UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-24719
SOFTWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 52-1092916
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
5845 RICHMOND HIGHWAY, SUITE 400
ALEXANDRIA, VA 22303
(703) 317 - 2424
Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of the latest practicable date:
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS September 30, 1998
Common Stock, $.001 par value 15,973,000
<PAGE>
SOFTWORKS, INC.
Quarterly Report on Form 10-Q for the Nine Months Ended September 30, 1998
Table of Contents
PAGE
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1998 and December 31, 3
1997
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17
HOLDERS
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SOFTWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 6,704 $ 360
Accounts receivable, net of allowance for
doubtful accounts of $288 and $206, respectively 9,177 10,652
Installment receivables 10,154 6,148
Prepaid expenses and other current assets 1,406 984
Deferred tax assets 180 138
---------------- ----------------
Total current assets 27,621 18,282
Installment receivables, noncurrent 7,729 6,480
Property and equipment, net 1,498 1,523
Software development costs, net 3,361 3,357
Goodwill, net of accumulated amortization of
$3,124 and $2,477, respectively 4,365 4,611
Other assets 1,056 734
Deferred tax assets, noncurrent 365 696
----------------- ----------------
Total assets $45,995 35,683
================= ================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 3,959 4,689
Current portion of long-term debt 968 1,083
Deferred maintenance revenue 6,435 6,225
Deferred installment revenue 6,938 5,506
Income taxes payable 356 -
Due to Parent - 1,554
---------------- ----------------
Total current liabilities 18,656 19,057
Deferred maintenance revenue, noncurrent 1,866 740
Deferred installment revenue, noncurrent 7,662 7,122
Long-term debt 1,575 1,294
Payable to Parent for federal income taxes 760 1,383
---------------- ----------------
Total liabilities 30,519 29,596
Stockholders' Equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; none issued or outstanding - -
Common stock, $.001 par value; 150,000,000 16 14
authorized; 15,973,000 and 14,083,000 shares
issued and outstanding, respectively
Additional paid-in capital 15,201 5,549
Retained earnings 335 578
Accumulated other comprehensive loss (76) (54)
---------------- ----------------
Total stockholders' equity 15,476 6,087
---------------- ----------------
Total liabilities and stockholders'
equity 45,995 35,683
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
</TABLE>
<PAGE>
SOFTWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
--------- ------- ------- -------
(UNAUDITED)(UNAUDITED)(UNAUDITED)(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 8,172 $ 4,281 $17,934 $10,385
Maintenance 2,619 2,578 7,795 7,407
Professional services 456 45 1,168 45
-------- ------- ------- --------
Total revenue 11,247 6,904 26,897 17,837
-------- ------- ------- --------
Cost of revenue (exclusive of
amortization and depreciation shown
separately below):
Software licenses 426 161 1,059 376
Maintenance 1,675 1,355 4,933 3,855
Professional services 244 38 665 38
-------- ----- ----- ------
Total cost of revenue 2,345 1,554 6,657 4,269
-------- ------ ----- ------
Gross margin 8,902 5,350 20,240 13,568
-------- ------ ------- -------
Operating expenses:
Sales and marketing 5,181 3,247 13,092 8,852
General and administrative 1,087 586 3,443 2,064
Amortization and depreciation 616 500 1,631 1,381
Research and development 850 683 1,543 1,369
--------- ------- ------ -------
Total operating expenses 7,734 5,016 19,709 13,666
--------- ------- ------ -------
Operating income (loss) 1,168 334 531 (98)
Other expenses (84) - (253) -
--------- ------- ------- -------
Income (loss) from operations before
income taxes 1,084 334 278 (98)
Provision for income taxes 547 207 521 128
--------- ------- ----- -------
Net income (loss) $ 537 $ 127 $ 243) $ (226)
========= ======= ======= =======
Basic and diluted net income (loss) $ 0.04 $ 0.01 $(0.02) $(0.02)
========= ======= ======= =======
Basic and diluted weighted average
shares outstanding 15,275 14,083 14,485 14,083
========= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
</TABLE>
<PAGE>
SOFTWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
---------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (243) $ (226)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities ---
Amortization and depreciation
Property and equipment 589 465
Software development costs 1,172 480
Goodwill 647 551
Provision for doubtful accounts 159 76
Deferred tax expense 289 193
Changes in operating assets and liabilities---
Accounts receivable and installment receivables (3,938) (7,347)
Prepaid expenses and other current assets (422) (284)
Other assets (322) (163)
Accounts payable and accrued expenses (497) 818
Income taxes payable 356 -
Deferred revenue 3,308 5,541
------------ -----------
Net cash provided by operating activities 1,098 104
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (564) (732)
Software development and technology purchases (1,286) (525)
Additional consideration for SOFTWORKS, Inc.
