UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 7372 52-1092916
(State or other (Primary Standard (I.R.S.
jurisdiction of Industrial Employer
Incorporation or Classification Code Identification
organization) Number) 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS December 31, 1998
Common Stock, $.001 15,973,000
par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 18, 1999, there were 15,973,000 shares of the Registrant's Common
Stock outstanding, which is the only outstanding class of common stock of the
Registrant. As of that date, the aggregate market value of the shares of Common
Stock held by non-affiliates of the registrant (based on the closing price for
the common Stock as quoted by the Nasdaq National Market on such date), was
approximately $57,475,000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are hereby incorporated by reference into this Form
10-K: PART III - Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14a of The Securities
Exchange Act of 1934.
<PAGE>
SOFTWORKS, INC.
Form 10-K for the Period Ended December 31, 1998
Table of Contents
PAGE
PART I ----
ITEM 1 Business 3
ITEM 2 Properties 7
ITEM 3 Legal Proceedings 7
ITEM 4 Submission of Matters to a Vote of Security Holders 7
PART II
ITEM 5 Market for Registrant's Common Equity and Related
Stockholder Matters 7
ITEM 6 Selected Consolidated Financial Data 8
ITEM 7 Management's Discussion and Analysis of Financial
condition and Results of Operations 9
ITEM 7a Quantitative and Qualitative Disclosures About
Market Risk 16
ITEM 8 Financial Statement and Supplementary Data 17
ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
ITEM 10 Directors and Executive Officers of the Registrant 36
ITEM 11 Executive Compensation 37
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management 37
ITEM 13 Certain Relationships and Related Transactions 37
PART IV
ITEM 14 Exhibits, Financial Statement schedules , and Reports
on Form 8-K 38
SIGNATURE 39
<PAGE>
PART I
ITEM 1 BUSINESS
Overview
Softworks, Inc., and its wholly owned subsidiaries, (collectively referred
to as "Softworks"), develops, markets, licenses and supports a family of
enterprise systems management and maintenance software products for performance,
data and storage management. Softworks' products are designed to optimize system
and application performance, maximize the value of purchased hardware and
software, and enhance the reliability and availability of the data processing
environment for enterprises that employ large enterprise servers, UNIX, and/or
Microsoft(R) Windows NT(R) ("NT") computing environments.
Softworks' products are developed using "SST", its proprietary combination
of a design strategy and development methodology and a set of core technologies
which is intended to enable Softworks' software products to provide an immediate
performance improvement and cost savings. Softworks believes that SST
differentiates Softworks from its competition by going beyond conventional
monitoring and reporting systems management to provide proactive alerts,
programmed responses and automated corrective actions. Products employing SST
are designed to address the weaknesses and exploit the strengths of native
operating systems and access methods found in multiple processing environments.
They incorporate a high degree of embedded intelligence, offer controlled
automation options that interface with existing hardware and software and
facilitate proactive systems management. With SST, the need for platform
specific expertise and additional manpower to effectively manage multiple
platform environments is significantly reduced.
Softworks has over 6,000 licenses of its products in use at over 2,000
installations worldwide, including installations at approximately 87% of the
Fortune 100. During 1998, Softworks added 50 new customers to its user base.
Historically, Softworks' products addressed only the performance and data
storage requirements of mainframe operating systems. In 1998, Softworks enhanced
its product family further by introducing UNIX and NT based storage products. In
1999, Softworks plans to introduce additional storage management products for
Oracle, EMC Symmetrix, IBM RAMAC, and StorageTek Tape Silo. Softworks' customers
operate in a variety of industries, such as financial services, healthcare and
manufacturing, and include Citicorp, GTE Data Services, NationsBank, Paine
Webber, Prudential Service Company, Sprint, State Farm Mutual Auto Insurance and
Wal-Mart. Softworks sells its products through a global direct sales force and a
network of international distributors and resellers.
Products and Services
Using Softworks' proprietary SST development methodologies and core
technologies, Softworks has developed offerings grouped into four Arenas: data
and storage management products, performance management products, Year 2000
products and professional services.
<PAGE>
Products
The following table describes the functionality of Softworks' products:
<TABLE>
<CAPTION>
INITIAL
RELEASE
PRODUCT DATE DESCRIPTION
<S> <C> <C>
DataStor Arena Enterprise-Wide Tools Designed to Facilitate Storage Management and System
and Data Availability
Catalog Solution 1986 . Provides comprehensive OS/390 catalog maintenance, diagnostics,
reporting, backup, repair and recovery
. Reduces disaster recovery time
. Improves the integrity and availability of the catalog environment and
mission-critical data resources distributed across multiple operating
system platforms
CenterStage 1995 . Provides centralized control and monitoring
A suite of independent of storage and data resources distributed
and integratable across multiple operating system platforms
products for OS/390-MVS, . Reduces the cost, complexity and skill
AIX, HP-UX, Solaris, DB2 requirements for capacity planning, disaster
and OpenEdition recovery, and storage resource management
. Reports storage subsystem information and provides an assessment of data
and storage problems Provides customer-controlled automation to correct
designated storage problems and minimize the need for storage administra-
tors to develop platform-specific solutions
Resource Availability 1998 . Integration of DataStor Arena functionality while adding 24X7 proactive
catalog monitoring, event-based alerts for catalog events, and automated
corrective action.
Performance Arena Derives Superior Performance from Mission-Critical Systems and Applications
Performance Essential
I/O Plus for VSAM 1984 . Designed to optimize and improve system and processing performance
I/O Plus for xSAM 1993 . Reduces the requirement for manual tuning
HiperLoad for VSAM efforts
1992 . May defer or eliminate costly processor upgrades while helping to ensure
that service level requirements are met
TeraSAM 1995 . Provides transparent file segmentation to overcome VSAM's 4GB file size
restriction
. Splits large VSAM files into separate physical data sets that can be
managed and processed more efficiently
. Enables parallel backup, restore and reorganization of segments to reduce
batch processing time
VSAM Assist 1978 . Provides VSAM backup, recovery, and migration capabilities to simplify
and improve VSAM file and data maintenance
. Reduces batch processing time while safeguarding data
VSAM Quick Index 1981 . Reduces batch processing time and processor utilization by building
alternate indices quickly
. Improves data availability by providing faster access to data
Year 2000 Arena Enterprise-Wide Tools Designed to Identify, Assess, Diagnose, Simulate,
Test, Age and Bridge Programs and Data to Solve Millennium Issues
HotDate 2000 1997- . Independent and integratable products which
1998 facilitate Year 2000 assessment,
remediation and testing on OS/390 and MVS
HotDate 2000/MP 1998 . Products that perform Year 2000 assessment and remediation for C and
COBOL on UNIX (HP-UX, Solaris, AIX) and assessment for Powerbuilder on NT
</TABLE>
<PAGE>
Softworks provides its customers both product maintenance and enhancement
releases under their existing maintenance agreements. Enhancement releases
typically occur once a year and are developed primarily to respond to market
demand and to ensure that the product is competitive in the market. Maintenance
releases occur at a minimum of one maintenance release per product per year.
Softworks typically introduces annual upgrades to its existing products.
Softworks provides implementation, training and consulting services for its
own software (Product SKILLPACKS) and the software of third-party vendors
(Extended SKILLPACKS). Softworks' SKILLPACKS are strategic IT services offerings
that provide customers with expertise and assistance in installing and
implementing certain software products. Product SKILLPACKS are intended to
expedite the effectiveness of Softworks' products, accelerate the customer's
staff productivity and expose the customer to the full capabilities of
Softworks' products. Extended SKILLPACKS provide implementation of third-party
products, assistance with product conversions, training in specific areas
related to systems management and address short-term, critical project
requirements. SKILLPACKS prices are dependent upon the complexity of each
customer's environment, the expertise level of each customer's staff, and each
customer's goal and time frame.
Customer Service and Technical Support
Softworks maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. Softworks' customer service staff
provides product support via telephone and e-mail 24 hours per day, seven days
per week. Softworks generally provides software and documentation updates,
including maintenance releases, operating system upgrades and major functional
upgrades, as part of its customer support services.
Customers
As of December 31, 1998, Softworks' products were licensed for use by
approximately 1,850 customers at over 2,000 installations, including 87 of the
Fortune 100 companies. Softworks' target customers are large organizations with
complex information systems. Softworks targets multi-platform enterprises that
rely on mainframe, UNIX OR NT based systems.
Sales, Distribution and Marketing
Softworks markets its products and services through its worldwide
distribution channels which include direct sales personnel, agents, and
distributors. Softworks has approximately 145 sales and sales support employees
who promote the licensing of Softworks' products and services. In the United
States Softworks operates 10 sales offices. Internationally, Softworks has sales
offices in Australia, Brazil, Canada, France, Spain, Japan, Germany, Italy and
the United Kingdom. The U.K. office also covers the Scandinavian and Benelux
countries. Softworks' international distributors currently are located in
Argentina, Chile, Israel, Korea, Mexico, Peru, Philippines, South Africa,
Thailand, Turkey, Uruguay and Venezuela. All offices are responsible for
specific geographic territories that may extend beyond the state, province, or
country in which the office is located.
Softworks' direct sales force is comprised of account managers and sales
engineers who, in addition to the sale of Softworks' products, are responsible
for technical demonstrations, product installation and product implementation. A
separate Federal Accounts group specifically targets United States government
customers, including end-users and system integrators. In addition to the
traditional distribution channels, Softworks has established a web-based
interface to allow the purchase and download of Softworks' UNIX-based products.
Since 1996, Softworks actively has encouraged customers who have licensed
only one or two products to license multiple products and to enter into
multi-year maintenance agreements to generate additional revenue and a
significant deferred revenue stream.
Softworks maintains vendor relationships with leading organizations such as
IBM, EMC, Hewlett-Packard, Sun, Oracle, and Tivoli. These relationships provide
Softworks access to pre-release versions of software to help ensure that
Softworks' products utilize the latest technology and continue to be competitive
with new operating systems and database releases. These relationships also
provide Softworks with insight for strategic planning and product direction.
