UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to _______________
COMMISSION FILE NUMBER 0-24719
SOFTWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1092916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS September 30, 1999
-------------- ------------------
<S> <C>
Common Stock, $.001 par value 16,896,109
</TABLE>
<PAGE>
SOFTWORKS, INC.
Form 10-Q for the Quarterly Period Ended September 30, 1999
Table of Contents
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three and nine months ended 4
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the three and nine 5
months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS IN SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,613 $ 6,003
Accounts receivable, net of allowance for doubtful accounts
of $355 and $289 in 1999 and 1998, respectively 11,233 14,316
Installment receivables, net of allowance for installment
reserve of $150 and $0 in 1999 and 1998, respectively 16,937 16,406
Prepaid expenses and other current assets 2,194 1,349
Deferred tax assets - 306
-------- --------
Total current assets 43,977 38,380
-------- --------
Installment receivables, noncurrent 13,947 7,908
Property and equipment, net 2,450 2,498
Software development costs, net 2,137 3,039
Goodwill, net of accumulated amortization of $4,011
and $3,346 in 1999 and 1998, respectively 3,478 4,143
Other assets 1,139 1,900
Income taxes receivable 253 -
Deferred tax assets, noncurrent 500 484
-------- --------
Total assets $ 67,881 $ 58,352
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,762 $ 6,136
Current portion of long-term debt 3,075 1,930
Deferred maintenance revenue 9,754 9,064
Deferred installment revenue 6,429 7,314
Income taxes payable - 2,057
-------- --------
Total current liabilities 24,020 26,501
-------- --------
Deferred maintenance revenue, noncurrent 7,958 3,882
Deferred installment revenue, noncurrent 6,158 7,883
Long-term debt, noncurrent 1,479 1,401
-------- --------
Total liabilities 39,615 39,667
-------- --------
Stockholders' Equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.001 par value; 50,000,000 and 150,000,000, 17 16
respectively; 16,896,109 and 15,973,000 shares issued and
outstanding, respectively
Common stock in treasury, at cost 245,000 shares in 1999 (1,686) -
Additional paid-in capital 25,395 15,201
Retained earnings 4,481 3,535
Accumulated other comprehensive income (loss) 59 (67)
-------- --------
Total stockholders' equity 28,266 18,685
-------- --------
Total liabilities and stockholders' equity $ 67,881 $ 58,352
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 11,303 $ 8,172 $ 26,355 $ 17,934
Services 3,601 3,075 10,422 8,963
-------- -------- --------- --------
Total revenue 14,904 11,247 36,777 26,897
-------- -------- --------- --------
Cost of revenue (exclusive of amortization and
depreciation shown separately below except for
amortization of software development costs):
Software licenses 384 426 920 1,059
Services 369 604 1,328 1,655
-------- -------- --------- --------
Total cost of revenue 753 1,030 2,248 2,714
-------- -------- --------- --------
Gross margin 14,151 10,217 34,529 24,183
-------- -------- --------- --------
Operating expenses:
Sales and marketing 8,208 5,181 20,354 13,092
General and administrative 998 1,087 3,106 3,443
Amortization and depreciation 708 616 2,152 1,631
Research and development 2,233 2,165 7,132 5,486
-------- -------- --------- --------
Total operating expenses 12,147 9,049 32,744 23,652
-------- -------- --------- --------
Operating income 2,004 1,168 1,785 531
Other expenses (133) (84) (234) (253)
-------- -------- --------- --------
Income from operations before provision for
income taxes 1,871 1,084 1,551 278
Provision for income taxes (730) (547) (605) (521)
-------- -------- --------- --------
Net income (loss) $ 1,141 $ 537 $ 946 $ (243)
======== ======== ========= ========
Basic net income (loss) per share $ 0.07 $ 0.04 $ 0.06 $ (0.02)
======== ======== ========= ========
Diluted net income (loss) per share $ 0.07 $ 0.04 $ 0.06 $ (0.02)
======== ======== ========= ========
Basic weighted average shares outstanding 17,050 15,275 16,474 14,485
======== ======== ========= ========
Diluted weighted average shares outstanding 17,154 15,275 17,112 14,485
======== ======== ========= ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 946 $ (243)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities
Amortization and depreciation
Property and equipment 859 589
Software development costs 902 1,172
Goodwill 665 647
Other 218 -
Allowance for doubtful accounts 66 159
Allowance for installment reserve 150 -
Deferred taxes 290 289
Changes in operating assets and liabilities---
Accounts receivable and installment receivables (3,703) (3,938)
Prepaid expenses and other current assets (845) (422)
Other assets 543 (322)
Income taxes (2,310) 356
Accounts payable and accrued expenses (1,374) (497)
Deferred revenue 2,156 3,308
-------- ----------
Net cash (used in) provided by operating activities (1,437) 1,098
-------- ----------
Cash flows from investing activities:
Purchases of property and equipment (811) (564)
Software development and technology purchases - (1,286)
Additional consideration for SOFTWORKS, Inc.
Acquisition - (408)
-------- ----------
Net cash used in investing activities (811) (2,258)
-------- ----------
Cash flows from financing activities:
Net borrowings from Principal Shareholder - (2,177)
Repayments of long-term debt (1,239) -
Proceeds from long-term debt 2,462 49
Net proceeds from secondary public offering 9,204 -
Net proceeds from initial public offering - 9,654
Purchase of Treasury Stock (1,686)
Proceeds from stock option exercises 991 -
-------- ----------
Net cash provided by financing activities 9,732 7,526
-------- ----------
Effect of exchange rate changes on cash and cash
equivalents 126 (22)
-------- ----------
Net increase in cash and cash equivalents 7,610 6,344
Cash and cash equivalents, beginning of period 6,003 360
-------- ----------
Cash and cash equivalents, end of period $ 13,613 $ 6,704
======== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 1,000 $ 21
-------- ----------
Income taxes paid $ 1,715 $ 14
======== ==========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements and notes
thereto have been prepared in accordance with generally accepted accounting
principles for interim financial information and should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1998 included in the Company's Form 10-K. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as permitted by rules and regulations of the Securities and Exchange
Commission.
