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 JUNE 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
Identification No.) incorporation or organization)
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 June 30, 1999
-------------- -------------
Common Stock, $.001 par value 17,139,734
<PAGE>
SOFTWORKS, INC.
Form 10-Q for the Quarterly Period Ended June 30, 1999
Table of Contents
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 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>
June 30, December 31,
1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,905 $ 6,003
Accounts receivable, net of allowance for doubtful
accounts of $301 and $289 in 1999 and 1998, respectively 10,197 14,316
Installment receivables, net of allowance for installment
reserve of $150 and $0 in 1999 and 1998, respectively 19,952 16,406
Prepaid expenses and other current assets 2,295 1,349
Deferred tax assets - 306
---------- ----------
Total current assets 44,349 38,380
---------- ----------
Installment receivables, noncurrent 10,445 7,908
Property and equipment, net 2,635 2,498
Software development costs, net 2,433 3,039
Goodwill, net of accumulated amortization of $3,789
and $3,346 in 1999 and 1998, respectively 3,700 4,143
Other assets 1,348 1,900
Income taxes receivable 1,201 -
Deferred tax assets, noncurrent 300 484
---------- ----------
Total assets $ 66,411 $ 58,352
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,084 $ 6,136
Current portion of long-term debt 2,887 1,930
Deferred maintenance revenue 8,343 9,064
Deferred installment revenue 8,327 7,314
Income taxes payable - 2,057
---------- ----------
Total current liabilities 23,641 26,501
---------- ----------
Deferred maintenance revenue, noncurrent 6,127 3,882
Deferred installment revenue, noncurrent 6,235 7,883
Long-term debt, noncurrent 1,709 1,401
---------- ----------
Total liabilities 37,712 39,667
---------- ----------
Stockholders' Equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; none issued or outstanding - -
Common stock, $.001 par value; 150,000,000 authorized; 17 16
17,139,734 and 15,973,000 shares issued and outstanding,
respectively
Additional paid-in capital 25,385 15,201
Retained earnings 3,340 3,535
Accumulated other comprehensive loss (43) (67)
---------- ----------
Total stockholders' equity 28,699 18,685
---------- ----------
Total liabilities and stockholders' equity $ 66,411 $ 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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------- -------------- ---------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 8,322 $ 6,026 $ 15,052 $ 9,762
Services 3,293 3,028 6,821 5,888
------- -------- -------- --------
Total revenue 11,615 9,054 21,873 15,650
------- -------- -------- --------
Cost of revenue (exclusive of amortization and
depreciation shown separately below except for
amortization of software development costs):
Software licenses 320 194 536 633
Services 410 526 959 1,051
------- -------- -------- --------
Total cost of revenue 730 720 1,495 1,684
------- -------- -------- --------
Gross margin 10,885 8,334 20,378 13,966
------- -------- -------- --------
Operating expenses:
Sales and marketing 7,134 4,516 12,146 7,911
General and administrative 1,036 1,254 2,108 2,356
Amortization and depreciation 734 525 1,444 1,015
Research and development 2,399 1,703 4,899 3,321
------- -------- -------- --------
Total operating expenses 11,303 7,998 20,597 14,603
------- -------- -------- --------
Operating (loss) income (418) 336 (219) (637)
Other expenses (55) (169) (101) (169)
------- -------- -------- --------
(Loss) income from operations before benefit from
(provision for) income taxes (473) 167 (320) (806)
Benefit from (provision for) income taxes 185 (180) 125 26
------- -------- -------- --------
Net loss $ (288) $ (13) $ (195) $ (780)
======= ======== ======== ========
Basic and diluted net loss per share $ (0.02) $ (0.00) $ (0.01) $ (0.06)
======= ======== ======== ========
Basic and diluted weighted average shares outstanding 16,385 14,083 16,180 14,083