acquisition (408) (546)
------------ -----------
Net cash used in investing activities (2,258) (1,803)
------------ -----------
Cash flows from financing activities:
Net (payments to) borrowings from Parent (1,554) 275
Change in amount payable to Parent for federal
income taxes (623) -
Repayments of long-term debt - (189)
Proceeds from long-term debt 49 -
Net proceeds from initial public offering 9,654 -
------------ -----------
Net cash provided by financing activities 7,526 86
------------ -----------
Effect of exchange rate changes on cash and
cash equivalents (22) -
------------ -----------
Net increase (decrease) in cash and cash equivalents 6,344 (1,613)
Cash and cash equivalents, beginning of period 360 1,735
------------ -----------
Cash and cash equivalents, end of period $ 6,704 $ 122
Supplemental disclosure of cash flow information:
Interest paid $ 21 22
----------- -----------
Income taxes paid $ 14 -
=========== ===========
Supplemental schedule of noncash investing and
financing activities:
Assumption of long-term debt from capitalized
software technology $ - 2,160
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
</TABLE>
<PAGE>
SOFTWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 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 owns subsidiaries in the
United Kingdom, France, Brazil, Australia, Italy, Germany, 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").
Public Offering
On August 4, 1998, the Company completed an initial public offering ("IPO")
of 4,200,000 shares of the Company's common stock, par value $.001. 1,700,000 of
these shares were sold by the Company, resulting in net proceeds to the Company
of approximately $9.7 million, while the remaining 2,500,000 shares sold were
owned by the Parent and another stockholder. In conjunction with the IPO, the
Company also issued 190,000 shares of common stock to a financial advisor.
Voting Trust Agreement
In conjunction with the IPO, shares owned by the Parent were deposited in a
voting trust. The voting power of the shares deposited in the trust is held by
three trustees who are members of the Board of Directors of SOFTWORKS. One
trustee is the Chairman of the Parent and the remaining two trustees are
directors who do not have a significant financial interest in the Parent, one of
which 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.
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.
As of September 30, 1998, the Parent owned 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 dispositions or encumbrances of assets and
the payment of dividends.
<PAGE>
2. Significant Accounting Policies
Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These financial statements are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these financial statements be read in conjunction with the financial
statements, and the notes thereto, included in the Company's prospectus dated
August 4, 1998 and subsequent Forms 10-Q as filed with the Securities and
Exchange Commission. In the opinion of management, the comparative financial
statements for the fiscal periods presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods. The results of operations for the three and nine months
ended September 30, 1998 are not necessarily indicative of the results for the
entire year ending December 31, 1998.
Increase in Authorized Shares and Stock Split
On May 27, 1998, the Company restated its articles of incorporation to
increase the number of authorized shares to 2,000,000 preferred shares and
150,000,000 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 the Parent. The effects of the stock split and stock
dividend have been given retroactive application in the consolidated financial
statements for all periods presented.
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 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. In March 1998, Statement of Positions
98-4 ("SOP 98-4") amended a portion of SOP 97-2. The adoption of SOP 97-2 and
the amendment contained in SOP 98-4 were not material to the Company's revenue
recognition policy for software transactions.
<PAGE>
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.
Income Taxes
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 to be 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.
Basic and Diluted Net Income (Loss) 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. As of September 30,1998, total
stock options granted were 3.6 million of 3.7 million authorized. Due to the
anti-dilutive nature of the options for all periods presented, there is no
effect on the calculation of weighted average shares for diluted earnings per
share. 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 issuances or grants at nominal prices.
Foreign Currency
The functional currency for all of the Company's international subsidiaries
is the subsidiary's local currency. Assets and liabilities of international
subsidiaries are translated into U.S. dollars at period-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 stockholders' equity.