<PAGE>
Softworks maintains marketing programs to support the sales and
distribution of its products and services, and communicate corporate direction.
Softworks' marketing department is responsible for collateral development, lead
generation and brand awareness of Softworks and its products. Marketing programs
include public relations, seminars, industry conferences and trade shows,
advertising and direct mail. Softworks' marketing organization also contributes
to both the product direction and strategic planning processes by providing
market research and conducting surveys and focus groups.
Licensing and Intellectual Property
Softworks considers certain features of its software, its internal
operations and development process, and its SST methodology and technology to be
proprietary. Softworks relies on a combination of trade secret, copyright and
trademark laws, contractual provisions and certain technology and security
measures to protect its proprietary intellectual property. Softworks does not
currently have any patents or pending patent applications. Notwithstanding the
efforts Softworks takes to protect its proprietary rights, existing trade
secret, copyright, and trademark laws afford only limited protection. In
addition, effective protection of copyrights, trade secrets, trademarks and
other proprietary rights may be unavailable or limited in certain international
countries. Softworks believes that, because of the rapid rate of technological
change in the computer software industry, factors such as the knowledge, ability
and experience of Softworks' employees, product and service offering
development, and quality of customer support services are more important than
any available trade secret or copyright protection.
Softworks generates revenue through perpetual product licenses and
maintenance service agreements that are renewed annually on the anniversary of
the original purchase date. In 1998, approximately 24% of Softworks' revenue was
generated from maintenance service agreements. Additional revenue is generated
when product licenses are transferred to different or larger CPUs. No single
customer accounted for greater than 5% of Softworks' total revenue in 1998.
Sales in the DataStor Arena accounted for 59% of total license revenue in 1998
while license revenue from the Performance Arena accounted for 32% of total
license revenue. For geographic data, please see "Geographic Information".
License fees are generated from the initial licensing of a product and the
subsequent licenses purchased under Softworks' central processing units ("CPU")
tier-based licensing program or its millions of instructions processed per
second ("MIPS") based licensing program. Included in license revenues are
capacity-based license upgrade fees which are charged when a customer acquires
the right to run an already licensed product on additional processing capacity
measured in MIPS for all CPU's for which Softworks' products are licensed. These
license upgrade fees include fees associated with a customer's purchase of the
right to operate a product with currently installed additional processing
capacity and/or with anticipated future processing capacity. Softworks does not
sell or transfer title of its products to its customers, but rather a perpetual
right to use the product is granted to customers pursuant to a licensing
agreement. Under the CPU option, the license fee is based principally upon the
number and size of the central processing units. Under the MIPS option, which
Softworks is now emphasizing, the license fee is based upon the amount of the
customer's computing power as measured in MIPS. In 1998, 74% of Softworks' new
licenses were priced on a MIPS basis. Softworks' client-server products are
licensed to end users on a per-server or length of service basis.
Softworks generally offers its customers extended payment terms of one to
five years. In the case of extended payment term agreements, the customer is
typically contractually bound to equal annual fixed payments. The first year of
maintenance is bundled with standard licensing agreements. In the case of
extended payment term agreements, maintenance is bundled for the length of the
payment term. Thereafter, in both instances, the customer may purchase
maintenance annually. Revenue, with respect to extended payment terms of one
year, is recognized upon contract acceptance and delivery of product. Revenue,
with respect to extended payment terms of greater than one year is deferred and
recognized as payments become due.
<PAGE>
Currently, Softworks licenses, on a perpetual basis, certain technology
from third parties which is incorporated in some of Softworks' products. In the
future, Softworks may license additional technology from third parties for
incorporation in some of Softworks' products on a perpetual or term basis.
Research and Development
The computer software industry is characterized by rapid technological
change which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
Softworks uses a design strategy and development methodology, SST, that
facilitates product development, adherence to market requirements, quality
testing practices, product consistency and ease of integration, and long-term
supportability and maintainability. This methodology has evolved over the life
of Softworks to address the changing requirements of product-for-market
development that have come about as a result of client-server technology
advances. Softworks is currently expanding the scope of its CenterStage suite of
products to address Oracle and NT, and to enhance and extend the SST knowledge
base.
Softworks believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of December 31, 1998, Softworks' research and development group
consisted of 67 employees. Softworks seeks to recruit highly qualified
employees, and its ability to attract and retain such employees will be a
principal factor in its success in maintaining a leading technological position.
For the three years ended December 31, 1998, 1997 and 1996, research and
development expenses were $7.8 million, $6.1 million and $3.9 million,
respectively. Softworks believes that significant investments in research and
development are required in order to remain competitive.
Competition
The market in which Softworks operates is highly competitive, rapidly
evolving and subject to continuous technological change. Softworks' products
have traditionally addressed niches within the performance and storage
management segments. In conjunction with Softworks' SST strategy, Softworks
groups its existing products into bundles to compete more effectively and better
address customers' strategic issues. This approach enables Softworks to expand
its audience to include systems and applications personnel, as well as a higher
level of management within the customer and prospect base.
Although Softworks believes that it maintains a competitive advantage by
bundling its software products to minimize point product competition and by
offering products which Softworks believes are unavailable from its competitors,
there are no assurances that Softworks can maintain or enhance its competitive
position against current and future competitors. Significant factors such as the
emergence of new products, fundamental changes in computing technology and data
storage and manipulation platforms and applications and aggressive pricing and
marketing strategies by Softworks' competitors may affect Softworks' competitive
position. Many of Softworks' current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and substantially greater financial, technical and marketing resources than
Softworks. There can be no assurance that Softworks' current and potential
competitors will not develop software products that may be or may be perceived
to be more effective or responsive to technological change than are Softworks'
current or future products or that Softworks' technologies and products will not
be rendered obsolete by such developments. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
have a material adverse effect on Softworks' business, operating results and
financial condition. Softworks' primary competitors are Sterling Software, Inc.
and Boole & Babbage, Inc. in the data and storage management market; Boole &
Babbage, Inc. and Computer Associates International, Inc. in the performance
management market; and Compuware, Inc. and Viasoft Inc. in the Year 2000 market.
Softworks believes that its products compete effectively on the basis of
quality, functionality, technical support and service, and embedded intelligence
and proactive automation.
<PAGE>
Employees
As of March 31, 1999, Softworks employed 264 full-time employees, including
151 in marketing, sales and support services, 66 in research and development, 20
in customer support and maintenance, and 27 in finance and administration.
Softworks employs 201 people in the United States and 63 in international
countries. The future success of Softworks will depend in large part upon its
continued ability to attract and retain highly skilled and qualified personnel
in a highly competitive environment. Softworks believes its employee relations
are good.
ITEM 2 PROPERTIES
Softworks' executive offices, customer support and marketing operations are
currently located in facilities occupying approximately 31,000 sq. ft. in
Alexandria, Virginia pursuant to a lease expiring in September 2001. The annual
rent and maintenance for the facility is approximately $411,000. The lease
provides for a renewal option for five years at the then current market rate of
rent. Softworks also leases an aggregate of approximately 20,000 sq. ft. at an
aggregate annual rental of approximately $350,000 in 11 locations throughout
North America which are used for sales activities. Softworks also maintains
international sales offices in Australia, Brazil, France, Spain, Germany,
Canada, Japan and the United Kingdom.
ITEM 3 LEGAL PROCEEDINGS
Softworks is not a party to any litigation that it believes could have a
material adverse effect on its business, financial condition and results of
operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for vote of security holders in the quarter ended
December 31, 1998.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Softworks' Common Stock began trading on the Nasdaq National Market
under the symbol "SWRX" on August 4, 1998. The following table sets forth the
high and low closing share prices per share for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31, 1998 High Low
---------------------------- ----------- ----------
<S> <C> <C>
Third quarter (commencing August 7,1998) $6.9375 $3.125
----------- ----------
Fourth quarter $7.435 $3.50
----------- ----------
</TABLE>
On March 18, 1999, the closing price was $11.00. As of March 18, 1999,
Softworks had approximately 28 holders of record.
Softworks has never paid or declared any cash dividends and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
Softworks currently intends to retain its future earnings, if any, to fund the
development and finance the growth of its business. The amount and timing of any
future dividends will depend on general business conditions encountered by
Softworks, as well as the financial condition, earnings and capital requirements
of Softworks and such other factors as the Board may deem relevant.
A registration statement (Registration No. 333-53939) for Softworks'
Initial Public Offering was filed on Form S-1 with the Securities and Exchange
Commission on July 9, 1998. In the offering, which was completed on August 4,
1998, Softworks sold 1,700,000 shares of common stock at an offering price of
$7.00 per share, generating approximately $9.7 million in net proceeds.
Softworks incurred approximately $2.2 million in expenses related to the Initial
Public Offering. The Underwriters of the offering were Soundview Financial
Group, Inc. and Raymond James & Associates, Inc.
Of the $9.7 million in net proceeds which Softworks received from the
Initial Public Offering, $3.0 million was used to repay Computer Concepts Corp.,
the principal shareholder, for amounts previously advanced and for Softworks'
effective cost to Computer Concepts of income tax expenses for prior years.
Approximately $1.5 million was used for working capital requirements. The
remaining proceeds remain temporarily invested in short-term federal guaranteed
securities, available for future product development, working capital, acquiring
or investing in businesses, technologies or products complimentary to Softworks'
business or other general corporate purposes.