======= ======== ======== ========
<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>
Six Months Ended June 30,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (195) $ (780)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities
Amortization and depreciation
Property and equipment 556 383
Software development costs 606 799
Goodwill 443 425
Other 145 -
Allowance for doubtful accounts 12 128
Allowance for installment reserve 150 -
Deferred tax provision (benefit) 490 (68)
Changes in operating assets and liabilities---
Accounts receivable and installment receivables (2,126) 45
Prepaid expenses and other current assets (946) (492)
Other assets 407 (209)
Income taxes receivable, net (3,258) -
Accounts payable and accrued expenses (2,052) (480)
Deferred revenue 889 2,286
--------- ---------
Net cash (used in) provided by operating activities (4,879) 2,037
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (693) (301)
Software development and technology purchases - (1,286)
Additional consideration for SOFTWORKS, Inc. - (405)
--------- ---------
Net cash used in investing activities (693) (1,992)
--------- ---------
Cash flows from financing activities:
Net borrowings from Principal Shareholder - 78
Repayments of long-term debt (1,113) -
Proceeds from long-term debt 2,378 28
Net proceeds from secondary public offering 9,204 -
Proceeds from stock option exercises 981 -
--------- ---------
Net cash provided by financing activities 11,450 106
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 24 (7)
--------- ---------
Net increase in cash and cash equivalents 5,902 144
Cash and cash equivalents, beginning of period 6,003 360
--------- ---------
Cash and cash equivalents, end of period $ 11,905 $ 504
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 595 $ 17
--------- ---------
Income taxes paid $ 1,713 $ 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 JUNE 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 six
month period ended June 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.
Secondary Offering and Form S-8
On May 4, 1999, the Company filed Form S-8 with the Securities and Exchange
Commission, covering the registration of 3,727,000 shares of the Company's
common stock in connection with the Company's 1998 Long-Term Incentive Plan, as
amended and the registration of 1,250,000 shares of the Company's common stock
in connection with the Company's 1999 Stock Option Plan. On June 21, 1999, the
Board of Directors reserved an additional 250,000 shares of common stock for
issuance under the Company's 1999 Stock Option Plan.
On June 4, 1999, the Company completed a secondary public offering of
3,500,000 shares of the Company's common stock. 1,000,000 of these shares were
issued and sold by the Company resulting in net proceeds to the Company of
approximately $9.2 million. The remaining 2,500,000 million were sold by certain
shareholders, none of whom are officers or directors of the Company.
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 June 30, 1999, the Principal Shareholder owned 41%
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 June 30, 1999, the Principal Shareholder owned 41% 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.
The Company imputes interest on the extended payment plans and recognizes
interest income as the related deferred license revenue is recognized.
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 June 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. In accordance with SFAS No. 128, basic
loss per share includes no dilution and is based on the weighted-average number
of shares of common stock outstanding during the period. Options to purchase
4,702,700 shares of common stock are not included in the computation of diluted
loss per share for the three and six months ended June 30, 1999, as their effect
would be anti-dilutive. As of June 30, 1998 the Company had no options
outstanding to purchase shares of common stock. The following details the
calculation of basic and diluted loss per share (in thousands, except income and
per share data).