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 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. In the opinion of management, all adjustments (consisting of normal
recurring entries) necessary for the fair presentation of the consolidated
financial position, results of operations, and changes in cash flows for the
periods presented have been included. Interim results of operations for the nine
month period ended September 30, 1999 are not necessarily indicative of
operating results for the full fiscal year.
Note 2. 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 addressing storage management and performance. SOFTWORKS
wholly owns subsidiaries in the United Kingdom, France, Brazil, Australia,
Italy, Germany, and Spain that 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.
Stock Repurchase
On August 9, 1999, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of SOFTWORKS, Inc. common stock. Through
September 30, 1999, the Company has repurchased 245,000 shares of common stock
at an average price of $6.88 per share.
Voting Trust Agreement
In conjunction with the initial public offering on August 4, 1998, shares
owned by Computer Concepts Corp. (the "Principal Shareholder") 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. A former
trustee, Daniel DelGiorno, Jr., is the Chief Executive Officer of the Principal
Shareholder who resigned as trustee and director of the Company on April 22,
1999. The three trustees currently serving are directors of the Company who do
not have a significant financial interest in the Principal Shareholder. One of
the trustees is the Chairman of SOFTWORKS. The voting trust agreement will
remain in effect until the earliest of: (i) the Principal Shareholder and its
affiliates collectively ceasing to own 25% or more of the common stock, (ii) the
acquisition by a person other than the Principal Shareholder and its affiliates
of a greater percentage of the common stock than that then owned by the
Principal Shareholder and its affiliates or (iii) 10 years from the date of the
voting trust agreement. As of September 30, 1999, the Principal Shareholder
owned 39% of the Company's common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of SOFTWORKS and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
<PAGE>
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, 1999, the Principal Shareholder owned 39% of the
outstanding shares of the Company. The Principal Shareholder received a going
concern opinion with respect to its audited financial statements for the year
ended December 31, 1997. A going concern opinion was not rendered for 1998.
Under certain circumstances, the Principal Shareholder'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.
Note 3. Significant Accounting Policies
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 in installments over extended periods of time, generally one
to five years. Through 1998, the Company did not consider sales contracts with
amounts due for periods greater than one year from delivery fixed and
determinable, and accordingly, recognized such amounts as revenue when they
became due. Beginning January 1, 1999, the Company considers sales contracts
with amounts due for periods of 3 years or less fixed and determinable.
Accordingly, the Company recognizes license revenue associated with these
contracts, net of provisions for returns, at the time of delivery and acceptance
of software products by the customer, when collectibility is probable. For
contracts with amounts due greater than 3 years, the Company does not consider
sales 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 is recognized as the services are performed. Maintenance and
professional service revenue are classified as services revenue on the
accompanying statement of operations.
The American Institute of Certified Public Accountants (AICPA) 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 Position 98-4 ("SOP 98-4"), "Deferral of the Effective Date of a
Provision of SOP 97-2", amended a portion of SOP 97-2. Subsequent to the
issuance of SOP 98-4 the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions". SOP 97-2,
the amendment contained in SOP 98-4 and the modification contained in SOP 98-9
were adopted by the Company but did not have a material effect on the Company's
software revenue recognition policy for software transactions.
Installment Receivables
The Company offers customers extended payment terms to purchase software.
The extended payment plans consist generally of plans with payment terms of one
to five years. The Company records an installment receivable for the payments
not yet billed by the Company. When the payment is billed by the Company, the
payment is classified as accounts receivable.
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 September 30, 1999, there has been no impairment in the carrying
value of long-lived assets.
<PAGE>
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 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 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. Basic net income (loss) per share and
diluted net income (loss) per share can be reconciled as indicated below (in
thousands, except income and per share data):
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
---------------------------- ------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common shareholders $1,141,000 17,050 $ 0.07 $ 537,000 15,275 $ 0.04
Effect of dilutive options 104 -
------------------------------ --------------------------------
Diluted net income per share:
Income available to common shareholders $1,141,000 17,154 $ 0.07 $ 537,000 15,275 $ 0.04
============================== ================================
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
---------------------------- ------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share:
Income available to common shareholders $ 946,000 16,474 $ 0.06 $(243,000) 14,485 $(0.02)
Effect of dilutive options 638 -
------------------------------ --------------------------------
Diluted net income (loss) per share:
Income available to common shareholders $ 946,000 17,112 $ 0.06 $(243,000) 14,485 $(0.02)
============================== ================================
</TABLE>
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.
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 September 30, 1999, 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 but requires no collateral
from its customers. Unless otherwise disclosed, the fair value of financial
instruments approximates their recorded values.
<PAGE>
Note 4. Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
information about operating segments in the annual financial statements and
requires selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Company is primarily engaged in a single line of business. The Company
aggregates and reports revenues from products which have similar economic
characteristics in their nature, production, and distribution process. The
Company's geographic locations vary between full operating offices and sales
offices. The Company has identified the reportable operating segments as North
America and International. These operating segments are representative of the
Company's management approach to its evaluation of the operations. The
accounting policies of the reportable operating segments are the same as those
described in the summary of significant accounting policies. The International
segment includes an aggregation of certain operations consisting primarily of
sales operations through the Company's international subsidiaries in the United
Kingdom, France, Brazil, Australia, Spain, Germany, and Italy, and sales
generated through international distributors primarily in Europe and Asia. The
following information is presented in accordance with SFAS No.