Transaction gains and losses are recognized in the consolidated statements of
operations as incurred. The Company does not engage in any hedging activities.
As a result, there is no guarantee that fluctuations in exchange rates might not
have a material adverse effect on the Company's financial results.
Fair Value of Financial Instruments
The carrying value of current assets and current liabilities approximate
their fair value because of the relatively short maturities of these
instruments.
<PAGE>
3. Geographic Information:
The Company is primarily engaged in a single line of business. Geographic
data is summarized between the United States and International. International
consists of operations through the Company's international subsidiaries in the
United Kingdom, France, Brazil, Australia, Spain, Germany, and Italy, as well as
sales generated through international 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 Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
United States $ 8,827 $ 5,709 $ 21,139 $ 14,517
International 2,420 1,195 5,758 3,320
============ ============ =========== ===========
Total $ 11,247 $ 6,904 $ 26,897 $ 17,837
============ ============ =========== ===========
Operating Income (Loss):
United States $ 1,395 $ 503 $ 1,475 $ 455
International (227) (169) (944) (553)
============ ============ =========== ===========
Total $ 1,168 $ 334 $ 531 $ (98)
============ ============ =========== ===========
Identifiable Assets:
United States $ 39,478 $ 26,878 $ 39,478 $ 26,878
International 6,517 1,820 6,517 1,820
============ ============ =========== ===========
Total $ 45,995 $ 28,698 $ 45,995 $ 28,698
============ ============ =========== ===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements. All statements other than statements of
historical fact included in this Form 10-Q including without limitation
statements under, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" 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 Form 10-Q, words
such as "anticipate," "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 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 the Parent, 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.
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's offerings are grouped into four market
segments ("Arenas"): performance management ("Performance Arena"); data and
storage management ("DataStor Arena"); Year 2000 ("Year 2000 Arena"); and
professional services ("Services Arena"). The Company derives its revenue
primarily from the licensing of its computer software programs, the sales of
software maintenance services, and from professional services involving product
implementation and staff augmentation services.
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.
Maintenance revenue also includes maintenance services for an initial period
that is included in the initial charge when the Company licenses its software
products under a long-term agreement. Thereafter on each anniversary date of the
license, the customer may elect to renew its maintenance contract with the
Company. Customers may also elect to purchase advance maintenance at the time of
product licensing for maintenance periods beyond the first year.
<PAGE>
Operating Results
The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software licenses 72.7% 62.0% 66.7% 58.2%
Maintenance 23.2% 37.3% 29.0% 41.5%
Professional services 4.1% 0.7% 4.3% 0.3%
----------- ----------- ----------- -----------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue (exclusive of
amortization and depreciation shown
separately below):
Software licenses 3.8% 2.3% 3.9% 2.1%
Maintenance 14.9% 19.6% 18.3% 21.6%
Professional services 2.2% 0.6% 2.5% 0.2%
----------- ----------- ----------- -----------
Total cost of revenue 20.9% 22.5% 24.7% 23.9%
----------- ----------- ----------- -----------
Gross margin 79.1% 77.5% 75.3% 76.1%
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 46.1% 47.0% 48.7% 49.6%
General and administrative 9.6% 8.6% 12.8% 11.6%
Amortization and depreciation 5.5% 7.2% 6.1% 7.7%
Research and development 7.6% 9.9% 5.7% 7.7%
----------- ----------- ----------- -----------
Total operating expenses 68.8% 72.7% 73.3% 76.6%
----------- ----------- ----------- -----------
Operating income (loss) 10.3% 4.8% 2.0% -0.5%
Other expenses -0.7% 0.0% -1.0% 0.0%
----------- ----------- ----------- -----------
Income (loss) from operations before
income taxes 9.6% 4.8% 1.0% -0.5%
Provision for income taxes 4.8% 3.0% 1.9% 0.8%
----------- ----------- ----------- -----------
Net income (loss) 4.8% 1.8% -0.9% -1.3%
=========== =========== =========== ===========
</TABLE>
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenue. Total revenue for the three months ended September 30, 1998
increased by 62.9% to $11.2 million from $6.9 million for the three months ended
September 30, 1997. License revenue for the three months ended September 30,
1998 increased 90.9% to $8.2 million from $4.3 million for the quarter ended
September 30, 1997. Revenue from product licenses in the Company's DataStor
Arena that includes its multi-platform data storage management product,
CenterStage, increased 68.9% for the three months ended September 30, 1998.