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
----------------------------------- ---------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per share:
Income available to
common shareholders $(288,000) 16,385 $ (0.02) $ (13,000) 14,083 $ (0.00)
=================================== =================================
Six months ended Six months ended
June 30, 1999 June 30, 1998
----------------------------------- ---------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------- ---------------------------------
Basic and diluted net
loss per share:
Income available to
common shareholders $(195,000) 16,180 $ (0.01) $(780,000) 14,083 $ (0.06)
=================================== =================================
</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 June 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 Six months ending
--------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
North America $ 8,506 $ 7,022 $15,539 $12,312
International 3,109 2,032 6,334 3,338
--------------------------------------------------
Total $11,615 $ 9,054 $21,873 $15,650
==================================================
Operating Income (Loss)
North America $(1,338) $ 464 $(2,338) $ 80
International 920 (128) 2,119 (717)
--------------------------------------------------
Total $ (418) $ 336 $ (219) $ (637)
==================================================
Identifiable Assets
North America $53,659 $32,457 $53,659 $32,457
International 12,752 4,235 12,752 4,235
--------------------------------------------------
Total $ 66,411 $36,692 $66,411 $36,692
==================================================
</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 six months ended June 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(R) Windows NT(R) computing
environments. The Company has over 6,400 licenses of our products in use at over
2,000 installations worldwide. Softworks' products are installed at 87% of the
Fortune 100 and 60% 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 June 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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software licenses 71.6 % 66.6 % 68.8 % 62.4 %
Services 28.4 % 33.4 % 31.2 % 37.6 %
----------- ----------- ----------- -----------
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 2.8 % 2.1 % 2.5 % 4.1 %
Services 3.5 % 5.8 % 4.4 % 6.7 %
----------- ----------- ----------- -----------
Total cost of revenue 6.3 % 7.9 % 6.9 % 10.8 %
----------- ----------- ----------- -----------
Gross margin 93.7 % 92.1 % 93.1 % 89.2 %
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 61.4 % 49.9 % 55.5 % 50.5 %
General and administrative 8.9 % 13.9 % 9.6 % 15.1 %
Amortization and depreciation 6.3 % 5.8 % 6.6 % 6.5 %
Research and development 20.7 % 18.8 % 22.4 % 21.2 %
----------- ----------- ----------- -----------
Total operating expenses 97.3 % 88.4 % 94.1 % 93.3 %
----------- ----------- ----------- -----------
Operating (loss) income (3.6 %) 3.7 % (1.0 %) (4.1 %)
Other expenses (0.5 %) (1.9 %) (0.5 %) (1.1 %)
----------- ----------- ----------- -----------
Loss (income) from operations before benefit
from (provision for) income taxes (4.1 %) 1.8 % (1.5 %) (5.2 %)
Benefit from (provision for) income taxes 1.6 % (1.9 %) 0.6 % 0.2 %
----------- ----------- ----------- -----------
Net loss (2.5 %) (0.1 %) (0.9 %) (5.0 %)
=========== =========== =========== ===========
</TABLE>
Three Months Ended June 30, 1999 and 1998
Revenue. Total revenue increased 28.3% to $11.6 million for the three
months ended June 30, 1999 from $9.1 million for the same period in the prior
year. License revenue increased 38.1% to $8.3 million from $6.0 million for the
three months ended June 30, 1999 and 1998, respectively. The increase was
primarily due to the increased sales of Softworks' products resulting from
continued expansion of the worldwide sales force and the introduction of
Resource Availability into the storage management segment. Sales in the storage
management segment accounted for 72.2% and 54.0% of total license revenue for
the three months ended June 30, 1999 and 1998, respectively. License revenue
from the performance management segment accounted for 25.2% and 36.4% of total
license revenue for the three months ended June 30, 1999 and 1998, respectively.
License revenue from the Year 2000 segment accounted for 1.6% of total license
revenue for the three months ended June 30, 1999 and 7.5% for the same period in
1998. International revenue increased as a percentage of total revenue to 26.8%
from 22.4% for the three months ended June 30, 1999 and 1998, respectively. In
terms of absolute dollars, international revenues increased 53.0% to $3.1
million for the three months ended June 30, 1999 from $2.0 million for the same
period in the prior year. This increase is primarily attributable to Softworks'
expansion into Germany, commencing in January 1999.
Services revenue, comprised of maintenance revenue and to a lesser extent,
revenue from professional services, increased 8.8% to $3.3 million for the three
months ended June 30, 1999 from $3.0 million for the same period in the prior
year. This increase is attributable to overall growth in license revenue and
renewals of maintenance contracts by the installed customer base.
<PAGE>
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 increased 64.9% to $320,000, or
2.8% of total revenue for the three months ended June 30, 1999 from $194,000, or
2.1% of total revenue for the same period in 1998. This increase was primarily
attributable to an increase in amortization of software development costs
resulting from the capitalization of software development costs during 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 22.1%
to $410,000, or 3.5% of total revenue for the three months ended June 30, 1999
from $526,000, or 5.8% of total revenue for the same period in the prior year.