<PAGE>
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended December 31, 1998, 1997, 1996 and 1995 are derived from Softworks' audited
financial statements and for the fiscal year ended December 31, 1994, is derived
from Softworks' unaudited financial statements. To better understand the
following financial information, investors should also read the "Management's
Discussion and Analysis of Operations." This data should also be read in
conjunction with the consolidated financial statements of Softworks, related
notes, and other financial information included elsewhere in this Form 10-K. All
numbers are in thousands, except per share amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue $ 43,749 $ 26,770 $ 16,525 $ 11,626 $9,449
Gross Margin 39,499 25,135 15,381 10,534 8,866
Net income (loss) 2,957 786 792 (1,711) 482
========== =========== =========== ========== =========
Basic and diluted net income (loss) per share $ 0.20 $ 0.06 $ 0.06 $ (0.12) $ 0.03
========== =========== =========== ========== =========
Basic and diluted weighted average shares
outstanding 14,860 14,083 14,083 14,083 14,083
========== =========== =========== ========== =========
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- ---------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 6,003 $ 360 $ 1,735 $ 167 $ 246
Working capital 11,879 (775) (824) (3,516) (2,098)
Total assets 58,352 35,683 22,543 12,766 12,633
Long term debt, net of current portion 1,401 1,294 351 465 135
Total stockholders' equity 18,685 6,087 5,355 4,563 6,214
</TABLE>
<PAGE>
ITEM 7 MANGEMENT'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-K 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-K, 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, 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 a family of enterprise
systems management software products for data and storage management and
performance management. Softworks provides automated systems management
solutions designed to optimize system and application performance, reduce
hardware expenditures, and enhance the reliability and availability of the data
processing environment for enterprises that employ primarily mainframe computing
environments, and increasingly UNIX and Microsoft(R) Windows NT(R)("NT").
Softworks believes that it has been a pioneer in the development of automated
systems management solutions and that it is currently a leading vendor in this
market. As of December 31, 1998, Softworks' products were licensed for use by 87
of the Fortune 100 companies.
Softworks' offerings are grouped into four market segments ("Arenas"): data
and storage management; performance management; Year 2000; and professional
services. Historically, Softworks' products addressed only the performance and
data storage requirements of mainframe operating systems. During 1998,
Softworks' products were expanded to include UNIX and NT-based storage
management products. In addition, Softworks has extended its product family by
launching a multi-platform suite of products in the Year 2000 Arena.
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, Softworks 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 which are sold as charged options to Softworks'
general customer base. Substantially all of Softworks' license agreements are
perpetual. Maintenance agreements are typically for a term of one year and renew
automatically upon the payment by the customer of an annual maintenance fee.
Revenue from software licenses is recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position
97-2,"Software Revenue Recognition", Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2" and Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." 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. Softworks provides creditworthy
customers with the option to pay for license fees in one lump sum or generally
in equal annual installments over extended periods of time, generally one to
five years. In such instances, Softworks does not consider sales contracts with
amounts due for periods greater than one year from delivery fixed and
determinable, and accordingly recognizes such amounts as revenue when they
become due. Maintenance revenue that is bundled with an initial license fee is
deferred and recognized ratably over the maintenance period. Amounts deferred
for maintenance are based on the fair value of equivalent maintenance services
sold separately. Revenue from professional services is recognized as the
services are performed. Deferred license revenue resulting from extended payment
agreements beyond one year is included in installment receivable and deferred
revenue. Related sales commissions are also deferred and recognized over the
period of the installment payment plan.
<PAGE>
Historically, Softworks has not experienced any significant bad debts
associated with these long-term installment arrangements which were introduced
by Softworks in 1996. Softworks introduced extended payment terms to all of its
customers in an effort to increase sales of its products, achieve a stream of
revenue and remain competitive. No single customer accounted for greater than 5%
of Softworks' total revenue in 1998.
During 1998, approximately 59% of Softworks' license revenue resulted from
products in the DataStor Arena which includes products such as Catalog Solution
and CenterStage. The Performance Arena, which includes products such as
Performance Essential and TeraSAM, accounted for approximately 32% of Softworks'
license revenue in 1998. Softworks' cost of license revenue consists primarily
of royalties paid to in-house and third-party software developers and
amortization of capitalized software costs. Beginning in 1997, and continuing
for four years, Softworks is obligated to pay a minimum annual royalty
associated with certain Year 2000 and other products.
Softworks derives significant recurring revenue from maintenance service
agreements. Maintenance fee revenue was $10.5 million, $10.0 million and $7.9
million, or 23.9%, 37.2% and 47.9% of total revenue in 1998, 1997 and 1996,
respectively.
Softworks markets and sells its products and services through a direct
sales force in the United States and directly and through distributors in South
America, Europe and Asia. International revenue transactions are denominated in
U.S. dollars and local currencies. Revenue generated by Softworks' international
distributors is translated into U.S. dollars at the time the transaction occurs.
Softworks has not sustained material foreign currency exchange losses and
presently does not attempt to hedge its exposure to fluctuations in
international currency exchange rates. International revenue generated by
Softworks contributed approximately 20.1%, 17.7%, and 29.5% of total revenue
during 1998, 1997 and 1996, respectively. Should Softworks' revenue from
international sales increase as intended, and should such sales be denominated
in international currencies, Softworks intends to adopt an adequate hedging
strategy to guard against international currency fluctuations.
Historically, Softworks has experienced fluctuations in interim sales with
greater revenues and net earnings in the latter half of the calendar year. As a
result, Softworks' operating results have fluctuated in the past and in the
future are expected to fluctuate significantly from quarter to quarter and may
fluctuate on an annual basis as a result of a number of factors. Revenue in any
quarter is dependent to a significant degree on orders booked and renewals of
agreements for maintenance in that quarter and is not predictable with any
degree of certainty. Since Softworks' expense levels are based in part on
management's expectations regarding future revenue, if revenue is below
expectations in any quarter, the adverse effect may be magnified by Softworks'
inability to adjust spending in a timely manner to compensate for any revenue
shortfall.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed in thousands of dollars
(except for per share data).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenue:
Software licenses $ 31,725 $ 16,633 $ 8,611
Services 12,024 10,137 7,914
------------------ ----------------- -----------------
Total revenue 43,749 26,770 16,525
------------------ ----------------- -----------------
Cost of revenue (exclusive of amortization
and depreciation shown separately below
except for amortization of software
development costs):
Software licenses 1,843 580 424
Services 2,407 1,055 720
------------------ ----------------- -----------------
Total cost of revenue 4,250 1,635 1,144
------------------ ----------------- -----------------
Gross margin 39,499 25,135 15,381
------------------ ----------------- -----------------
Operating expenses:
Sales and marketing 19,666 12,463 6,161
General and administrative 4,575 2,791 2,217
Amortization and depreciation 2,169 1,972 1,596
Research and development 7,800 6,093 3,911
------------------ ----------------- -----------------
Total operating expenses 34,210 23,319 13,885
------------------ ----------------- -----------------
Operating income 5,289 1,816 1,496
Other expenses 252 - -
------------------ ----------------- -----------------
Income from operations before
provision for income taxes 5,037 1,816 1,496
Provision for income taxes 2,080 1,030 704
------------------ ----------------- -----------------
Net income $ 2,957 $ 786 $ 792
================== ================= =================
Basic and diluted net income per share $ 0.20 $ 0.06 $ 0.06
================== ================= =================
Basic and diluted weighted average shares
outstanding 14,860 14,083 14,083
================== ================= =================
</TABLE>
<PAGE>
The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Software licenses 72.5% 62.1% 52.1%
Services 27.5% 37.9% 47.9%
------ ------ ------
Total revenue 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 4.2% 2.2% 2.6%
Services 5.5% 3.9% 4.3%
------ ------ ------
Total cost of revenue 9.7% 6.1% 6.9%
------ ------ ------
Gross margin 90.3% 93.9% 93.1%
------ ------ ------
Operating expenses:
Sales and marketing 44.9% 46.6% 37.3%
General and administrative 10.5% 10.4% 13.4%
Amortization and depreciation 5.0% 7.4% 9.6%
Research and development 17.8% 22.7% 23.7%
------ ------ ------
Total operating expenses 78.2% 87.1% 84.0%
------ ------ ------
Operating income 12.1% 6.8% 9.1%
Other expenses 0.6% 0.0% 0.0%
------ ------ ------
Income from operations before
income taxes 11.5% 6.8% 9.1%
Provision for income taxes 4.7% 3.9% 4.3%
------ ------ ------
Net income 6.8% 2.9% 4.8%
====== ====== ======
</TABLE>
Years Ended December 31, 1998 and 1997
Revenue. Total revenue increased 63.4% to $43.7 million in 1998 from $26.8
million in 1997. License revenue increased 90.7% to $31.7 million in 1998 from
$16.6 million in 1997. The increase was primarily due to the increased sales of
Softworks' products resulting from continued expansion of the worldwide sales
force, the conversion from CPU-based pricing to MIPS-based pricing and the
introduction of Resource Availability into the DataStor Arena. During 1998,
MIPS-based licenses accounted for 74% of new sales. Sales in the DataStor Arena
accounted for 59% of total license revenue in 1998 and 1997. License revenue
from the Performance Arena accounted for 32% of total license revenue in 1998
and 1997. License revenue from the Year 2000 Arena accounted for 5.3% of total
license revenue in 1998 and 3.5% in 1997. International revenue increased as a
percentage of total revenue to 20.1% in 1998 from 17.7% for the period ending
December 31, 1997. In terms of absolute dollars, international revenues
increased 85.9% to $8.8 million in 1998 from $4.7 million in 1997. This increase
is attributable to Softworks' continuing international expansion.
Services revenue, comprised of maintenance revenue and to a lesser extent,
revenue from professional services, increased 18.6% to $12.0 million in 1998
from $10.1 million in 1997. This increase is attributable to overall growth in
license revenue, renewals of maintenance contracts by the installed customer
base and customer acceptance of the SKILLPACKS and Extended SKILLPACKS services.
Cost of Revenue. Cost of software license revenue includes royalties paid
to Company developers and to a third party under a licensing agreement,
<PAGE>
amortization of capitalized software development costs and costs of shipping and
fulfillment. Cost of software license revenue increased 217.8% to $1.8 million,
or 4.2% of total revenue in 1998 from $580,000, or 2.2% in 1997. This increase
was primarily attributable to the royalties paid as a result of a third party
licensing agreement that commenced in July 1997, as well as an increase in
royalty payments to Company developers resulting from increased software license
revenue. Costs of services revenue is comprised of costs of maintenance and to a
lesser extent, costs of professional services. Cost of services revenue
increased 128.2% to $2.4 million, or 5.5% of total revenue in 1998 from $1.1
million or 3.9% of total revenue in 1997. This increase is primarily
attributable to the staffing of maintenance personnel to support the growth of
the international customer base and to a lesser extent, the commencement of
professional services operations in the third quarter of 1997.