Revenue from product licenses in the Company's Performance Arena increased
116.3% for the three months ended September 30, 1998. Maintenance revenue
increased 1.6% to $2.62 million for the three months ended September 30, 1998
from $2.57 million for the three months ended September 30, 1997. Professional
services, which commenced operations in the third quarter of 1997, contributed
$456,000 to total revenue for the period ended September 30, 1998. International
revenue, consisting of the Company's licensing from its international
operations, comprised of foreign subsidiaries, distributors, and marketing
agents, increased 102.5% to $2.4 million for the three months ended September
30, 1998 from $1.2 million for the three months ended September 30, 1997. As a
percentage of total revenue, international revenue increased to 21.5% for the
quarter ended September 30, 1998 from 17.3% for the quarter ended September 30,
1997. The increase was primarily the result of increased product sales in the
UK, Australia and Brazil.
Cost of Revenue. Included in the cost of revenue are cost of software
license revenue, cost of maintenance revenue, and cost of professional services
revenue. Cost of software license revenue includes royalties paid to Company
developers and to third parties. Cost of software license revenue increased
164.6% to $426,000, or 3.8% of total revenue, for the three months ended
September 30, 1998 from $161,000, or 2.3% of total revenue, for the three months
ended September 30, 1997. This increase was primarily attributable to an
increase in royalties as a result of increased sales of products. Cost of
maintenance revenue increased 23.6% to $1.7 million, or 14.9% of total revenue,
for the three months ended September 30, 1998 from $1.4 million, or 19.6% of
total revenue, for the three months ended September 30, 1997. This increase is
attributable to an increasing customer base of maintenance contracts. Cost of
professional service revenue, which consists primarily of salaries and expenses,
commenced operations in the third quarter of 1997 and was $244,000 for the three
months ended September 30, 1998.
Sales and Marketing Expense. Sales and marketing expenses include salaries
and related costs, commissions, travel, facilities and computers, pre-sales
support, communications costs, trade shows and other promotional expenses for
the Company's direct sales organization and marketing staff. Sales and marketing
expenses increased 59.6% to $5.2 million for the three months ended September
30, 1998 from $3.2 million for the three months ended September 30, 1997. This
increase was attributable primarily to increased commission expenses resulting
from increased sales, and increased personnel costs resulting from growth in the
Company's sales organization. As a percentage of revenue, sales and marketing
expenses decreased to 46.1% for the three months ended September 30, 1998 from
47.0% for the three months ended September 30, 1997. The Company expects that
sales and marketing expenditures will increase in terms of absolute dollars, and
may decrease as a percentage of revenue, during the remainder of 1998 and
thereafter. The increase in absolute dollars is expected to be incurred as
additional personnel are hired, field offices are opened and promotional
expenditures increase to allow the Company to increase its market penetration
and to pursue new market opportunities.
General and Administrative Expense. General and administrative expenses
include administrative salaries and related benefits, management fees,
recruiting and relocation expenses, as well as legal, accounting and other
professional fees. General and administrative expenses increased 85.5% to $1.1
million for the three months ended September 30, 1998 from $586,000 for the
three months ended September 30, 1997. The increase in general and
administrative expenses was principally due to an increase in staffing levels
and administrative personnel necessary to support the Company's growth. As a
percentage of revenue, this expense increased to 9.6% for the three months ended
September 30, 1998 from 8.6% for the three months ended September 30, 1997. The
Company expects that general and administrative expenditures will increase in
absolute dollars and may decrease as a percentage of total revenue during 1998
and thereafter. The increase in absolute dollars is expected to be required for
the expansion of the Company's administrative staff and internal systems to
support expanding operations and the costs of operating as a public company.
<PAGE>
Amortization and Depreciation Expense. Amortization and depreciation
expenses increased 23.2% to $616,000 for the three months ended September 30,
1998 from $500,000 for the three months ended September 30, 1997.
Research and Development Expense. Research and development expenses include
compensation and related costs for the personnel involved in the Company's
research and development efforts. Research and development expenses increased
24.5% to $850,000 for the three months ended September 30, 1998 from $683,000
for the three months ended September 30, 1997.