131 for all periods presented (in thousands):
<TABLE>
<CAPTION>
Three months ending Nine months ending
-----------------------------------------------------
September September September September
30, 1999 30, 1998 30, 1999 30, 1998
-----------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
North America $ 12,140 $ 8,827 $ 27,679 $ 21,139
International 2,764 2,420 9,098 5,758
-----------------------------------------------------
Total $ 14,904 $ 11,247 $ 36,777 $ 26,897
=====================================================
Operating Income (Loss)
North America $ 1,869 $ 1,395 $ (469) $ 1,475
International 135 (227) 2,254 (944)
-----------------------------------------------------
Total $ 2,004 $ 1,168 $ 1,785 $ 531
=====================================================
Identifiable Assets
North America $ 53,976 $ 39,478 $ 53,976 $ 39,478
International 13,905 6,517 13,905 6,517
-----------------------------------------------------
Total $ 67,881 $ 45,995 $ 67,881 $ 45,995
=====================================================
</TABLE>
Revenue from unaffiliated customers is based on the location of the
customer. Operating income (loss) consists of the related income (loss) of the
Company's subsidiaries based upon the location of their respective operations.
Identifiable assets are those assets used in the Company's operations in those
operating segments. For the nine months ended September 30, 1999, no single
customer represented greater than five percent of revenues.
<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 SOFTWORKS' financial position, business strategy and the plans and
objectives of SOFTWORKS' 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
SOFTWORKS or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of SOFTWORKS' management, as
well as assumptions made by, and information currently available to, SOFTWORKS'
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 SOFTWORKS' software products,
dependence on proprietary technology, competitive factors, risks associated with
potential acquisitions, the ability to recruit personnel, the dependence on key
personnel, and control of SOFTWORKS by the Principal Shareholder. Such
statements reflect the current views of SOFTWORKS 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
SOFTWORKS. All subsequent written and oral forward-looking statements
attributable to SOFTWORKS or persons acting on its behalf are expressly
qualified in their entirety by this paragraph.
OVERVIEW
SOFTWORKS develops, markets, licenses and supports storage and performance
management software products. SOFTWORKS' products are designed to optimize
system and application performance and the management of multi-platform storage
resources in order to maximize the value of purchased hardware and software. The
Company's products address these issues for organizations that employ
enterprise-scale servers, OS/390, UNIX, and Microsoft Windows NT computing
environments. The Company has over 6,700 licenses of our products in use at over
2,000 installations worldwide. SOFTWORKS' products are installed at 88% of the
Fortune 100 and 55% of the Fortune 500 companies.
SOFTWORKS' revenue consists of revenue from licensing its software
products, revenue from the maintenance and support of its software products and
professional services relating to information technology ("IT") consulting.
Generally, the Company is required by its license agreement to provide
maintenance and enhancements during a stated 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 that 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 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 is recognized as the services are
performed. Deferred license revenue resulting from certain extended payment
agreements is included in installment receivables and deferred installment
revenue. Related sales commissions are also deferred and recognized over the
period of the installment payment plan. Maintenance and support services revenue
represents the ratable recognition of fees to enroll licensed products in our
software maintenance and support program. Enrollment entitles the customer to
product enhancements, technical support services, and ongoing compatibility with
third party operating systems. Maintenance revenue also includes the ratable
recognition of the bundled fees included in any extended term payment agreement.
Once a product license is acquired and paid for, maintenance fees are generally
incurred annually and equal 15% to 20% of the current list price of the product
at the time of renewal, less any applicable discounts. Information concerning
the Company's revenue recognition policy is set forth in Note 3 to the September
30, 1999 Consolidated Financial Statements included in Item 1, and is
incorporated herein by reference.
<PAGE>
RESULTS OF OPERATIONS
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 September 30, Nine Months Ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software licenses 75.8% 72.7% 71.7% 66.7%
Services 24.2% 27.3% 28.3% 33.3%
----------- ----------- ----------- -----------
Total revenue 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Cost of revenue (exclusive of amortization and
Depreciation shown separately below except for
Amortization of software development costs):
Software licenses 2.6% 3.8% 2.5% 3.9%
Services 2.5% 5.4% 3.6% 6.2%
----------- ----------- ----------- -----------
Total cost of revenue 5.1% 9.2% 6.1% 10.1%
----------- ----------- ----------- -----------
Gross margin 94.9% 90.8% 93.9% 89.9%
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 55.1% 46.1% 55.3% 48.7%
General and administrative 6.7% 9.6% 8.4% 12.8%
Amortization and depreciation 4.7% 5.5% 5.9% 6.1%
Research and development 15.0% 19.3% 19.4% 20.3%
----------- ----------- ----------- -----------
Total operating expenses 81.5% 80.5% 89.0% 87.9%
----------- ----------- ----------- -----------
Operating income 13.4% 10.3% 4.9% 2.0%
Other expenses (0.8%) (0.7%) (0.7%) (1.0%)
----------- ----------- ----------- -----------
Income from operations before provision for
income taxes 12.6% 9.6% 4.2% 1.0%
Provision for income taxes (4.9%) (4.8%) (1.6%) (1.9%)
----------- ----------- ----------- -----------
Net income (loss) 7.7% 4.8% 2.6% (0.9%)
========== =========== =========== ===========
</TABLE>
Three Months Ended September 30, 1999 and 1998
Revenue. Total revenue increased 32.5% to $14.9 million for the three
months ended September 30, 1999 from $11.2 million for the same period in the
prior year. License revenue increased 38.3% to $11.3 million from $8.2 million
for the three months ended September 30, 1999 and 1998, respectively. The
increase was primarily due to the increased sales of SOFTWORKS' products in
North America resulting from an increase in average contract price.
International revenue decreased as a percentage of total revenue to 18.5% from
21.5% for the three months ended September 30, 1999 and 1998, respectively. In
terms of absolute dollars, international revenues increased 14.2% to $2.8
million for the three months ended September 30, 1999 from $2.4 million for the
same period in the prior year. This increase is primarily attributable to
SOFTWORKS' expansion into Germany, commencing in January 1999.
Sales in the storage management segment accounted for 63.5% and 61.6% of
total license revenue for the three months ended September 30, 1999 and 1998,
respectively. License revenue from the performance management segment accounted
for 32.4% and 30.1% of total license revenue for the three months ended
September 30, 1999 and 1998, respectively. License revenue from the Year 2000
segment accounted for 1.2% of total license revenue for the three months ended
September 30, 1999 and 3.4% for the same period in 1998.