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 57.8% to $19.7 million in 1998
from $12.5 million in 1997. This increase was attributable primarily to
increased commission expenses resulting from increased sales, and increased
personnel costs resulting from growth in Softworks' sales organization. In
addition, the opening of the international sales offices in Germany, Australia
and Spain and one domestic sales office contributed to an increase in certain
fixed costs over 1997. As a percentage of revenue, sales and marketing expenses
decreased to 44.9% in 1998 from 46.6% in 1997.
General and Administrative Expense. General and administrative expenses
include administrative salaries and related benefits, management fees,
recruiting and relocation expenses, as well as legal, accounting and other
professional fees. General and administrative expenses increased 63.9% to $4.6
million in 1998 from $2.8 million in 1997. The increase in general and
administrative expenses was principally due to an increase in finance and
administrative personnel necessary to support Softworks' growth and the costs
associated with operating as a public company.
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 the research and development effort including Softworks'
data center operations. Research and development increased 28.0% to $7.8 million
or 17.8% of 1998 revenue from $6.1 million or 22.7% of 1997 revenue. The
increase is primarily attributable to an increase in personnel necessary to
support Softworks' research and development efforts.
Provision for Income Taxes. The provision for income taxes increased to
$2.1 million in 1998 from $1.0 million in 1997. For the period ending December
31, 1997, Softworks reported its financial results on a consolidated basis with
Computer Concepts and did not file separate tax returns. On a stand-alone basis,
if Softworks had filed a separate Federal tax return, its effective rate for
1997 would have been 56.7%. For 1998 the effective tax rate was 41.3%. The
decrease in effective rates is due to the reduction in previously non-deductible
operating losses incurred by the international subsidiary corporations. A
valuation reserve has been established for the deferred tax asset generated from
the remaining international net operating losses as it is uncertain when, and
if, these losses will be utilized against future international income.
Years Ended December 31, 1997 and 1996
Total Revenue. Total revenue increased 62.0% to $26.8 million in 1997 from
$16.5 million in 1996. License revenue increased 93.2% to $16.6 million in 1997
from $8.6 million in 1996. The increase was primarily due to an increase in the
number of licenses of Softworks' products in the Performance Arena and DataStor
Arena, the conversion from CPU-based pricing to MIPS-based pricing, the
availability of extended payment terms to customers for a full fiscal year, as
well as the introduction of its Year 2000 products. New products in the Year
2000 Arena introduced during 1997 accounted for approximately 3.5% of software
license revenue. During 1997, Softworks entered into approximately 100
MIPS-based licenses which accounted for $6.2 million in revenue. Sales in the
DataStor Arena accounted for approximately 59% of license revenue in 1997,
compared to approximately 60% of license revenue in 1996. Sales in the
Performance Arena accounted for approximately 32% of license revenue in 1997,
compared to approximately 36% of license revenue in 1996. Services revenue is
comprised of maintenance revenue and to a lesser extent, revenue from
professional services. Services revenue increased 28.1% to $10.1 million in 1997
from $7.9 million in 1996. This increase is attributable to overall growth in
license revenue and renewals of maintenance contracts by the installed customer
base and to a lesser extent, the commencement of professional services
operations in the third quarter of 1997. International revenue decreased as a
percentage of total revenue to 17.7% for the period ending December 31, 1997
from 29.5% for the period ending December 31, 1996. In terms of absolute
dollars, international revenue decreased slightly to $4.7 million for the period
ending December 31, 1997 from $4.9 million for the period ending December 31,
1996.
<PAGE>
Cost of Revenue. Cost of software license revenue increased 36.8% to
$580,000, or 2.2% of total revenue, in 1997, from $424,000, or 2.6% of total
revenue, in 1996. Cost of services revenue is comprised of costs of maintenance
and to a lesser extent, costs of professional services. Cost of services
increased 46.5% to $1.0 million in 1997 from $720,000 in 1996. As a percentage
of services revenue, cost of services increased to 10.4% in 1997 from 9.1% in
1996. This increase is primarily attributable to the staffing of maintenance
personnel to support international sales in lieu of reliance upon distributors
and to a lesser extent, the commencement of professional services operations in
the third quarter of 1997.
Sales and Marketing Expense Sales and Marketing expense increased
102.3% to $12.5 million in 1997 from $6.2 million in 1996. The increase was
primarily attributable to the expansion of the direct sales force both
domestically and internationally. Sales and marketing expense was 46.6% of total
revenue in 1997 and 37.3% of total revenue in 1996.
General and Administrative Expense. General and administrative expense
increased 25.9% to $2.8 million in 1997 from $2.2 million in 1996. As a
percentage of total revenue, general and administrative expense declined to
10.4% in 1997 from 13.4% in 1996. General and administrative expenses grew in
absolute dollars as Softworks added personnel to all administrative areas, but
declined as a percentage of total revenue principally due to economies of scale
associated with increased revenue.
Research and Development Expense. Research and development expense
increased 55.8% to $6.1 million in 1997 from $3.9 million in 1996. The increase
was primarily attributable to Softworks' accelerated development of its
multi-platform and Year 2000 products.
Provision for Income Taxes. The provision for income taxes increased 46.3%
to $1.0 million in 1997 from $704,000 in 1996. During these years, Softworks was
reported on a consolidated basis for Federal income tax purposes with Computer
Concepts and did not file a separate Federal tax return. On a stand-alone basis,
if Softworks had filed a separate Federal tax return, its effective rates for
1997 and 1996 would have been 56.7% and 47.1%, respectively. These rates differ
from the Federal statutory income tax rate primarily because of the
non-deductibility of operating losses incurred by the international subsidiary
corporations. A valuation reserve has been established for the deferred tax
asset generated from international net operating losses as it is uncertain when,
and if, these losses will be utilized against future international income.
LIQUIDITY AND CAPITAL RESOURCES
Softworks has funded its operations through cash generated from operations
and proceeds from its recent initial public offering. Softworks had cash and
cash equivalents of $6.0 million and $360,000 at December 31, 1998 and December
31, 1997, 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.
For the twelve months ended December 31, 1998 and 1997, net cash provided
by operating activities was $1.3 million and $213,000, respectively. This
increase is primarily a result of an increase in net income adjusted for
significant non-cash expenses, such as depreciation and amortization.
Softworks' investing activities primarily include expenditures for fixed
assets in support of Softworks' product development activities and
infrastructure, software development and technology purchases and additional
contingent consideration paid to two former stockholders in connection with the
acquisition of Softworks by Computer Concepts. Net cash used in investing
activities increased 29.6% to $3.3 million in 1998 from $2.6 million in 1997.
The increase was primarily a result of an increase in purchases related to fixed
assets in support of Softworks' product development infrastructure .
For the twelve months ended December 31, 1998 and 1997, net cash provided
by financing activities was $7.7 million and $1.0 million, respectively. The
increase in cash provided by financing activities was primarily a result of cash
generated from Softworks' initial public offering offset by repayments made to
Computer Concepts for federal income taxes and borrowings.
<PAGE>
Softworks' principal commitments as of December 31, 1998 consisted
primarily of (i) leases on its corporate headquarters facilities, various sales
offices and operating equipment, (ii) employment agreements and (iii) a software
licensing and distribution agreement. Softworks' current cash and cash
equivalent balances, cash flow from its operations, and the proceeds of its
recent public offering, are expected to be sufficient to meet its working
capital and capital expenditure needs for at least the next 12 months. However,
there can be no assurance that 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.
RECENT DEVELOPMENTS
New Sales Office
In February, 1999, Softworks established a branch sales office in Tokyo, Japan
which will serve customers of the OS/390, MVS, and Fujitsu operating systems.
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug"or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by Softworks. Accordingly,
Softworks is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. Softworks presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated cost of these efforts is not expected to be
material to Softworks' 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
Softworks' business involves software development, Softworks has not sought
further verification or validation by independent third parties of its
corrections of Year 2000 Problems. However, Softworks' Year 2000 project team is
reviewing Softworks' project plans and monitoring progress against those plans.
Software Sold to Consumers. Softworks believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting Softworks' software products have been identified or
corrected due to complexity of these products and the fact that these products
interact with other third party vendor products and operate on computer systems
which are not under Softworks' control.
Internal Information Technology Infrastructure. Softworks believes that it
has identified substantially all of the major computers, software applications,
and related equipment used in connection with its internal operations that must
be modified, upgraded, or replaced to minimize the possibility of a material
disruption to its business. Softworks has commenced the process of modifying,
upgrading, and replacing major systems that have been identified as adversely
affected, and expects to complete this process or to the extent it has not
modified or replaced such systems, to develop contingency plans before the
end of June, 1999.
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 is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment and expects to complete such
assessment by the June, 1999. Softworks estimates that the total cost of
completing any required modifications, upgrades, or replacements of these
internal systems will not have a material adverse effect on Softworks' business
or results of operations. This estimate is being monitored and will be revised
as additional information becomes available.
Suppliers. Softworks has initiated communications, including surveys, with
third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by Softworks to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, Softworks
has limited or no control over responses to its inquiries and the actions of
these third party suppliers. Thus, while Softworks does not anticipate any
significant Year 2000 Problems with these systems, there can be no assurance
that these suppliers will resolve any or all of their Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
Softworks or any of its customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on Softworks' business, financial condition, and results of
operation.
<PAGE>
Most Likely Consequences of Year 2000 Problems. Softworks expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting Softworks 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, management expects that Softworks could likely suffer the
following
1. a significant number of operational inconveniences and
inefficiencies for Softworks and its customers that may divert
management's time and attention and financial and human resources
from its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by Softworks or its customers to prevent or
alleviate material business disruptions.