This decrease is primarily attributable to a decline in 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 58.0% to $7.1 million from $4.5
million for the three months ended June 30, 1999 and 1998, respectively. As a
percentage of revenue, sales and marketing expenses increased to 61.4% for the
three months ended June 30, 1999 from 49.9% 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 June 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 17.4% to $1.0 million from $1.3 million for the three months ending
June 30, 1999 and 1998. As a percentage of revenue, general and administrative
expenses decreased to 8.9% for the three months ending June 30, 1999 from 13.9%
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 39.8% to $734,000 from $525,000 for the three months ended
June 30, 1999 and 1998, respectively. This increase is primarily due to
purchases of equipment since June 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 40.9% to $2.4 million or
20.7% of revenue for the three months ended June 30, 1999 from $1.7 million or
18.8% of revenue for the same period in the prior year. The increase is
primarily attributable to the capitalization of $466,000 of certain software
development costs associated with multiplatform products during the three months
ended June 30, 1998.
Six Months Ended June 30, 1999 and 1998
Revenue. Total revenue increased 39.8% to $21.9 million for the six months
ended June 30, 1999 from $15.7 million for the same period in the prior year.
License revenue increased 54.2% to $15.1 million from $9.8 million for the six
months ended June 30, 1999 and 1998, respectively. The increase was primarily
due to the increased sales of Softworks' products resulting from continued
expansion of the worldwide sales force and the introduction of Resource
Availability into the storage management segment. Sales in the storage
management segment accounted for 73.0% and 55.4% of total license revenue for
the six months ended June 30, 1999 and 1998, respectively. License revenue from
the performance management segment accounted for 24.1% and 35.4% of total
license revenue for the six months ended June 30, 1999 and 1998, respectively.
License revenue from the Year 2000 segment accounted for 1.5% of total license
revenue for the six months ended June 30, 1999 and 6.4% for the same period in
1998. International revenue increased as a percentage of total revenue to 29.0%
from 21.3% for the six months ended June 30, 1999 and 1998, respectively. In
terms of absolute dollars, international revenues increased 90.0% to $6.3
million for the six months ended June 30, 1999 from $3.3 million for the same
period in the prior year. This increase is primarily attributable to Softworks'
expansion into Germany.
Services revenue, comprised of maintenance revenue and to a lesser extent,
revenue from professional services, increased 15.8% to $6.8 million for the six
months ended June 30, 1999 from $5.9 million for the same period in the prior
year. This increase is attributable to overall growth in license revenue 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 15.3% to $536,000, or
2.5% of total revenue for the six months ended June 30, 1999 from $633,000, or
4.1% 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
June 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 8.8% to $959,000, or 4.4% of total revenue for the six months ended
June 30, 1999 from $1.1 million, or 6.7% of total revenue for the same period in
the prior year. This decrease is primarily attributable to a decline in
professional service expenses in 1999.
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 53.5% to $12.1 million from $7.9
million for the six months ended June 30, 1999 and 1998, respectively. As a
percentage of revenue, sales and marketing expenses increased to 55.5% for the
six months ended June 30, 1999 from 50.5% 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 June 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 10.5% to $2.1 million from $2.4 million for the six months ending June
30, 1999 and 1998. As a percentage of revenue, general and administrative
expenses decreased to 9.6% for the six months ending June 30, 1999 from 15.1%
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 42.3% to $1.4 million from $1.0 million for the six months
ended June 30, 1999 and 1998, respectively. This increase is primarily due to
purchases of equipment subsequent to June 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 47.5% to $4.9 million or
22.4% of revenue for the six months ended June 30, 1999 from $3.3 million or
21.2% 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 six
months ended June 30, 1998.
<PAGE>
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. Softworks had cash and
cash equivalents of $11.9 million and $6.0 million at June 30, 1999 and December
31, 1998, respectively.
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 $4.9 million for the six months
ended June 30, 1999, as compared with net cash provided by operating activities
of $2.0 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 six months ended June 30, 1999. During 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 65.2% to
$693,000 for the six months ended June 30, 1999 from $2.0 million for the same
period in the prior year. The decrease was primarily a result of costs incurred
in the six month period ended June 30, 1998 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
during the six month period ended June 30, 1999.