Services revenue, comprised of maintenance revenue and to a lesser extent,
revenue from professional services, increased 17.1% to $3.6 million for the
three months ended September 30, 1999 from $3.1 million for the same period in
the prior year. This increase is attributable to overall growth in, and renewals
of, maintenance contracts by the installed customer base.
Cost of Revenue. Cost of software license revenue includes royalties paid
to Company developers and to a third party under a licensing agreement,
amortization of capitalized software development costs and costs of shipping and
fulfillment. Cost of software license revenue decreased 9.9% to $384,000, or
2.6% of total revenue for the three months ended September 30, 1999 from
$426,000, or 3.8% of total revenue for the same period in 1998. This decrease
was primarily attributable to the termination of certain royalty agreements,
offset in part by increased amortization of software development costs that were
capitalized subsequent to September 30, 1998. Costs of services revenue is
<PAGE>
comprised of costs of maintenance and to a lesser extent, costs of professional
services. Cost of services revenue decreased 38.9% to $369,000, or 2.5% of total
revenue for the three months ended September 30, 1999 from $604,000, or 5.4% of
total revenue for the same period in the prior year. This decrease is primarily
attributable to a decline in certain professional service expenses during the
period.
Sales and Marketing Expense. Sales and marketing expenses include salaries
and related costs, commissions, travel, facilities, communications costs and
promotional expenses for SOFTWORKS' direct sales organization and marketing
staff. Sales and marketing expenses increased 58.4% to $8.2 million from $5.2
million for the three months ended September 30, 1999 and 1998, respectively. As
a percentage of revenue, sales and marketing expenses increased to 55.1% for the
three months ended September 30, 1999 from 46.1% for the same period in the
prior year. This increase was attributable primarily to increased commission
expenses resulting from increased sales and to increased sales overhead costs
resulting from growth in SOFTWORKS' sales organization, including five new
offices that opened since September 30, 1998.
General and Administrative Expense. General and administrative expenses
include the costs of corporate operations, legal, finance and accounting, human
resources and other general operations. General and administrative expenses
decreased 8.2% to $998,000 from $1.1 million for the three months ending
September 30, 1999 and 1998, respectively. As a percentage of revenue, general
and administrative expenses decreased to 6.7% for the three months ending
September 30, 1999 from 9.6% for the same period in the prior year. Although
general and administrative expenses decreased, management expects them to
increase in the future to support the Company's growth.
Amortization and Depreciation Expense. Amortization and depreciation
expenses increased 14.9% to $708,000 from $616,000 for the three months ended
September 30, 1999 and 1998, respectively. This increase is primarily due to
purchases of equipment for SOFTWORKS' data center operations since September 30,
1998.
Research and Development Expense. Research and development expenses include
salaries and related costs for software developers, quality assurance and
documentation personnel involved in SOFTWORKS' research and development efforts,
as well as support for research and development, including SOFTWORKS' data
center operations. Research and development expenses were $2.2 million for the
three months ended September 30, 1999 and 1998. As a percentage of revenue,
research and development expenses decreased to 15.0% for the three months ended
September 30, 1999 from 19.3% for the same period in the prior year.
Nine Months Ended September 30, 1999 and 1998
Revenue. Total revenue increased 36.7% to $36.8 million for the nine months
ended September 30, 1999 from $26.9 million for the same period in the prior
year. License revenue increased 47.0% to $26.4 million from $17.9 million for
the nine months ended September 30, 1999 and 1998, respectively. The increase
was primarily due to the increased sales of SOFTWORKS' products in North America
resulting from an increase in average contract price. International revenue
increased as a percentage of total revenue to 24.7% from 21.4% for the nine
months ended September 30, 1999 and 1998, respectively. In terms of absolute
dollars, international revenues increased 58% to $9.1 million for the nine
months ended September 30, 1999 from $5.8 million for the same period in the
prior year. This increase is primarily attributable to SOFTWORKS' expansion into
Germany.
Sales in the storage management segment accounted for 68.9% and 58.0% of
total license revenue for the nine months ended September 30, 1999 and 1998,
respectively. License revenue from the performance management segment accounted
for 28.0% and 32.6% of total license revenue for the nine months ended September
30, 1999 and 1998, respectively. License revenue from the Year 2000 segment
accounted for 1.2% of total license revenue for the nine months ended September
30, 1999 and 4.8% for the same period in 1998.
Services revenue, comprised of maintenance revenue and to a lesser extent,
revenue from professional services, increased 16.3% to $10.4 million for the
nine months ended September 30, 1999 from $9.0 million for the same period in
the prior year. This increase is attributable to overall growth in, and renewals
of, maintenance contracts by the installed customer base.
Cost of Revenue. Cost of software license revenue includes royalties paid
to Company developers and to a third party under a licensing agreement,
amortization of capitalized software development costs and costs of shipping and
fulfillment. Cost of software license revenue decreased 13.1% to $920,000, or
2.5% of total revenue for the nine months ended September 30, 1999 from $1.1
million, or 3.9% for the same period in 1998. This decrease was primarily
attributable to the termination of certain royalty agreements, offset in part by
increased amortization of software development costs that were capitalized
subsequent to September 30, 1998. Costs of services revenue is comprised of
costs of maintenance and to a lesser extent, costs of professional services.
Cost of services revenue decreased 19.8% to $1.3 million, or 3.6% of total
revenue for the nine months ended September 30, 1999 from $1.7 million, or 6.2%
of total revenue for the same period in the prior year. This decrease is
primarily attributable to a decline in certain professional service expenses in
1999.
<PAGE>
Sales and Marketing Expense. Sales and marketing expenses include salaries
and related costs, commissions, travel, facilities, communications costs and
promotional expenses for SOFTWORKS' direct sales organization and marketing
staff. Sales and marketing expenses increased 55.5% to $20.4 million from $13.1
million for the nine months ended September 30, 1999 and 1998, respectively. As
a percentage of revenue, sales and marketing expenses increased to 55.3% for the
nine months ended September 30, 1999 from 48.7% for the same period in the prior
year. This increase was attributable primarily to increased commission expenses
resulting from increased sales and to increased sales overhead costs resulting
from growth in SOFTWORKS' sales organization, including five new offices that
opened subsequent to September 30, 1998.