Contingency Plans. Softworks is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. Softworks expects to complete its contingency
plans by the end of June 1999. Depending on the systems affected, these plans
could include accelerated replacement of affected equipment or software, short
to medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If Softworks is required to
implement any of these contingency plans, it could have a material adverse
effect on Softworks' 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 therewith, could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
ITEM 7a QUANTIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SOFTWORKS, Inc.:
We have audited the accompanying consolidated balance sheets of SOFTWORKS, Inc.,
a Delaware corporation, and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SOFTWORKS, Inc., and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington D.C.
February 9, 1999
<PAGE>
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,003 $ 360
Accounts receivable, net of allowance for doubtful accounts of
$289 and $206 in 1998 and 1997, respectively 14,316 10,652
Installment receivables 16,406 6,148
Prepaid expenses and other current assets 1,349 984
Deferred tax assets 306 138
------------- -------------
Total current assets 38,380 18,282
------------- -------------
Installment receivables, noncurrent 7,908 6,480
Property and equipment, net 2,498 1,523
Software development costs, net 3,039 3,357
Goodwill, net of accumulated amortization of $3,346
and $2,477 in 1998 and 1997, respectively 4,143 4,611
Other assets 1,900 734
Deferred tax assets, noncurrent 484 696
------------- -------------
Total assets $ 58,352 $ 35,683
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 6,136 $ 4,689
Current portion of long-term debt 1,930 1,083
Deferred maintenance revenue 9,064 6,225
Deferred installment revenue 7,314 5,506
Income taxes payable 2,057 -
Due to Principal Shareholder - 1,554
------------- -------------
Total current liabilities 26,501 19,057
------------- -------------
Deferred maintenance revenue, noncurrent 3,882 740
Deferred installment revenue, noncurrent 7,883 7,122
Long-term debt, noncurrent 1,401 1,294
Payable to Principal Shareholder for federal income taxes - 1,383
------------- -------------
Total liabilities 39,667 29,596
------------- -------------
Stockholders' Equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.001 par value; 150,000,000 authorized; 16 14
15,973,000 and 14,083,000 shares issued and outstanding
in 1998 and 1997, respectively
Additional paid-in capital 15,201 5,549
Retained earnings 3,535 578
Accumulated other comprehensive loss (67) (54)
------------- -------------
Total stockholders' equity 18,685 6,087
------------- -------------
Total liabilities and stockholders' equity $ 58,352 $ 35,683
============= =============
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenue:
Software licenses $ 31,725 $ 16,633 $ 8,611
Services 12,024 10,137 7,914
------------ ------------ ------------
Total revenue 43,749 26,770 16,525
------------ ------------ ------------
Cost of revenue (exclusive of amortization
and depreciation shown separately below
except for amortization of software
development costs):
Software licenses 1,843 580 424
Services 2,407 1,055 720
------------ ------------ ------------
Total cost of revenue 4,250 1,635 1,144
------------ ------------ ------------
Gross margin 39,499 25,135 15,381
------------ ------------ ------------
Operating expenses:
Sales and marketing 19,666 12,463 6,161
General and administrative 4,575 2,791 2,217
Amortization and depreciation 2,169 1,972 1,596
Research and development 7,800 6,093 3,911
------------ ------------ ------------
Total operating expenses 34,210 23,319 13,885
------------ ------------ ------------
Operating income 5,289 1,816 1,496
Other expenses 252 - -
------------ ------------ ------------
Income from operations before
provision for income taxes 5,037 1,816 1,496
Provision for income taxes 2,080 1,030 704
------------ ------------ ------------
Net income $ 2,957 $ 786 $ 792
============ ============ ===========
Basic and diluted net income per share $ 0.20 $ 0.06 $ 0.06
============ ============ ===========
Basic and diluted weighted average shares
outstanding 14,860 14,083 14,083
============ ============ ===========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Common Stock Paid-In Earnings Comprehensive Stockholders' Comprehensive
Shares Amount Capital (Deficit) Loss Equity Income (Loss)
------------ ------- ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 14,083,000 $ 14 $ 5,489 $ 711 $ - $ 6,214
Contribution to Capital - - 60 - - 60
Net loss and comprehensive loss - - - (1,711) - (1,711) $ (1,711)
------------ ----- ------------ --------- ---------- ------------ ==========
BALANCE, December 31, 1995 14,083,000 14 5,549 (1,000) - 4,563
Net income and comprehensive income - - - 792 - 792 $ 792
------------ ----- ------------ --------- ---------- ------------ ==========
BALANCE, December 31, 1996 14,083,000 14 5,549 (208) - 5,355
Foreign currency translation adjustment - - - - (54) (54) $ (54)
Net income - - - 786 - 786 786
------------ ----- ------------ --------- ---------- ------------ ----------
Total comprehensive income $ 732
==========
BALANCE, December 31, 1997 14,083,000 14 5,549 578 (54) 6,087
Foreign currency translation adjustment - - - - (13) (13) $ (13)
Issuance of common stock to consultant
in connection with initial public
offering 190,000 - - - - -
Issuance of common stock pursuant to
the initial public offering, net of
offering costs 1,700,000 2 9,652 - - 9,654
Net income - - - 2,957 - 2,957 2,957
------------ ----- ------------ --------- ---------- ------------ ----------
Total comprehensive income $ 2,944
==========
BALANCE, December 31, 1998 15,973,000 $ 16 $ 15,201 $ 3,535 $ (67) $ 18,685
============ ===== ============ ========= ========== ============
<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>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,957 $ 786 $ 792
Adjustments to reconcile net income to net cash
provided by operating activities ---
Amortization and depreciation
Property and equipment 774 697 505
Software development costs 1,480 689 543
Goodwill 869 749 659
Provision for doubtful accounts 317 75 50
Loss on disposal of property and equipment - - 2
Deferred tax provision (benefit) 44 (33) 569
Changes in operating assets and liabilities---
Accounts receivable and installment receivables (15,667) (11,002) (8,598)
Prepaid expenses and other current assets (365) (561) (314)
Other assets (1,166) (377) (306)
Accounts payable and accrued expenses 1,447 2,515 761
Income taxes payable 2,057 - -
Deferred revenue 8,550 6,675 8,071
-------------- -------------- --------------
Net cash provided by operating activities 1,297 213 2,734
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (1,749) (990) (445)
Software development and technology purchases (1,162) (1,044) (359)
Additional consideration for SOFTWORKS, Inc. acquisition (401) (522) (478)
-------------- -------------- --------------
Net cash used in investing activities (3,312) (2,556) (1,282)
-------------- -------------- --------------
Cash flows from financing activities:
Net (payments to) borrowings from Parent (1,554) 407 145
Change in amount payable to Parent for federal income taxes (1,383) 858 -
Repayments of long-term debt - (253) (190)
Proceeds from long-term debt 954 - 161
Net proceeds from initial public offering 9,654 - -
-------------- -------------- --------------
Net cash provided by financing activities 7,671 1,012 116
-------------- -------------- --------------
Effect of exchange rate changes on cash and cash equivalents (13) (44) -
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 5,643 (1,375) 1,568
Cash and cash equivalents, beginning of period 360 1,735 167
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 6,003 $ 360 $ 1,735
============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 24 $ 44 $ 46
-------------- -------------- --------------
Income taxes paid $ 14 $ (96) $ 40
============== ============== ==============
Supplemental schedule of noncash investing and
financing activities:
Assumption of long-term debt from capitalized
software technology $ - $ 2,160 $ -
============== ============== ==============
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
SOFTWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
The Company
SOFTWORKS, Inc. ("SOFTWORKS" or the "Company") designs, develops, markets,
and supports systems management software products for enterprise computing
environments primarily in the United States. SOFTWORKS wholly owns subsidiaries
in the United Kingdom, France, Brazil, Australia, Italy, Germany, and Spain
which operate primarily as sales offices. SOFTWORKS was incorporated in 1977
under the state laws of Maryland and reincorporated in 1998 under the state laws
of Delaware. In 1993, SOFTWORKS was acquired by Computer Concepts Corp. (the
"Principal Shareholder").
Increase in Authorized Shares and Stock Split
SOFTWORKS has restated its articles of incorporation to increase the number
of authorized shares to 2,000,000 of preferred shares and 150,000,000 of common
shares. Additionally, on May 28, 1998, the Board of Directors of SOFTWORKS
effected a 5,000-for-1 stock split. Further, on June 29, 1998, the Board of
Directors of SOFTWORKS declared and issued a stock dividend of 583,000 shares of
Common Stock to its sole stockholder, the Principal Shareholder. The effects of
the stock split, and stock dividend have been given retroactive application in
the consolidated financial statements for all periods presented.
Public Offering
On August 4, 1998, the Company completed an initial public offering ("IPO")
of 4,200,000 shares of the Company's common stock, par value $.001. 1,700,000 of
these shares were sold by the Company, resulting in net proceeds to the Company
of approximately $9.7 million, while the remaining 2,500,000 shares sold were
owned by the Principal Shareholder and another stockholder. In conjunction with
the IPO, the Company also issued 190,000 shares of common stock to a consultant.
Voting Trust Agreement
In conjunction with the IPO, shares owned by 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. One trustee is the Chief Executive Officer of the Principal
Shareholder and the remaining two trustees are directors of the Company who do
not have a significant financial interest in the Principal Shareholder, one of
which is the Chairman of SOFTWORKS. The agreement provides that upon a change in
either of the remaining two trustees, the trustees not affiliated with the
Principal Shareholder shall have control of the selection of the successor
director/trustee. This agreement remains in effect until the Principal
Shareholder reduces its ownership to 25% of SOFTWORKS.
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.
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 December 31, 1998, the Principal Shareholder owned more than 50% 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.
<PAGE>
2. 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. In such instances, the Company does not consider sales contracts
with amounts due for periods greater than one year from delivery fixed and
determinable, and accordingly, recognizes such amounts as revenue when they
become due. Maintenance revenue that is bundled with an initial license fee is
deferred and recognized ratably over the maintenance period. Amounts deferred
for maintenance are based on the fair value of equivalent maintenance services
sold separately. Revenue from professional services 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.
Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
Installment Receivables
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.
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the useful life of the
asset or the lease term. Capitalized lease assets are amortized over the shorter
of the lease term or the service life of the related assets.
Software Development Costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased software
technologies are recorded at cost and software technologies acquired in purchase
business transactions are recorded at their estimated fair value. Software costs
associated with technology development and purchased software technologies are
amortized using the greater of the ratio of current revenue to total projected
revenue for a product or the straight line method over a useful life of 2 to 5
years. Amortization of software costs begins when products become available for
general customer release. Costs incurred prior to the establishment of
technological feasibility are expensed as incurred and reflected as research and
development costs in the accompanying consolidated statements of operations.
Goodwill
In connection with its acquisition by the Principal Shareholder in 1993
under which there was a change in 100 percent of the Company's equity interests,
the excess of the acquisition cost of the Company over the then fair value of
its tangible and intangible net assets (or goodwill) has been recorded on the
books of the Company, using "push-down" accounting. The goodwill is being
amortized over a ten year period.
<PAGE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software development costs, and property
and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. The Company has determined
that as of December 31, 1998, there has been no impairment in the carrying value
of long-lived assets.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the determination of deferred tax assets and liabilities
based on the differences between the financial statement and income tax bases of
assets and liabilities, using enacted tax rates. SFAS No. 109 requires that the
net deferred tax asset is to be adjusted by a valuation allowance, if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the net deferred tax asset will not be realized.
Basic and Diluted Net Income (Loss) Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and has been implemented for all periods presented. SFAS No. 128 requires
dual presentation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share includes the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As of December 31, 1998, the total
stock options outstanding were 3,604,225 of 3,727,000 authorized. Due to the
anti-dilutive nature of the options for all periods presented, there is no
effect on the calculation of weighted average shares for diluted earnings per
share. As a result, the basic and diluted earnings per share amounts are
identical.
Basic and diluted net earnings per share is also computed pursuant to SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an initial
public offering, be included in the calculation of basic and diluted net income
per share as if they were outstanding for all periods presented. To date the
Company has not had any issuances or grants at nominal prices.
Foreign Currency
The functional currency for all of the Company's international subsidiaries
is the subsidiary's local currency. Assets and liabilities of international
subsidiaries are translated into U.S. dollars at period-end exchange rates and
revenue and expense accounts and cash flows are translated at average exchange
rates during the period. Gains and losses resulting from translation are
recorded as accumulated other comprehensive income in stockholders' equity.
Transaction gains and losses are recognized in the consolidated statements of
operations as incurred. The Company does not engage in any hedging activities .
As a result, there is no guarantee that fluctuations in exchange rates might not
have a material adverse effect on the Company's financial results.
Included in cash and cash equivalents at December 31, 1998 and December 31,
1997 is approximately $464,000 and $278,000 of cash denominated in various
foreign currencies, respectively.
New Accounting Pronouncements
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The adoption of SFAS No.
130 did not have a material impact on the Company's results of operations,
financial position, or cash flows.
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
<PAGE>
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The adoption
of SFAS No. 131 has had no significant impact on the Company's results of
operations, financial position or cash flows.
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", ("SOP
98-1"). SOP 98-1 requires the Company to capitalize internal computer software
costs once certain capitalization criteria is met. SOP 98-1 is effective January
1, 1999, and is applied to all projects in progress upon the initial application
of SOP 98-1. The Company has not yet determined the impact of the adoption of
SOP 98-1, however, a percentage of the Company's historical development expenses
may now be required to be capitalized under SOP 98-1.
During 1998, the Company adopted AICPA Statement of Position 98-5,
"Reporting on the Cost of Start-Up Activities." The adoption of this statement
requires the expensing of preopening costs as incurred. The adoption of SOP 98-5
did not have a material impact on the Company's results of operations, financial
position, or cashflows.
Concentrations and Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivables. At December 31, 1998, 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.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
3. Installment Receivables and Deferred Installment Revenue:
Perpetual license agreements may be executed under installment payment
plans with payment terms of one to five years. The initial payment due is
classified as accounts receivable and the remaining payments are classified as
installment receivables. Revenue for payment terms beyond one year is classified
as deferred installment revenues and recognized when the payments become due.
Maintenance revenue that is bundled with the initial license fee is
deferred, classified as deferred installment revenue and recognized ratably over
the maintenance period. The maintenance revenue due within twelve months is
classified as accounts receivable and the amount due beyond twelve months is
classified as installment receivables.
The following identifies the payment schedules for the noncurrent
installment receivables at December 31, 1998 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Payment Schedule
----------------
<S> <C>
Due in 2000 $ 5,249
Due in 2001 1,852
Due in 2002 756
Due in 2003 51
----------------
$ 7,908
================
</TABLE>
Deferred installment revenue which relates to the installment receivables
is scheduled to be earned as follows (in thousands):
<TABLE>
<CAPTION>
Software Licenses Software Total
Maintenance
--------------------------------------------------------
<S> <C> <C> <C>
Earned in 1999 $ 5,656 $ 1,658 $ 7,314
================ ================= =================
Earned in 2000 3,988 1,237 5,225
Earned in 2001 1,428 424 1,852
Earned in 2002 534 222 756
Earned in 2003 38 12 50
---------------- ----------------- -----------------
$ 5,988 $ 1,895 $ 7,883
================ ================= =================
</TABLE>
The Company imputes interest on extended payment contracts based on a
borrowing rate of 6.1% (libor plus one percent). Interest income is recognized
when the related deferred license revenue is recognized. Interest income
included in software license revenue is $433,000 in 1998, $136,000 in 1997 and
$0 in 1996.
4. Prepaid Expenses and Other Assets:
Included in prepaid expenses and other current assets are prepaid
commissions of $839,000 and $511,000 at December 31, 1998 and December 31, 1997,
respectively. Also included in other assets are noncurrent prepaid commissions
of $878,000 and $538,000 at December 31, 1998 and December 31, 1997,
respectively.
5. Property and Equipment:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
Useful Life --------------------------
in Years 1998 1997
---------------- ------------ -----------
<S> <C> <C> <C>
Computer equipment and software 3 to 5 $ 4,214 $ 2,565
Furniture and fixtures 5 to 7 250 204
Leasehold improvements 7 554 500
----------- -----------
5,018 3,269
----------- -----------
Less-Accumulated depreciation (2,520) (1,746)
----------- -----------
Property and equipment, net $ 2,498 $ 1,523
=========== ===========
</TABLE>
<PAGE>
6. Software Development Costs:
Software development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Capitalized software development costs $ 2,298 $ 1,242
Purchased and acquired software
technologies for resale 4,334 4,228
----------------- -----------------
6,632 5,470
----------------- -----------------
Less-Accumulated amortization (3,593) (2,113)
----------------- -----------------
Capitalized software development costs, net $ 3,039 $ 3,357
================= =================
</TABLE>
In July 1997, the Company acquired from Cognizant Technology Solutions
Corporation ("CTS") the rights to certain technology (the "Technology") that
complement certain Year 2000 product solutions and the development of the
Company's application resource management tools. Pursuant to the software
distribution agreement, in exchange for the Technology rights, the Company is
required to pay CTS a royalty on sales of the Technology at defined rates
subject to minimum annual royalties as follows: $100,000 in 1997, $900,000 in
1998, $1,400,000 in 1999 and $400,000 in 2000. An asset equal to the present
value of the minimum annual royalties of $2,160,000 has been recorded as
purchased and acquired software technologies for resale and is being amortized
using the straight-line method over the five year term of the agreement. The
payment obligation is recorded as debt.
7. Acquisition by the Principal Shareholder:
In September 1993, the Company was acquired by the Principal Shareholder
and the acquisition was accounted for using the purchase method of accounting.
Accordingly, assets and liabilities were recorded at their fair values as of the
effective date of the acquisition, and the operations of the Company have been
included in the Principal Shareholder's consolidated statements of operations
since that date. The purchase price approximated $5,700,000 (payable in cash and
restricted common stock of the Principal Shareholder) and originally resulted in
$5,484,000 of goodwill related to the excess of cost over the fair value of net
assets acquired. The acquisition agreement also required the Company to make
additional contingent purchase consideration payments to two of the Company's
former stockholders based upon certain product revenue for the four-year period
ending September 1998, up to a maximum of $1,000,000 each, for an aggregate
maximum of $2,000,000. As of December 31, 1998, the Company had paid the maximum
of $2,000,000 to the non-employee former stockholders, which has been treated as
additional consideration in connection with the acquisition and, accordingly,
added to the goodwill related to the acquisition.
8. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Trade accounts payable 1,069 1,834
Accrued payroll and benefits 1,046 579
Commissions payable 2,463 1,368
Royalties Payable 538 75
Other accrued expenses 1,020 833
----------------- -----------------
6,136 4,689
================= =================
</TABLE>
<PAGE>
9. Stock Options and Stock-Based Compensation:
Principal Shareholder Common Stock and Options
Prior to the IPO, certain Company employees received part of their
compensation in the form of the Principal Shareholder's common stock or options.
Included in the Company's consolidated statements of operations are noncash
compensation charges related to the fair value of the Principal Shareholder's
common stock issued and noncash compensation charges related to the intrinsic
value of stock options granted pursuant to APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Charges for both stock and options totaled $18,000
and $187,000 for the years ended December 31, 1997 and 1996, respectively.
During 1998, no such stock or options were issued. Accordingly, there were no
related charges. In addition, during 1998, certain outstanding options under the
existing plan were repriced; however, there were no related charges to the
Company associated with this repricing.