For the six months ended June 30, 1999 and 1998, net cash provided by
financing activities was $11.5 million and $106,000, 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.
Softworks' principal commitments as of June 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.
<PAGE>
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
None.
ITEM 5. OTHER INFORMATION
None.
<PAGE>
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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 Real
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*
10.13 1998 Long-term Incentive Plan, as amended **
10.14 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.
(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: August 11, 1999 By: /s/ Judy G. Carter
-------------------------------------
Judy G. Carter
President, Chief Executive Officer and Director
Date: August 11, 1999 By: /s/ Robert C. McLaughlin
-------------------------------------
Robert C. McLaughlin
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending June 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> JUN-30-1999
<CASH> 11,905
<SECURITIES> 0
<RECEIVABLES> 30,600
<ALLOWANCES> 451
<INVENTORY> 0
<CURRENT-ASSETS> 44,349
<PP&E> 5,711
<DEPRECIATION> 3,076
<TOTAL-ASSETS> 66,411
<CURRENT-LIABILITIES> 23,641
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 28,682
<TOTAL-LIABILITY-AND-EQUITY> 66,411
<SALES> 11,615
<TOTAL-REVENUES> 11,615
<CGS> 730
<TOTAL-COSTS> 730
<OTHER-EXPENSES> 11,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> (473)
<INCOME-TAX> (185)
<INCOME-CONTINUING> (288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
SOFTWORKS, Inc.
1999 Stock Option Plan, as amended
- ----------------------------------
SECTION 1. GENERAL PROVISIONS
------------------
1.1. Name and General Purpose
------------------------
The name of this plan is the SOFTWORKS, Inc. 1999 Stock Option Plan
(hereinafter called the "1999 Plan"). The 1999 Plan is intended to be a
broadly-based incentive plan which enables SOFTWORKS Inc. (the "Company") and
its subsidiaries and affiliates to foster and promote the interests of the
Company by attracting and retaining directors, officers and employees of, and
consultants to, the Company who contribute to the Company's success by their
ability, ingenuity and industry, to enable such directors, officers, employees
and consultants to participate in the long-term success and growth of the
Company by giving them a proprietary interest in the Company and to provide
incentive compensation opportunities competitive with those of competing
corporations.
1.2 Definitions
-----------
a. "Affiliate" means any person or entity controlled by or under common
control with the Company, by virtue of the ownership of voting securities, by
contract or otherwise.
b. "Board" means the Board of Directors of the Company.
c. "Change in Control" means a change of control of the Company, or in any
person directly or indirectly controlling the Company, which shall mean:
(i) any person who is not currently such becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding voting securities;
or
(ii) three or more directors, whose election or nomination for election
is not approved by a majority of the Incumbent Board (as hereinafter defined),
are elected within any single 24-month period to serve on the Board of
Directors; or
(iii) members of the Incumbent Board cease to constitute a majority of
the Board of Directors without the approval of the remaining members of the
Incumbent Board; or
(iv) any merger (other than a merger where the Company is the survivor
and there is no accompanying Change in Control under subparagraphs (i), (ii) or
(iii) of this paragraph (b)), consolidation, liquidation or dissolution of the
Company, or the sale of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur pursuant to subparagraph (i) of this definition solely because 25% or more
of the combined voting power of the Company's outstanding securities is acquired
by one or more employee benefit plans maintained by the Company or by any other
employer, the majority interest in which is held, directly or indirectly, by the
Company. For purposes of this definition, the terms "person" and "beneficial
owner" shall have the meaning set forth in Sections 3(a) and 13(d) of the
Exchange Act, and in the regulations promulgated thereunder, as in effect on
February 7, 1999; and the term "Incumbent Board" shall mean (A) the members of
the Board of Directors of the Company on February 7, 1999, to the extent that
they continue to serve as members of the Board of Directors, and (B) any
individual who becomes a member of the Board of Directors after February 7,
1999, if his election or nomination for election as a director was approved by a
vote of at least three-quarters of the then Incumbent Board.
d. "Committee" means the Committee referred to in Section 1.3 of the 1999
Plan.
e. "Common Stock" means shares of the Common Stock, par value $.10 per
share, of the Company.
f. "Company" means SOFTWORKS Inc., a corporation organized under the laws
of the State of Delaware (or any successor corporation).
g. "Fair Market Value" means the market price of the Common Stock on The
Nasdaq Stock Market on the date of the grant or as reported on any other
exchange on which the Common Stock is then traded on such date or on any other
date on which the Common Stock is to be valued hereunder. If no sale shall have
been reported on any such exchange, Fair Market Value shall be determined by the
Committee.