General and Administrative Expense. General and administrative expenses
include the costs of corporate operations, legal, finance and accounting, human
resources and other general operations. General and administrative expenses
decreased 9.8% to $3.1 million from $3.4 million for the nine months ending
September 30, 1999 and 1998. As a percentage of revenue, general and
administrative expenses decreased to 8.4% for the nine months ending September
30, 1999 from 12.8% for the same period in the prior year. Although general and
administrative expenses decreased, management expects them to increase in
absolute dollars in the future to support the Company's growth.
Amortization and Depreciation Expense. Amortization and depreciation
expenses increased 31.9% to $2.2 million from $1.6 million for the nine months
ended September 30, 1999 and 1998, respectively. This increase is primarily due
to purchases of equipment subsequent to September 30, 1998.
Research and Development Expense. Research and development expenses include
salaries and related costs for software developers, quality assurance and
documentation personnel involved in SOFTWORKS' research and development efforts,
as well as support for research and development, including SOFTWORKS' data
center operations. Research and development increased 30.0% to $7.1 million or
19.4% of revenue for the nine months ended September 30, 1999 from $5.5 million
or 20.3% of revenue for the same period in the prior year. The amount of the
increase is primarily attributable to the capitalization of $854,000 of certain
software development costs associated with multiplatform products during the
nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
SOFTWORKS has funded its operations through cash generated from operations,
external financing and proceeds from its initial public offering on August 4,
1998 and its secondary public offering on June 4, 1999. In addition, in
September 1999, the Company sold $4.9 million of unbilled accounts receivable.
In the future, the Company may sell additional unbilled accounts receivable from
time to time. SOFTWORKS had cash and cash equivalents of $13.6 million and $6.0
million at September 30, 1999 and December 31, 1998, respectively.
On August 9, 1999, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of SOFTWORKS, Inc. common stock. Through
September 30, 1999, the Company has repurchased 245,000 shares of common stock
at an average price of $6.88 per share.
SOFTWORKS has not sustained material foreign currency exchange losses and
presently does not attempt to hedge its exposure to fluctuations in foreign
currency exchange rates. Should SOFTWORKS' revenue from international sales
increase as intended, and should such sales be denominated in foreign
currencies, SOFTWORKS intends to adopt an adequate hedging strategy to guard
against foreign currency fluctuations.
Net cash used in operating activities was $1.4 million for the nine months
ended September 30, 1999, as compared with net cash provided by operating
activities of $1.1 million for the same period in the prior year. This decrease
is primarily a result of the increase in income taxes paid and the growth in
accounts receivable and installment receivables. The Company paid income taxes
of $1.7 million during the nine months ended September 30, 1999. During the
first eight months of the same period in 1998, the Company reported its
financial results on a consolidated basis with its former parent, and did not
file separate tax returns.
SOFTWORKS' investing activities primarily include expenditures for fixed
assets in support of SOFTWORKS' product development activities and
infrastructure. Net cash used in investing activities decreased 64.1% to
$811,000 for the nine months ended September 30, 1999 from $2.3 million for the
same period in the prior year. The decrease was primarily a result of a decrease
in costs for software development and technology purchases and additional
contingent consideration paid to two former stockholders in connection with the
acquisition of SOFTWORKS by the Principal Shareholder, offset in part by
increased purchases of property and equipment.
For the nine months ended September 30, 1999 and 1998, net cash provided by
financing activities was $9.7 million and $7.5 million, respectively. The
increase in cash provided by financing activities was primarily a result of
proceeds received from the Company's secondary public offering. The secondary
public offering provided the Company with approximately $9.2 million in net
proceeds. During the period, the Company also received proceeds from long-term
debt of $2.5 million, primarily a result of borrowings under a line of credit
agreement, as well as certain capital leases. Stock option exercises provided
the Company with proceeds of $1.0 million. Cash used in financing activities
during the period include debt repayment of approximately $1.2 million and the
purchase of $1.7 million in treasury stock.
<PAGE>
SOFTWORKS' principal commitments as of September 30, 1999 consisted
primarily of (i) leases on its corporate headquarters facilities, various sales
offices and operating equipment, (ii) employment agreements, (iii) a software
licensing and distribution agreement, and (iv) long-term debt arising from a
line of credit.
SOFTWORKS' current cash and cash equivalent balances, and cash flow from
its operations 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 SOFTWORKS will have sufficient capital to finance potential
acquisitions or other growth oriented activities, which could require SOFTWORKS
to incur additional debt or obtain other financing.
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
"Millennium Bug" or "Year 2000 problem."
Assessment. The Year 2000 problem could affect computers, software, and
other equipment which SOFTWORKS uses, operates, or maintains. Accordingly,
SOFTWORKS has reviewed its internal computer programs and systems to ensure that
the programs and systems are Year 2000 compliant. SOFTWORKS presently believes
that its computer systems are Year 2000 compliant. However, while the estimated
cost of these efforts is not expected to be material to its overall financial
position, or any year's results of operations, there can be no assurance to this
effect. SOFTWORKS has obtained certification of its processes to assess Year
2000 problems from the Information Technology Association of America (ITAA).
Because its business involves software development, SOFTWORKS has not sought
further verification or validation by independent third parties of its
corrections of Year 2000 problems.
Software Sold to Consumers. SOFTWORKS believes that it has substantially
identified and resolved all potential Year 2000 problems with the software
products it develops and markets. However, it also believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting its software products have been identified or corrected due to the
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 its control.
SOFTWORKS recognizes the significance of the Year 2000 issue as it relates
to its internal systems, including IT and non-IT systems. To that extent
SOFWORKS has achieved the following:
Internal Information Technology Infrastructure. SOFTWORKS believes that it
has identified, modified, upgraded, or replaced substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations in order to minimize the possibility of a material
disruption to its business. While most of the upgrades were planned as part of a
general enchancement to its infrastructure, the timing of the upgrades also
result in Year 2000 compliance.