Stock Option Plan
In May 1998, the Company adopted the SOFTWORKS, Inc. 1998 Long-Term
Incentive Plan (the "1998 Incentive Plan") which authorizes the issuance of a
maximum of 3,727,000 shares of Common Stock. The 1998 Incentive Plan provides
for grants of options to officers, key employees, consultants and independent
contractors of the Company and its affiliates. The 1998 Incentive Plan provides
for the granting of incentive stock options, non-qualified stock options,
performance grants and other types of awards. This plan is administered by the
Long-Term Incentive Plan Administrative Committee of the Board of Directors,
which has sole discretion and authority, consistent with the provisions of the
1998 Incentive Plan, to determine which eligible participants will receive
options, the time when options will be granted and the terms of options granted.
Prior to the implementation of the 1998 Incentive Plan, the Company did not
have a stock option plan in place. The following is a summary of the option
activity of the 1998 Incentive Plan.
<TABLE>
<CAPTION>
Options Weighted-
Average Exercise
Price
----------------- -----------------
<S> <C> <C>
Balance December 31, 1997 - $ -
Stock options granted 3,613,850 7.00
Stock options exercised - -
Stock options canceled (9,625) 7.00
----------------- -----------------
Balance December 31, 1998 3,604,225 $ 7.00
================= =================
</TABLE>
As of December 31, 1998, options to purchase 1,599,660 shares of common
stock were exercisable with a weighted-average exercise price of $7.00. The
weighted-average remaining contractual life of options outstanding at December
31, 1998, was 3.3 years. The weighted average fair value of options issued in
1998 was $3.77.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a "fair value based method" of accounting
for stock-based compensation. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Prior to the issuance of SFAS No. 123,
stock-based compensation was accounted for under the "intrinsic value method" as
defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value method, compensation is
the excess, if any, of the market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing the accounting in APB Opinion No. 25 must
make pro forma disclosures as if the fair value based method of accounting had
been applied. The Company applies APB Opinion No. 25 and the related
interpretations in accounting for its stock-based compensation.
<PAGE>
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
No. 123, the Company's net income and net income per share would have been
decreased to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
--------- ------- --------
<S> <C> <C> <C>
Net income (loss) attributable to
common stockholders:
As reported.................. $ 2,957 $ 786 $ 792
Pro forma.................... $ (287) 598 672
Basic and diluted loss per share:
As reported.................. $ 0.20 $ 0.06 $ 0.06
Pro forma.................... $ (0.02) 0.04 0.05
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants during the years ended December 31, 1998, 1997 and 1996: no dividend
yield, expected volatility from 72% to 130%, risk-free interest rates from 5.4%
to 6.3% and an expected terms ranging from 1.1 to 4.4 years.
10. Transactions with the Principal Shareholder:
Prior to the initial public offering, the Principal Shareholder provided
certain corporate and administrative services to the Company, including
executive management and professional services (accounting, auditing, and
legal). These services were performed for $500,000 in the years ended December
31, 1997 and 1996. These costs were allocated to the Company based on a
proportional cost allocation method. During 1998, there were no net charges for
administrative services. The Company and its Principal Shareholder also jointly
participated in certain employee benefit plans (defined contribution and
employee health), and the Company was allocated a portion of these costs on an
incremental basis. As of December 31, 1998 the Company's foreign subsidiary,
Softworks International, Ltd employed 2 individuals that performed services
primarily on behalf of the Principal Shareholder. These amounts, and other
associated costs are reimbursed to the Company periodically. As of December 31,
1998, the amount owed to the Company by the Principal Shareholder was
approximately $188,000, which has subsequently been repaid.
Management believes that the intercompany charges and cost allocations were
reasonable and approximate the expenses that the Company would have incurred had
it been operating as a stand-alone entity. Subsequent to its public offering,
the Company has performed the corporate and administrative functions directly,
using its own resources or purchased services, and will continue to be
responsible for the costs and expenses associated with the management of a
public corporation. As of December 31, 1998, other than as set forth above, the
Company had no amounts due from or owed to the Principal Shareholder.
<PAGE>
11. Income Taxes:
The following table summarizes components of income (loss) before income
taxes and the (benefit from) provision for both current and deferred income
taxes.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income (loss) before (benefit from) provision
for income taxes:
United States $ 4,857 $ 2,579 $ 1,471
Foreign 180 (763) 25
-------------- --------------- ---------------
Total $ 5,037 $ 1,816 $ 1,496
============== =============== ===============
Provision for (benefit from) income taxes
Current-
United States $ 1,769 $ 858 $ -
Foreign 30 55 135
State and other 237 150 -
-------------- --------------- ---------------
2,036 1,063 135
-------------- --------------- ---------------
Deferred-
United States 40 (27) 505
Foreign - - (16)
State and other 4 (6) 80
--------------- --------------- ---------------
44 (33) 569
--------------- --------------- ---------------
Total $ 2,080 $ 1,030 $ 704
=============== =============== ===============
</TABLE>
The following table summarizes the significant differences between the
U.S. Federal statutory tax rate and the Company's effective tax rate for
financial statement purposes:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
U.S. Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net of U.S. federal tax effect 4.7 3.5 6.8
Non-U.S. taxes 1.0 2.0 5.9
Foreign operating (loss) income (0.4) 14.3 (0.6)
Other 2.0 2.9 1.0
--------------- --------------- ---------------
Effective tax rate 41.3% 56.7% 47.1%
=============== =============== ===============
</TABLE>
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets are summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Current:
Accruals and reserves $ 306 $ 138
------------ -------------
306 138
------------ -------------
Long-Term:
Fixed and intangible assets 115 347
Capitalized software 369 349
Net operating loss carryforwards - foreign 200 229
Valuation allowance on foreign net operating
loss carryforwards (200) (229)
------------ -------------
484 696
------------ -------------
Net deferred tax assets $ 790 $ 834
============ =============
</TABLE>
In 1997, the Company utilized federal net operating losses generated in
1995 and 1996, aggregating $1,000,000. Included in the deferred tax assets as of
December 31, 1998 and 1997, is net operating income and loss from international
subsidiaries in the amount of $180,000 and $763,000, resulting in a deferred tax
benefit of $200,000 and $229,000, respectively. Most of the net operating loss
carryforwards have no expiration date. The Company has provided for full
valuation allowances of these international net operating losses.
12. Commitments and Contingencies:
Royalty Commitments
The Company has entered into royalty agreements with several employees of
the Company. These agreements call for royalties ranging from 1% to 7% of
various product revenue. These agreements range in term from three to five years
and contain no provisions for minimum royalties. One agreement is with an
officer of the Company and has resulted in royalty expense of $115,000, $188,000
and $98,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The agreement with this officer was terminated in conjunction with the signing
of an employment agreement in 1998.
Employment Agreements
The Company has entered into employment agreements with several key
employees of the Company. These agreements call for an annual aggregate base
compensation commitment of $800,000 through 2001.
Leases
The Company leases certain computer equipment under long-term
non-cancelable leases which are classified as capital leases and are included as
part of property and equipment. Operating leases are primarily for office space
and equipment.
<PAGE>
At December 31, 1998, the future minimum lease payments under operating
and capital leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Operating Leases Capital Leases Total
- ------------------------------------- --------------------------------------- -----------------
<S> <C> <C> <C>
1999 1,080 269 1,349
2000 1,013 269 1,282
2001 747 268 1,015
2002 153 - 153
2003 101 - 101
----------------- ----------------- -----------------
Total 3,094 806 3,900
Amounts representing interest - (59) (59)
----------------- ----------------- -----------------
Net 3,094 747 3,841
================= ================= =================
</TABLE>
Rent expense approximated $1,097,000, $896,000 and $522,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Employee 401(k) Savings Plan
The Company provides pension benefits to eligible employees through a
401(k) plan sponsored jointly by the Company and the Principal Shareholder. The
Company's allocable share of employer matching contributions to this 401(k) plan
approximated $77,000, $52,000 and $36,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Long Term Debt
The Company's long term debt commitments consist of future amounts due for
certain technology purchases (Note 6) and an obligation under a capital lease.
13. 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):
<PAGE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec 31 Year
------------- ------------ --------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
North America 5,290 7,022 8,827 13,812 34,951
International 1,306 2,032 2,420 3,040 8,798
------------- ------------ --------------- ------------- -------------
Total 6,596 9,054 11,247 16,852 43,749
============= ============ =============== ============= =============
Operating Income (Loss)
North America (384) 464 1,395 4,588 6,063
International (589) (128) (227) 170 (774)
------------- ------------ --------------- ------------- -------------
Total (973) 336 1,168 4,758 5,289
============= ============ =============== ============= =============
Identifiable Assets
North America 31,897 32,457 39,478 48,827 48,827
International 3,465 4,235 6,517 9,525 9,525
------------- ------------ --------------- ------------- -------------
Total 35,362 36,692 45,995 58,352 58,352
============= ============ =============== ============= =============
1997
----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec 31 Year
------------- ------------ --------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
North America 3,647 5,161 5,709 7,521 22,038
International 1,019 1,106 1,195 1,412 4,732
------------- ------------ --------------- ------------- -------------
Total 4,666 6,267 6,904 8,933 26,770
============= ============ =============== ============= =============
Operating Income (Loss)
North America (263) 215 503 1,901 2,356
International (233) (151) (169) 13 (540)
------------- ------------ --------------- ------------- -------------
Total (496) 64 334 1,914 1,816
============= ============ =============== ============= =============
Identifiable Assets
North America 21,240 23,881 26,878 33,015 33,015
International 1,152 1,307 1,820 2,668 2,668
------------- ------------ --------------- ------------- -------------
Total 22,392 25,188 28,698 35,683 35,683
============= ============ =============== ============= =============
1996
----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec 31 Year
------------- ------------ --------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
North America 2,236 2,051 3,188 4,168 11,643
International 956 1,363 900 1,663 4,882
------------- ------------ --------------- ------------- -------------
Total 3,192 3,414 4,088 5,831 16,525
============= ============ =============== ============= =============
Operating Income (Loss)
North America (267) (155) 441 571 590
International 110 337 80 379 906
------------- ------------ --------------- ------------- -------------
Total (157) 182 521 950 1,496
============= ============ =============== ============= =============
Identifiable Assets
North America 11,649 12,753 15,241 21,272 21,272
International 435 770 851 1,271 1,271
------------- ------------ --------------- ------------- -------------
Total 12,084 13,523 16,092 22,543 22,543
============= ============ =============== ============= =============
</TABLE>
<PAGE>
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. No single customer represents greater than five percent of
revenues.