<PAGE>
h. "Non-Employee Director" shall have the meaning set forth in Rule 16(b)
promulgated by the Securities and Exchange Commission ("Commission").
i. "Option" means any option to purchase Common Stock under Section 2 of
the 1999 Plan.
j. "Option Agreement" means the option agreement described in Section 2.4
of the 1999 Plan.
k. "Participant" means any director, officer, employee or consultant of the
Company, a Subsidiary or an Affiliate who is selected by the Committee to
participate in the 1999 Plan.
l. "Subsidiary" means any corporation in which the Company possesses
directly or indirectly 50% or more of the combined voting power of all classes
of stock of such corporation.
m. "Total Disability" means accidental bodily injury or sickness which
wholly and continuously disabled an optionee. The Committee, whose decisions
shall be final, shall make a determination of Total Disability.
1.3 Administration of the Plan
--------------------------
The 1999 Plan shall be administered by the Board or by the Committee
appointed by the Board consisting of two or more members of the Board all of
whom shall be Non-Employee Directors. The Committee shall serve at the pleasure
of the Board and shall have such powers as the Board may, from time to time,
confer upon it.
Subject to this Section 1.3, the Committee shall have sole and complete
authority to adopt, alter, amend or revoke such administrative rules, guidelines
and practices governing the operation of the 1999 Plan as it shall, from time to
time, deem advisable, and to interpret the terms and provisions of the 1999
Plan.
The Committee shall keep minutes of its meetings and of action taken by
it without a meeting. A majority of the Committee shall constitute a quorum, and
the acts of a majority of the members present at any meeting at which a quorum
is present, or acts approved in writing by all of the members of the Committee
without a meeting, shall constitute the acts of the Committee.
1.4 Eligibility
-----------
Stock Options may be granted only to directors, officers, employees or
consultants of the Company or a Subsidiary or Affiliate. Any person who has been
granted any Option may, if he is otherwise eligible, be granted an additional
Option or Options.
1.5 Shares
------
The aggregate number of shares reserved for issuance pursuant to the
1999 Plan shall be 1,500,000 shares of Common Stock, or the number and kind of
shares of stock or other securities which shall be substituted for such shares
or to which such shares shall be adjusted as provided in Section 1.6.
Such number of shares may be set aside out of the authorized but
unissued shares of Common Stock or out of issued shares of Common Stock acquired
for and held in the Treasury of the Company, not reserved for any other purpose.
Shares subject to, but not sold or issued under, any Option terminating or
expiring for any reason prior to its exercise in full will again be available
for Options thereafter granted during the balance of the term of the 1999 Plan.
1.6 Adjustments Due to Stock Splits,
Mergers, Consolidation, Etc.
--------------------------------
If, at any time, the Company shall take any action, whether by stock
dividend, stock split, combination of shares or otherwise, which results in a
proportionate increase or decrease in the number of shares of Common Stock
theretofore issued and outstanding, the number of shares which are reserved for
issuance under the 1999 Plan and the number of shares which, at such time, are
subject to Options shall, to the extent deemed appropriate by the Committee, be
increased or decreased in the same proportion, provided, however, that the
Company shall not be obligated to issue fractional shares.
Likewise, in the event of any change in the outstanding shares of
Common Stock by reason of any recapitalization, merger, consolidation,
reorganization, combination or exchange of shares or other corporate change, the
Committee shall make such substitution or adjustments, if any, as it deems to be
appropriate, as to the number or kind of shares of Common Stock or other
securities which are reserved for issuance under the 1999 Plan and the number of
shares or other securities which, at such time are subject to Options.