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. SOFTWORKS has
assessed and remediated the effect of the Year 2000 problem on its office and
facilities equipment under its control, and the total costs associated with
completing the required modifications, upgrades, or replacements of these
internal systems were not material.
Suppliers. SOFTWORKS has initiated communications, including surveys, with
business critical third party suppliers of the major computers, software, and
other equipment which it uses, operates, or maintains to identify and, to the
extent possible, to resolve issues involving the Year 2000 problem. SOFTWORKS
has received vendor certification that all of its business critical information
technology systems, including internal communications systems, accounting and
finance systems, customer service systems, and sales and marketing tracking
systems, are Year 2000 compliant. Accordingly, SOFTWORKS does not anticipate any
significant Year 2000 problems with these systems; however, it cannot ensure
that these suppliers will resolve any or all of their Year 2000 problems with
these systems before the occurrence of a material disruption to its business or
that of its customers. SOFTWORKS believes that its primary exposure is presently
with respect to public utilities and telecommunications suppliers. 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 SOFTWORKS' business,
financial condition, and results of operation.
<PAGE>
Additionally, SOFTWORKS has initiated communications, including surveys,
with all other vendors or businesses that supply any service to SOFTWORKS. While
it has limited or no control over responses to its inquiries and the actions of
these third party suppliers, SOFTWORKS does not view this category of services
to be business critical and in the event of a Year 2000 problem with a
particular vendor, believes that those goods or services could easily be
obtained from other sources.
Banking Relationships. SOFTWORKS has confined its banking relationships to
top tier finanical institutions around the world who have represented that their
respective systems are Year 2000 compliant. Any failure of these banks to
resolve Year 2000 problems with their systems in a timely manner would result in
financial inconvenience and, depending upon the duration of the failure, could
have a material adverse effect on SOFTWORKS' financial condition and results of
operation.
Most Likely Consequences of Year 2000 Problems. SOFTWORKS believes that it
has identified all Year 2000 problems that could materially adversely affect its
business operations. However, it does not believe that it is possible to
determine with complete certainty that all Year 2000 problems which affect it
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. In addition, SOFTWORKS is unable to determine with any
degree of certainty the changes in buying habits of its current and potential
customers due to their concerns over Year 2000 issues. As a result, SOFTWORKS
expects that it could likely experience a significant number of operational
inconveniences and inefficiencies that may divert management's time and
attention and its financial and human resources from its ordinary business
activities. In addition, SOFTWORKS may experience a lesser number of serious
system failures that may require significant efforts by it or its customers to
prevent or alleviate material business disruptions.
Contingency Plans. SOFTWORKS has developed contingency plans to be
implemented in the event of any Year 2000 problems affecting its internal
systems. Depending on the systems affected, these plans could include the use of
company owned cellular telephones, conducting business from alternate company
locations, accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, and possible increased work
hours for its 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. Should SOFTWORKS be
required to implement any of these contingency plans, it could have a material
adverse effect on its financial condition and results of operations.
Disclaimer. The discussion of SOFTWORKS' efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
SOFTWORKS ability to achieve Year 2000 compliance and the level of incremental
costs associated with such compliance, could be adversely affected by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in its ongoing compliance review.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of SOFTWORKS was held on August 9, 1999.
The following is a brief description of each matter voted upon at the meeting
and the number of votes cast for, withheld or against, and the number of
abstentions with respect to each matter. Both proposals were approved by the
shareholders.
(a) The shareholders approved the election of the nominees to the
Company's board of directors.
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Robert Devine 14,307,743 5,750
Charles Feld 14,307,743 5,750
</TABLE>
(b) The shareholders approved the amendment to Article "FOURTH" of the
Company's Certificate of Incorporation to reduce the number of
authorized shares of common stock from 152,000,000 to 52,000,000.
<TABLE>
<CAPTION>
Votes For Votes Withheld Abstained
--------- -------------- ---------
<S> <C> <C>
14,297,663 4,380 11,450
</TABLE>
ITEM 5. OTHER INFORMATION
None.
<PAGE>
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
Exhibit Number Description
---------------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant, as amended
3.2 By-Laws of Registrant*
4.1 Specimen Common Stock Certificate*
10.1 Lease Agreement dated June 14, 1994 between Registrant and WHT Real
Estate Limited Partnership*
10.2 First Amendment to Lease Agreement*
10.3 Second Amendment to Lease Agreement*
10.4 Employment Agreement between the Registrant and James Cannavino*
10.5 Employment Agreement between the Registrant and C.R. Kinsey, III*
10.6 Employment Agreement between the Registrant and Judy G. Carter*
10.7 Employment Agreement between the Registrant and Lisa Welch*
10.8 Employment Agreement between the Registrant and Robert McLaughlin*
10.9 Form of Indemnification Agreement between the Company and its
officers and directors*
10.10Distribution Agreement dated July 8, 1997 between the Registrant and
Cognizant Technology Solutions Corporation*
10.11 1998 Long-term Incentive Plan, as amended **
10.12 1999 Stock Option Plan, as amended***
27 Financial Data Schedule
* Incorporated by reference to Registration Statement No. 333-53939.
** Incorporated by reference to Form S-8 Registration Statement No.
333-77747.
*** Incorporated by reference to June 1998 Form 10-Q
(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 10, 1999 By: /s/ Judy G. Carter
-------------------------------------
Judy G. Carter
President, Chief Executive Officer and Director
Date: November 10, 1999 By: /s/ Robert C. McLaughlin
-------------------------------------
Robert C. McLaughlin
Treasurer and Chief Financial Officer
State of Delaware Page 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "SOFTWORKS, INC.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH
DAY OF MAY, A.D. 1998, AT 12 O'CLOCK P.M.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2899223 8100
AUTHENTICATION:
9116684
981212854 DATE: 06-03-98
<PAGE>
CERTIFICATE OF INCORPORATION
of
SOFTWORKS, Inc.