14. Interim Financial Data -- Unaudited
The following table of quarterly financial data has been prepared from the
financial records of the Company, without audit, and reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented:
<TABLE>
<CAPTION>
1998 Quarter Ended
-------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------------ ------------ --------------- -------------
<S> <C> <C> <C> <C>
Revenue 6,596 9,054 11,247 16,852
Gross margin 5,632 8,334 10,217 15,316
Income (loss) from operations (973) 336 1,168 4,758
Net income (loss) (767) (13) 537 3,200
Basic and diluted income (loss) per share (0.05) (0.00) 0.04 0.20
1997 Quarter Ended
--------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------------ ------------- --------------- -------------
Revenue 4,666 6,267 6,904 8,933
Gross margin 4,385 5,943 6,465 8,342
Income (loss) from operations (496) 64 334 1,914
Net income (loss) (333) (20) 127 1,012
Basic and diluted income (loss) per share (0.02) (0.00) 0.01 0.07
</TABLE>
The sum of the per share amounts may not equal the annual amounts because of the
changes in the weighted-average number of shares outstanding during the year.
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers and directors of Softworks, and their ages as of December 31,
1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Directors and Executive Officers
James A. Cannavino(1) 54 Chairman of the Board of Directors
Judy G. Carter 46 President, Chief Executive Officer and Director
C.R. Kinsey, III 53 Vice President and Chief Technology Officer
Robert C. McLaughlin 52 Treasurer and Chief Financial Officer
Daniel DelGiorno, Jr. 43 Director
Robert Devine(1) 59 Director
Charles Feld(1) 55 Director
Other Key Personnel
Joseph Miksch 50 Vice President, Global Sales
Lisa Welch 33 Vice President, Technology
<FN>
(1) Member, audit committee.
</FN>
</TABLE>
James A. Cannavino has been Chairman of the Board of Softworks since April
1998. Mr. Cannavino is President and Chief Executive Officer of CyberSafe, Inc.,
a corporation specializing in network security. He was the President and Chief
Executive Officer of Perot Systems Corporation through July 1997, and prior to
that was a Senior Vice President at IBM, responsible for strategy and
development. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino currently is a consultant to Computer Concepts
and serves on the boards of the National Center for Missing and Exploited
Children, 7th Level and Marist College.
Judy G. Carter has been President and Chief Executive Officer and a
Director of Softworks since October 1993. Prior thereto, Ms. Carter was the
Chief Operating Officer for Softworks from 1991. Ms. Carter started at Softworks
as a system software developer and progressed into a number of supervisory and
managerial roles, culminating in her appointment as vice president of technical
services in 1990. Ms. Carter is a director of Fairfax Opportunities Unlimited, a
non-profit organization.
C.R. Kinsey, III, a co-founder of Softworks, has been Vice President of
Softworks since May 1998 and has been Chief Technology Officer since 1977. From
1977 until May 1998, Mr. Kinsey was also Secretary and Treasurer of the Company.
In addition, Mr. Kinsey is a primary technical advisor to the Company's
technology division for new product research and development, product
enhancements and service and support.
Robert C. McLaughlin has been Treasurer and Chief Financial Officer since
March 1998. Prior thereto, Mr. McLaughlin was a Department Director with global
responsibilities at Perot Systems Corporation in Dallas, Texas from November
1996 through December 1997. Mr. McLaughlin also served as Senior Vice President
for a real estate investment venture in West Palm Beach, Florida from 1993 to
1996, as a Vice President of First Union National Bank of Florida, N.A. in Fort
Lauderdale from 1991 to 1993 and a Vice President of Southeast Bank, N.A. in
Miami from 1987 to 1991.
Daniel DelGiorno, Jr. has been a Director of Softworks since May 1998. Mr.
DelGiorno is the President and Chief Executive Officer, Treasurer and a director
of Computer Concepts for more than the past five years. He is also the President
and principal stockholder of Tech Marketing Group Corp., a privately held
corporation which is a stockholder of Computer Concepts.
Robert Devine has been a Director of Softworks since May 1998. Mr. Devine
is a director and the Chief Executive Officer of Chemtainer Industries, Inc. for
more than twenty years. Chemtainer Industries manufactures and distributes a
diverse array of commercial and consumer products nationally and internationally
with eleven plants located in nine states from coast to coast. Mr. Devine is
also a director of Rototron Corp. and Tracey International, and has been a
director and vice-president of the non-profit New York City Mental Health
Association for more than ten years.
Charles Feld has been a Director of Softworks since July 1998. Mr. Feld is
President of the Feld Group, Inc., a provider of temporary chief information
officer consulting services, for more than the past five years. Since December
1997, Mr. Feld has also served as operating Chief Information Officer of Delta
Air Lines. Prior thereto, from June 1992 until August 1997, Mr. Feld served as
operating Chief Information Officer for Burlington Northern Santa Fe Corp.
<PAGE>
Other Key Personnel
Joseph Miksch has been Vice President, Global Sales since 1996. Mr. Miksch
is responsible for all of Softworks's global direct and indirect sales efforts
in Europe, the Middle East, Africa, Asia-Pacific and North and South America.
Prior to joining the Company, Mr. Miksch was Chief Operating Officer at DBE,
Inc. for two years, where he was responsible for launching new products into the
Oracle and DB2 markets. Prior thereto, for 10 years, Mr. Miksch served in
several senior vice president positions at Computer Associates, Inc. in its
system, graphics application and database divisions.
Lisa Welch has been Vice President, Technology since 1996. Ms. Welch is
responsible for strategic planning and business development, and direct research
and product development. She is also responsible for customer service and
information delivery activities. Prior to joining Softworks in 1988, Ms. Welch
was employed with NCR as a systems engineer.
ITEM 11 EXECUTIVE COMPENSATION
The information that is required in response to this Item is incorporated herein
by reference to Softworks' Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1999 pursuant to Regulation 14A.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information that is required in response to this Item is incorporated herein
by reference to Softworks' Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1999 pursuant to Regulation 14A.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information that is required in response to this Item is incorporated herein
by reference to Softworks' Proxy Statement to be filed with the Securities and
Exchange Commission by April 30, 1999 pursuant to Regulation 14A.
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10K
(a) Listed below are the documents filed as a part of this report:
1. Financial Statements and the Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
3. Exibits
Exhibit Description
Number
- ------------- ------------------------------------------------------
3.1 Certificate of Incorporation of Registrant*
3.2 By-Laws of Registrant*
4.1 Specimen Common Stock Certificate*
10.1 Lease Agreement dated June 14, 1994 between
Registrant and WHT Reall Estate Limited Partnership*
10.2 First Amendment to Lease Agreement*
10.3 Second Amendment to Lease Agreement*
10.4 1998 Long Term Incentive Plan*
10.5 Employment Agreement between the Registrant and
James Cannavino*
10.6 Employment Agreement between the Registrant and
C.R. Kinsey, III*
10.7 Employment Agreement between the Registrant and
Judy G. Carter*
10.8 Employment Agreement between the Registrant and
Lisa Welch*
10.9 Employment Agreement between the Registrant and
Joseph Miksch*
10.10 Employment Agreement between the Registrant and
Robert McLaughlin*
10.11 Form of Indemnification Agreement between the
Company and its officers and directors*
10.12 Distribution Agreement dated July 8, 1997 between the
Registrant and Cognizant Technology Solutions
Corporation*
27.1 Financial Data Schedule
* Incorporated by reference to Registration Statement No 333-
53939.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1999 By: /s/ Judy G. Carter
-------------------------------------
Judy G. Carter
President, Chief Executive Officer and Director
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.
Date: March 30, 1999 By: /s/ James A. Cannavino
-------------------------------------
James A. Cannavino
Chairman of the Board of Directors
Date: March 30, 1999 By: /s/ Judy G. Carter
-------------------------------------
Judy G. Carter
President, Chief Executive Officer and Director
Date: March 30, 1999
-------------------------------------
C.R. Kinsey, III
Vice President and Chief Technology Officer
Date: March 30, 1999 By: /s/ Robert C. McLaughlin
-------------------------------------
Robert C. McLaughlin
Treasurer and Chief Financial Officer
Date: March 30, 1999 By: /s/ Daniel DelGiorno, Jr.
-------------------------------------
Daniel DelGiorno, Jr.
Director
Date: March 30, 1999 By: /s/ Robert Devine
-------------------------------------
Robert Devine
Director
Date: March 30, 1999 By: /s/ Charles Feld
-------------------------------------
Charles Feld
Director
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SOFTWORKS, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of SOFTWORKS, Inc. (a Delaware corporation)
and subsidiaries and have issued our report thereon dated February 9, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in item 14.a.2, Valuation and
Qualifying Accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 9, 1999
SOFTWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Revenue and
Period Deductions Expense Ending Balance
-----------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for accounts receivable $ 242 $ (43) $ 50 $ 249
Year ended December 31, 1997
Allowance for accounts receivable $ 249 $ (118) $ 75 $ 206
Year ended December 31, 1998
Allowance for accounts receivable $ 206 $ (234) $ 317 $ 289
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,003
<SECURITIES> 0
<RECEIVABLES> 31,011
<ALLOWANCES> 289
<INVENTORY> 0
<CURRENT-ASSETS> 38,380
<PP&E> 5,018
<DEPRECIATION> 2,520
<TOTAL-ASSETS> 58,352
<CURRENT-LIABILITIES> 26,501
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 18,669
<TOTAL-LIABILITY-AND-EQUITY> 58,352
<SALES> 43,749
<TOTAL-REVENUES> 43,749
<CGS> 4,250
<TOTAL-COSTS> 4,250
<OTHER-EXPENSES> 34,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 5,037
<INCOME-TAX> 2,080
<INCOME-CONTINUING> 2,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,957
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