<PAGE>
In the event of a Change in Control, at the option of the Board or
Committee, (a) all Options outstanding on the date of such Change in Control
shall, for a period of sixty (60) days following such Change in Control, become
immediately and fully exercisable, and (b) an optionee will be permitted to
surrender for cancellation within sixty (60) days after such Change in Control
any Option or portion of an Option which was granted more than six (6) months
prior to the date of such surrender, to the extent not yet exercised, and to
receive a cash payment in an amount equal to the excess, if any, of the Fair
Market Value (on the date of surrender) of the shares of Common Stock subject to
the Option or portion thereof surrendered, over the aggregate purchase price for
such Shares under the Option.
1.7 Non-Alienation of Benefits
--------------------------
Except as herein specifically provided, no right or unpaid benefit
under the 1999 Plan shall be subject to alienation, assignment, pledge or charge
and any attempt to alienate, assign, pledge or charge the same shall be void. If
any Participant or other person entitled to benefits hereunder should attempt to
alienate, assign, pledge or charge any benefit hereunder, then such benefit
shall, in the discretion of the Committee, cease.
1.8 Withholding or Deduction for Taxes
----------------------------------
If, at any time, the Company or any Subsidiary or Affiliate is
required, under applicable laws and regulations, to withhold, or to make any
deduction for any taxes, or take any other action in connection with any Option
exercise, the Participant shall be required to pay to the Company or such
Subsidiary or Affiliate, the amount of any taxes required to be withheld, or, in
lieu thereof, at the option of the Company, the Company or such Subsidiary or
Affiliate may accept a sufficient number of shares of Common Stock to cover the
amount required to be withheld.
1.9 Administrative Expenses
-----------------------
The entire expense of administering the 1999 Plan shall be borne by the
Company.
1.10 General Conditions
------------------
a. The Board or the Committee may, from time to time, amend, suspend or
terminate any or all of the provisions of the 1999 Plan, provided that, without
the Participant's approval, no change may be made which would alter or impair
any right theretofore granted to any Participant.
b. With the consent of the Participant affected thereby, the Committee may
amend or modify any outstanding Option in any manner not inconsistent with the
terms of the 1999 Plan, including, without limitation, and irrespective of the
provisions of Section 2.3(c) below, to accelerate the date or dates as of which
an installment of an Option becomes exercisable.
c. Nothing contained in the 1999 Plan shall prohibit the Company or any
Subsidiary or Affiliate from establishing other additional incentive
compensation arrangements for employees of the Company or such Subsidiary or
Affiliate.
d. Nothing in the 1999 Plan shall be deemed to limit, in any way, the right of
the Company or any Subsidiary or Affiliate to terminate a Participant's
employment with the Company (or such Subsidiary or Affiliate) at any time.
e. Any decision or action taken by the Board or the Committee arising out of or
in connection with the construction, administration, interpretation and effect
of the 1999 Plan shall be conclusive and binding upon all Participants and any
person claiming under or through any Participant.
f. No member of the Board or of the Committee shall be liable for any act or
action, whether of commission or omission, (i) by such member except in
circumstances involving actual bad faith, nor (ii) by any other member or by any
officer, agent or employee.
1.11 Compliance with Applicable Law
------------------------------
Notwithstanding any other provision of the 1999 Plan, the Company shall
not be obligated to issue any shares of Common Stock, or grant any Option with
respect thereto, unless it is advised by counsel of its selection that it may do
so without violation of the applicable Federal and State laws pertaining to the
issuance of securities and the Company may require any stock certificate so
issued to bear a legend, may give its transfer agent instructions limiting the
transfer thereof, and may take such other steps, as in its judgment are
reasonably required to prevent any such violation.
<PAGE>
1.12 Effective Dates
---------------
The 1999 Plan was adopted by the Board on February 7, 1999 and amended
by the Board on June 21, 1999. The 1999 Plan shall terminate on February 6,
2009.