(a Delaware corporation)
* * * * * *
THE UNDERSIGNED, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly, Chapter 1, Title 8, of the Delaware Code and
the acts amendatory thereof and supplemental thereto and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation is:
SOFTWORKS, Inc.
SECOND: The location of the registered office of the Corporation in the
State of Delaware is at Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation in the State of Delaware at such address upon whom process against
the Corporation may be served is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: (a) The total number of shares of all classes of stock which the
corporation shall have authority to issue is ONE HUNDRED FIFTY-TWO MILLION
(152,000,000) shares. Of these (i) ONE HUNDRED FIFTY MILLION (150,000,000)
shares shall be shares of Common Stock of the par value of $.001 per share; and
(ii) TWO MILLION (2,000,000) shares shall be shares of Preferred Stock of the
par value of $.001 per share.
<PAGE>
(b) Subject to the rights of any holders of Preferred Stock, the
Common Stock shall be entitled to dividends out of funds legally available
therefor, when, as and if declared and paid to the holders of Common Stock, and
upon liquidation, dissolution or winding up of the Corporation, to share ratably
in the assets of the Corporation available for distribution to the holders of
Common Stock. Except as otherwise provided herein or by law, the holders of the
Common Stock shall have full voting rights and powers, and each share of Common
Stock shall be entitled to one vote.
(c) The Preferred Stock may be issued from time to time in classes or
series and shall have such voting powers, full or limited, or no voting powers,
and such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions of the Board
of Directors providing for the issuance of such stock.
FIFTH: The name and mailing address of the incorporator is as follows:
Nancy D. Lieberman Blau, Kramer, Wactlar
& Lieberman, P.C.
100 Jericho Quadrangle
Suite 225
Jericho, New York 11753
SIXTH: (a) The number of directors of the corporation shall be determined
in the manner prescribed by the by-laws of this corporation.
(b) The Board of Directors shall be divided into three (3) classes as
nearly equal in number as possible, and no class shall include less than one (1)
director. The terms of the office of the directors initially classified shall be
as follows: that of Class I shall expire at the next annual meeting of
shareholders to be held in 1999, Class II at the second annual meeting of
shareholders to be held in 2000 and Class III at the third succeeding annual
meeting of shareholders to be held in 2001. The foregoing notwithstanding, each
director shall serve until his successor shall have been duly elected and
qualified, unless he shall resign, become disqualified, disabled or shall
otherwise be removed. Whenever a vacancy occurs on the Board of Directors, a
majority of the remaining directors have the power to fill the vacancy by
electing a successor director to fill that portion of the unexpired term
resulting from the vacancy.
(c) At each annual meeting of shareholders after such initial
classification, directors chosen to succeed those whose terms then expire at
such annual meeting shall be elected for a term of office expiring at the third
succeeding annual meeting of shareholders after their election. When the number
of directors is increased by the Board of Directors and any newly created
directorships are filled by the Board of Directors, there shall be no
<PAGE>
classification of the additional directors until the next annual meeting of
shareholders. Directors elected, whether by the Board of Directors or by the
shareholders, to fill a vacancy, subject to the foregoing, shall hold office for
a term expiring at the annual meeting at which the term of the Class to which
they shall have been elected expires. Any newly created directorships or any
decrease in directorships shall be so apportioned among the classes as to make
all classes as nearly equal in number as possible.
SEVENTH: Meetings of stockholders may be held within or without the State
of Delaware as the by-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the corporation. Election of directors
need not be by written ballot unless the by-laws of the corporation shall so
provide.
EIGHTH: Subject to the provisions contained in Article TWELFTH hereof, the
corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
NINTH: Any action required to be taken or which may be taken at any annual
or special meeting of stockholders of the corporation may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
TENTH: Special meetings of stockholders may be called by the Chairman of
the Board, President or a majority of the Board of Directors or at the written
request of stockholders owning at least sixty-six and two-thirds percent
(66-2/3%) of the entire voting power of the corporation's capital stock.
ELEVENTH: In the event that it is proposed that the corporation enter into
a merger or consolidation with any other corporation and such other corporation
or its affiliates singly or in the aggregate own or control directly or
indirectly fifteen (15%) percent or more of the outstanding voting power of the
capital stock of this corporation, or that the corporation sell substantially
all of its assets or business to such other corporation, the affirmative vote of
the holders of not less than sixty-six and two-thirds (66-2/3%) percent of the
total voting power of all outstanding shares of capital stock of this
corporation shall be required for the approval of any such proposal; provided,
however, that the foregoing shall not apply to any such merger, consolidation or
sale of assets or business which was approved by resolutions of the Board of
<PAGE>
Directors of this corporation prior to the acquisition of the ownership or
control of fifteen (15%) percent of the outstanding shares of this corporation
by such other corporation or its affiliates, nor shall it apply to any such
merger, consolidation or sale of assets or business between this corporation and
another corporation, fifty (50%) percent or more of the total voting power of
which is owned by this corporation. For the purposes hereof, an "affiliate" is
any person (including a corporation, partnership, trust, estate or individual)
who directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified; and
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise.
TWELFTH: The provisions set forth in Articles SIXTH, NINTH, TENTH AND
ELEVENTH above may not be altered, amended or repealed in any respect unless
such alteration, amendment or repeal is approved by the affirmative vote of the
holders of not less than sixty-six and two-thirds percent (66-2/3%) of the total
voting power of all outstanding shares of capital stock of the corporation.
THIRTEENTH: Each person who at any time is or shall have been a director or
officer of the Corporation and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is, or
he or his testator or intestate was, a director, officer, employee or agent of
the Corporation, or served at the request of the Corporation as a director,
officer, employee, trustee or agent of another corporation, partnership, joint,
venture, trust or other enterprise, shall be indemnified against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any such threatened,
pending or completed action, suit or proceeding to the full extent authorized
under Section 145 of the General Corporation Law of the State of Delaware. The
foregoing right of indemnification shall in no way be exclusive of any other
rights of indemnification to which such director, officer, employee or agent may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors, or otherwise.