Provision for Income Taxes. The provision for income taxes increased to
$547,000 for the three months ended September 30, 1998 from $207,000 for the
three months ended September 30, 1997. For the period ending September 30, 1997,
the Company reported its financial results on a consolidated basis with the
Parent and did not file separate tax returns.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenue. Total revenue increased 50.8% to $26.9 million for the nine months
ended September 30, 1998 from $17.8 million for the nine months ended September
30, 1997. License revenue increased 72.7% to $17.9 million for the nine months
ended September 30, 1998 from $10.4 million for the nine months ended September
30, 1997. Maintenance revenue increased 5.2% to $7.8 million for the nine months
ended September 30, 1998 from $7.4 million for the nine months ended September
30, 1997. Professional services, which commenced operations in the third quarter
of 1997, contributed $1.2 million to total revenue for the nine month period
ended September 30, 1998.
Cost of Revenue. Included in the cost of revenue are cost of software
license revenue, cost of maintenance revenue, and cost of professional services
revenue. Cost of software license revenue includes royalties paid to Company
developers and to a third party under a licensing agreement. Cost of software
license revenue increased 181.6% to $1.1 million, or 3.9% of total revenue, for
the nine months ended September 30, 1998 from $376,000, or 2.1% of total
revenue, for the nine months ended September 30, 1997. This increase was
primarily attributable to the royalties paid as a result of a third party
agreement that commenced in July 1997, as well as an increase in royalty
payments resulting from increased software license revenue. Cost of maintenance
revenue increased 28.0% to $4.9 million, or 18.3% of total revenue, for the nine
months ended September 30, 1998 from $3.9 million, or 21.6% of total revenue,
for the nine months ended September 30, 1997. Cost of professional services
revenue, which consists primarily of salaries and expenses, commenced operations
in the third quarter of 1997 and was $665,000 for the nine months ended
September 30, 1998.
Sales and Marketing Expense. Sales and marketing expenses include 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 expenses increased 47.9% to $13.1 million
for the nine months ended September 30, 1998 from $8.9 million for the nine
months ended September 30, 1997. This increase was attributable primarily to
increased commission expenses resulting from increased sales, and increased
personnel costs resulting from growth in the Company's sales organization. As a
percentage of revenue, sales and marketing expenses decreased to 48.7% for the
nine months ended September 30, 1998 from 49.6% for the nine months ended
September 30, 1997.
General and Administrative Expense. General and administrative expenses
include administrative salaries and related benefits, management fees,
recruiting and relocation expenses, as well as legal, accounting and other
professional fees. General and administrative expenses increased 66.8% to $3.4
million for the nine months ended September 30, 1998 from $2.1 million for the
nine months ended September 30, 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 and the costs associated
with operating as a public company. As a percentage of revenue, these expenses
increased to 12.8% for the nine months ended September 30, 1998 from 11.6% for
the nine months ended September 30, 1997.
<PAGE>
Amortization and Depreciation Expense. Amortization and depreciation
expenses increased 18.1% to $1.6 million for the nine months ended September 30,
1998 from $1.4 million for the nine months ended September 30, 1997.
Research and Development Expense. Research and development expenses include
salaries and related costs for the personnel involved in the Company's research
and development efforts. Research and development expenses were $1.5 million for
the nine months ended September 30, 1998 and $1.4 million for the nine months
ended September 30, 1997.
Provision for Income Taxes. The provision for income taxes increased to
$521,000 for the nine months ended September 30, 1998 from $128,000 for the nine
months ended September 30, 1997. For the period ending September 30, 1997, the
Company reported its financial results on a consolidated basis with the Parent
and did not file separate tax returns.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through cash generated from
operations and its recent initial public offering. The Company had cash and cash
equivalents of $6.7 million at September 30, 1998. At September 30, 1998, the
balance due to the Parent was $760,000.
For the nine months ended September 30, 1998 and 1997, net cash provided by
operating activities was $1.0 million and $104,000, respectively. For the nine
months ended September 30, 1998 and 1997, net cash used in investing activities
was $2.3 and $1.8 million respectively. The increase in cash used in investing
activities was primarily a result of purchases related to software development.
