABLE>
F-14
<PAGE> 62
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
U.S. Federal statutory tax rate............................. (34.0)% 34.0% 34.0%
State and local taxes, net of U.S. federal tax effect....... (5.7) 6.8 3.5
Non-U.S. taxes.............................................. 2.2 5.9 2.0
Foreign operating loss (income)............................. 1.1 (0.6) 14.3
Other....................................................... -- 1.0 2.9
----- ---- ----
Effective tax rate.......................................... (36.4)% 47.1% 56.7%
===== ==== ====
</TABLE>
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- -----
<S> <C> <C>
Current:
Net operating loss carryforwards -- U.S................... $414 $ --
Accruals and reserves..................................... 58 138
---- -----
472 138
---- -----
Long-Term:
Fixed and intangible assets............................... 190 347
Capitalized software...................................... 139 349
Net operating loss carryforwards -- foreign............... -- 229
Valuation allowance on foreign net operating loss
carryforwards.......................................... -- (229)
---- -----
329 696
---- -----
Net deferred tax assets................................... $801 $ 834
==== =====
</TABLE>
In 1997, the Company utilized federal net operating losses generated in
1995 and 1996, aggregating $1,000,000. Included in the deferred tax assets as of
December 31, 1997 are net operating losses from foreign subsidiaries in the
amount of $763,000, resulting in a deferred tax benefit of $229,000. Most of the
net operating loss carryforwards have no expiration date. The Company has
provided for full valuation allowances of these foreign net operating losses due
to the uncertainty of future income estimates.
12. STOCKHOLDER'S EQUITY:
Stock Option Plan
In May 1998, the Company adopted the SOFTWORKS, Inc. 1998 Long Term
Incentive Plan (the "1998 Incentive Plan") which authorizes the issuance of a
maximum of 3,727,000 shares of Common Stock. The 1998 Incentive Plan provides
for grants of options to officers, key employees, consultants and independent
contractors of the Company and its affiliates. The 1998 Incentive Plan provides
for the granting of incentive stock options, non-qualified stock options,
performance grants and other types of awards. This plan is administered by the
Long Term Incentive Plan Administrative Committee of the Board of Directors,
which has sole discretion and authority, consistent with the provisions of the
1998 Incentive Plan, to determine which eligible participants will receive
options, the time when options will be granted and the terms of options granted.
As of June 29, 1998, the Company has not granted any options to purchase shares
of Common Stock under the 1998 Incentive Plan.
F-15
<PAGE> 63
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split and Stock Dividend
In May 1998, the Company declared and issued a stock dividend, to its sole
Stockholder of 2,640 shares (pre-split) of Common Stock. This dividend brought
the total outstanding shares at the time of the stock dividend to 2,700
(pre-split). On a post 5,000-for-1 split basis (see Note 1) the Common Stock
outstanding is 13,500,000. Because of its magnitude, the stock dividend has been
treated as a stock split. The effects of the stock dividend and the 5,000-for-1
stock split have been given retroactive application in the consolidated
financial statements for all periods presented.
On June 29, 1998, the Company declared and issued a stock dividend of
583,000 shares of Common Stock to its Stockholder. The effects of this stock
dividend have also been given retroactive application in the consolidated
financial statements for all periods presented.
13. COMMITMENTS AND CONTINGENCIES:
Royalty Commitments
The Company has entered into royalty agreements with several employees of
the Company. These agreements call for royalties ranging from 1% to 10% on
various product revenue. These agreements range in term from three to five years
and contain no provisions for minimum royalties. One agreement is with an
officer of the Company and has resulted in royalty expense of $64,000, $98,000,
and $188,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The agreement with this officer will be terminated in conjunction with the
signing of an employment agreement in 1998.
Leases
The Company leases certain computer equipment under long-term
non-cancelable leases which are classified as capital leases and are included as
part of property and equipment. Operating leases are primarily for office space,
equipment and automobiles.
At December 31, 1997, the future minimum lease payments under operating and
capital leases are summarized as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- -------
<S> <C> <C>
1998...................................................... $ 647 $63
1999...................................................... 559 --
2000...................................................... 494 --
2001...................................................... 347 --
2002...................................................... 101 --
------ ---
Total........................................... 2,148 63
Amounts representing interest............................. -- (2)
------ ---
Net............................................. $2,148 $61
====== ===
</TABLE>
Rent expense approximated $391,000, $522,000, $896,000, $193,000 and
$292,000 for the years ended December 31, 1995, 1996, and 1997, and for the
three months ended March 31, 1997 (unaudited) and March 31, 1998 (unaudited),
respectively.
Employee 401(k) Savings Plan
The Company provides pension benefits to eligible employees through a
401(k) plan sponsored jointly by the Company and the Parent. The Company's
allocable share of employer matching contributions to this
F-16
<PAGE> 64
SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
401(k) plan approximated $26,000, $36,000, $52,000, $15,000 and $19,000 for the
years ended December 31, 1995, 1996, and 1997, and for the three months ended
March 31, 1997 (unaudited) and March 31, 1998 (unaudited), respectively.
Employment Agreements
The Company is in the process of negotiating employment agreements in an
effort to retain several key employees. The employment agreements are expected
to have terms in excess of one year and will include provisions typically found
in such agreements with respect to confidentiality, severance and incentives.
14. GEOGRAPHIC INFORMATION:
The Company is primarily engaged in a single line of business. Geographic
data is summarized between the United States and Foreign. Foreign consists of
operations through the Company's foreign subsidiaries in the United Kingdom,
France, Brazil, Australia, Spain and Italy, as well as sales generated through
foreign distributors primarily in Europe and Asia. Geographic data is presented
in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" for all periods presented as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
United States...................... $ 8,894 $11,643 $22,038 $ 3,647 $ 5,290
Foreign............................ 2,732 4,882 4,732 1,019 1,306
------- ------- ------- ------- -------
Total...................... $11,626 $16,525 $26,770 $ 4,666 $ 6,596
======= ======= ======= ======= =======
Operating (Loss) Income:
United States...................... $(2,843) $ 590 $ 2,356 $ (263) $ (384)
Foreign............................ 153 906 (540) (233) (589)
------- ------- ------- ------- -------
Total...................... $(2,690) $ 1,496 $ 1,816 $ (496) $ (973)
======= ======= ======= ======= =======
Identifiable Assets:
United States...................... $12,348 $21,272 $33,015 $21,240 $31,897
Foreign............................ 418 1,271 2,668 1,152 3,465
------- ------- ------- ------- -------
Total...................... $12,766 $22,543 $35,683 $22,392 $35,362
======= ======= ======= ======= =======
</TABLE>
F-17
<PAGE> 65
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 25
Management............................ 34
Certain Transactions.................. 39
Principal and Selling Stockholders.... 41
Description of Capital Stock.......... 42
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Index to Financial Statements......... F-1
</TABLE>
UNTIL AUGUST 29, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
4,200,000 Shares
[SOFTWORKS LOGO]
SOFTWORKS
Common Stock
-----------------------
PROSPECTUS
-----------------------
SoundView Financial Group, Inc.
Raymond James & Associates, Inc.
August 4, 1998
------------------------------------------------------
------------------------------------------------------