FOURTEENTH: Any and all right, title, interest and claim in or to any
dividends declared by the Corporation, whether in cash, stock, or otherwise,
which are unclaimed by the stockholder entitled thereto for a period of six (6)
years after the close of business on the payment date shall be and be deemed to
be extinguished and abandoned; such unclaimed dividends in the possession of the
Corporation, its transfer agents, or other agents or depositaries, shall at such
time become the absolute property of the Corporation, free and clear of any and
all claims for any person whatsoever.
FIFTEENTH: Any and all directors of the Corporation shall not be liable to
the Corporation or any stockholder thereof for monetary damages for breach of
fiduciary duty as director except as otherwise required by law. No amendment to
or repeal of this Article FIFTEENTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any act or omission of such director occurring prior to such
amendment or repeal.
<PAGE>
SIXTEENTH: The Board of Directors of the Corporation shall expressly have
the power and authorization to make, alter and repeal the By-Laws of the
Corporation, subject to the reserved power of the stockholders to make, alter
and repeal any By-Laws adopted by the Board of Directors.
THE UNDERSIGNED, for the purposes of forming a Corporation under the laws
of the State of Delaware, does hereby make and execute this Certificate and
affirm and acknowledge, under the penalties of perjury, that this Certificate is
my act and deed and that the facts herein stated are true, and I have
accordingly set my hand hereto this 26th day of May, 1998.
/s/ Nancy D. Lieberman
-------------------------------
Nancy D. Lieberman
Incorporator
Blau, Kramer, Wactlar
& Lieberman, P.C.
100 Jericho Quadrangle
Jericho, New York 11753
<PAGE>
State of Delaware Page 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER,
WHICH MERGES:
"SOFTWORKS, INC.", A MARYLAND CORPORATION, WITH AND INTO "SOFTWORKS, INC.",
UNDER THE NAME OF "SOFTWORKS, INC." A CORPORATION ORGANIZED AND EXISTING UNDER
THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE
TWENTY-NINTH DAY OF MAY, A.D. 1998, AT 1:30 O'CLOCK P.M.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2899223 8100M
AUTHENTICATION:
9228319
981299018 DATE: 07-31-98
<PAGE>
CERTIFICATE OF MERGER
OF
SOFTWORKS, Inc.
(a Maryland Domestic)
INTO
SOFTWORKS, Inc.
(a Delaware Domestic)
* * * * * *
The undersigned corporation
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the merger is as follows:
NAME STATE OF INCORPORATION
---- ----------------------
SOFTWORKS, Inc. Maryland
SOFTWORKS, Inc. Delaware
SECOND: That an Agreement of Merger between the parties to the merger has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of section 252 of
the General Corporation Law of Delaware.
THIRD: That the name of the surviving corporation of the merger is
Softworks, Inc., a Delaware corporation.
FOURTH: That the Certificate of Incorporation of Softworks, Inc., a
Delaware corporation which is surviving the merger, shall be the Certificate of
Incorporation of the surviving corporation.
FIFTH: That the executed Agreement of Merger is on file at an office of the
surviving corporation, the address of which is 5845 Richmond Highway,
Alexandria, Virginia 22303.
SIXTH: That a copy of the Agreement of Merger will be furnished by the
surviving corporation, on request and without cost, to any stockholder of any
constituent corporation.
<PAGE>
SEVENTH: The authorized capital stock of each foreign corporation which is
a party to the merger is as follows:
<TABLE>
<CAPTION>
Par value per share
or statement that
shares are without
Corporation Class Number of Shares par value
- ----------- ----- ---------------- -------------------
<S> <C> <C> <C>
Softworks, Inc. Common Stock 10,000 $10.00
(Maryland)
</TABLE>
Dated: May 28, 1998
------------
SOFTWORKS, INC.(a Delaware Corporation)
By: /s/ Judy G. Carter,
--------------------------
Judy G. Carter, President
<PAGE>
State of Delaware Page 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "SOFTWORKS, INC.", FILED IN THIS OFFICE ON THE NINTH DAY OF NOVEMBER, A.D.
1999, AT 10 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2899223 8100 0071852
AUTHENTICATION:
991476092 DATE: 11-09-99
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
SOFTWORKS, INC.
---------------
SOFTWORKS, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors, Inc. of SOFTWORKS,
INC., resolutions were adopted setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said amendment to
be advisable and calling a meeting of the stockholders of the corporation for
consideration thereof.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the Annual Meeting of Stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the following
amendment:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing paragraph (a) of Article FOURTH of
the Company's Certificate of Incorporation, so that, as amended said
Article shall be and read as follows:
"FOURTH; (a) The total number of shares of all classes of stock
which the corporation shall have authority to issue is FIFTY-TWO
MILLION (52,000,000) shares. Of these (i) FIFTY MILLION (50,000,000)
shares shall be shares of common stock of the par value of $.001 per
share; and (ii) TWO MILLION (2,000,000) shares shall be shares of
Preferred Stock of the par value of $.001 per share."
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, said SOFTWORKS, INC. has caused this certificate to be
signed by JUDY G. CARTER, its President and C. R. KINSEY, III, its Secretary,
this 23RD day of September, 1999.
SOFTWORKS, INC.
By: /s/ Judy G. Carter
-------------------------
Judy G. Carter, President
ATTEST:
By: /s/ C. R. Kinsey, III
---------------------
C. R. Kinsey, III
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,613
<SECURITIES> 0
<RECEIVABLES> 28,675
<ALLOWANCES> 505
<INVENTORY> 0
<CURRENT-ASSETS> 43,977
<PP&E> 5,828
<DEPRECIATION> 3,378
<TOTAL-ASSETS> 67,881
<CURRENT-LIABILITIES> 24,019
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 28,249
<TOTAL-LIABILITY-AND-EQUITY> 67,881
<SALES> 14,904
<TOTAL-REVENUES> 14,904
<CGS> 753
<TOTAL-COSTS> 753
<OTHER-EXPENSES> 12,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> 1,871
<INCOME-TAX> 730
<INCOME-CONTINUING> 1,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,141
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