For the nine months ended September 30, 1998 and 1997, net cash provided by
financing activities was $7.5 million and $86,000 respectively. The increase in
cash provided by financing activities was primarily a result of the Company's
initial public offering.
The Company's principal commitments as of September 30, 1998 consisted
primarily of (i) leases on its corporate headquarters facilities, various sales
offices and operating equipment, (ii) employment agreements and (iii) a software
licensing and distribution agreement. There were no material commitments for
capital expenditures. The Company's current cash and cash equivalent balances,
cash flow from its operations, and the proceeds of its recent public 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.
<PAGE>
RECENT DEVELOPMENTS
Initial Public Offering. On August 4, 1998, the Company consummated its
Initial Public Offering ("IPO") of 4,200,000 shares of its Common Stock at a
price of $7.00 per share, of which 1,700,000 shares were issued and sold by the
Company, 1,500,000 shares were sold by the Parent, and 1,000,000 shares were
sold by another selling stockholder. The net proceeds to the Company from the
IPO were approximately $9.7 million.
New Subsidiary Corporations: The Company has established a wholly-owned
subsidiary in the Republic of Germany (Softworks Deutschland GmbH) and has
recruited and trained a portion of its planned sales force, in contemplation of
operating a direct sales and customer support operation in Germany as of January
1, 1999.
The Company has created a Foreign Sales Corporation, within the purview of
the Tax Reform Act of 1984. This subsidiary (SOFTWORKS FSC, INC) is domesticated
in the U.S. Virgin Islands.
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug" or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems 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 overall financial position, or any year's results
of operations, there can be no assurance to this effect.
The Company has obtained certification of its processes to assess Year 2000
Problems from the Information Technology Association of America (ITAA). Because
the Company's business involves software development, the Company has not sought
further verification or validation by independent third parties of its
corrections of Year 2000 Problems. However, the Company's Year 2000 project team
is reviewing the Company's project plans and monitoring progress against those
plans.
Software Sold to Consumers. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company's software products have been identified or
corrected due to complexity of these products and the fact that these products
interact with other third party vendor products and operate on computer systems
which are not under the Company's control.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected, and
expects to complete this process before the end of 1998.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
<PAGE>
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
Suppliers. The Company has initiated communications, including surveys,
with third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company does not anticipate any significant Year 2000
Problems with these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the occurrence
of a material disruption to the business of the Company or any of its customers.
Any failure of these third parties to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the Company's
business, financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and
inefficiencies for the Company and its clients that may divert
management's time and attention and financial and human resources from
its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its clients to prevent or
alleviate material business disruptions.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of 1998. Depending on the systems affected, these plans could
include accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
<PAGE>
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
IMPACT OF EUROPEAN MONETARY UNION
The European Union is moving towards economic and monetary union in Europe,
with the goal of introducing a single currency called the EURO. The Company is
currently assessing the effect of the EURO conversion on its European
operations.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various litigation matters
arising in the ordinary course of its business. The Company believes that the
resolution of currently pending legal proceedings, either individually or taken
as a whole, will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exibit Number Description
- ---------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant*
3.2 By-Laws of Registrant*
4.1 Specimen Common Stock Certificate*
10.1 Lease Agreement dated June 14, 1994 between Registrant
and WHT Reall Estate Limited Partnership*
10.2 First Amendment to Lease Agreement*
10.3 Second Amendment to Lease Agreement*
10.4 1998 Long Term Incentive Plan*
10.5 Employment Agreement between the Registrant and James
Cannavino*
10.6 Employment Agreement between the Registrant and C.R.
Kinsey, III*
10.7 Employment Agreement between the Registrant and Judy
G. Carter*
10.8 Employment Agreement between the Registrant and Lisa
Welch*
10.9 Employment Agreement between the Registrant and Joseph
Miksch*
10.10 Employment Agreement between the Registrant and Robert
McLaughlin*
10.11 Form of Indemnification Agreement between the Company
and its officers and directors*
10.12 Distribution Agreement dated July 8, 1997 between the
Registrant and Cognizant Technology Solutions
Corporation*
27.1 Financial Data Schedule
* Incorporated by reference to Registration Statement No 333-53939.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Softworks, Inc.
Date: November 16, 1998 By: /s/ Robert C. McLaughlin
-------------------------------------
Robert C. McLaughlin
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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