Section 2. OPTION GRANTS
-------------
2.1 Authority of Committee
----------------------
Subject to the provisions of the 1999 Plan, the Committee shall have
the sole and complete authority to determine (i) the Participants to whom
Options shall be granted; (ii) the number of shares to be covered by each
Option; and (iii) the conditions and limitations, if any, in addition to those
set forth in Sections 2 and 3 hereof, applicable to the exercise of an Option,
including without limitation, the nature and duration of the restrictions, if
any, to be imposed upon the sale or other disposition of shares acquired upon
exercise of an Option.
Stock Options granted under the 1999 Plan shall be non-qualified stock
options.
The Committee shall have the authority to grant Options.
2.2 Option Exercise Price
---------------------
The price of stock purchased upon the exercise of Options granted
pursuant to the 1999 Plan shall be the Fair Market Value thereof at the time
that the Option is granted.
The purchase price is to be paid in full in cash, certified or bank
cashier's check or, at the option of the Company, Common Stock valued at its
Fair Market Value on the date of exercise, or a combination thereof, when the
Option is exercised and stock certificates will be delivered only against such
payment.
2.3 Option Grants
-------------
Each Option will be subject to the following provisions:
a. Term of Option
--------------
An Option will be for a term of not more than ten years from the date of
grant.
b. Exercise
---------
(i) By an Employee:
--------------
Subject to the power of the Committee under Section 1.10(b) above and except
in the manner described below upon the death of the optionee, an Option may be
exercised only in installments as follows: up to one-half of the subject shares
on and after the first anniversary of the date of grant, up to all of the
subject shares on and after the second such anniversary of the date of the grant
of such Option but in no event later than the expiration of the term of the
Option.
An Option shall be exercisable during the optionee's lifetime only by the
optionee and shall not be exercisable by the optionee unless, at all times since
the date of grant and at the time of exercise, such optionee is an employee of
or providing services to the Company, any parent corporation of the Company or
any Subsidiary or Affiliate, except that, upon termination of all such
employment or provision of services (other than by death, Total Disability, or
by Total Disability followed by death in the circumstances provided below), the
optionee may exercise an Option at any time within three months thereafter but
only to the extent such Option is exercisable on the date of such termination.
Upon termination of all such employment by Total Disability, the optionee may
exercise such Options at any time within three years thereafter, but only to the
extent such Option is exercisable on the date of such termination.
In the event of the death of an optionee (i) while an employee of or providing
services to the Company, any parent corporation of the Company or any Subsidiary
or Affiliate, or (ii) within three months after termination of all such
employment or provision of services (other than for Total Disability) or (iii)
within three years after termination on account of Total Disability of all such
employment or provision of services, such optionee's estate or any person who
acquires the right to exercise such option by bequest or inheritance or by
reason of the death of the optionee may exercise such optionee's Option at any
time within the period of three years from the date of death. In the case of
clauses (i) and (iii) above, such Option shall be exercisable in full for all
the remaining shares covered thereby, but in the case of clause (ii) such Option
shall be exercisable only to the extent it was exercisable on the date of such
termination.
<PAGE>
(ii) By Persons other than Employees:
-------------------------------
If the optionee is not an employee of the Company or the parent corporation of
the Company or any Subsidiary or Affiliate, the vesting of such optionee's right
to exercise his Options shall be established and determined by the Committee in
the Option Agreement covering the Options granted to such optionee.
Notwithstanding the foregoing provisions regarding the exercise of an Option
in the event of death, Total Disability, other termination of employment or
provision of services or otherwise, in no event shall an Option be exercisable
in whole or in part after the termination date provided in the Option Agreement.
c. Transferability
---------------
An Option granted under the 1999 Plan shall not be transferable otherwise than
by will or by the laws of descent and distribution, or, as determined by the
Board or the Committee, to (i) a member or members of the optionee's family,
(ii) a trust, (iii) a family limited partnership or (iv) a similar estate
planning vehicle primarily for members of the optionee's family.
2.4 Agreements
----------
In consideration of any Options granted to a Participant under the 1999
Plan, each such Participant shall enter into an Option Agreement with the
Company providing, consistent with the 1999 Plan, such terms as the Committee
may deem advisable.
